Monday, January 12, 2009

UBS in Serious Need of Editorializing

In what might be a blatant example of investment banking schizophrenia, or merely a good-ole "talking up the book", two of UBS key "strategists", Larry Hathaway and David Bianco, in the span of 1 business day, manage to come out with two essentially contradictory reports. On one hand, David Bianco, head of Global Equity Strategy, in a note to clients January 12, claims the following (slightly abbreviated and bolded for sanity purposes):

"- S&P 500 Target and Estimates: Our 2009 year end S&P target is 1300. This suggests one of the highest return years following one of the worst return years for the S&P 500 since the depression. We expect S&P 500 EPS to be $67 in 2008, $63 in 2009 and $82 in 2010. "

"- The recession and its bubble of pessimism is a buying opportunity: The S&P has suffered one of its very worst crashes in history and unlike past crashes this one came despite rather reasonable valuations at the peak. We don't advocate excessive risk taking, but we do unequivocally encourage buying stocks in leading multinational companies today without trying to time better entry points."

"- What's the portfolio strategy of the Sweet 35 - Bberg ticket UBS_ST35 (Ed. yup, you guessed it, a freely traded, UBS constructed index). We (UBS) favor the Big-cap, Internationally exposed, Growth stocks of the S&P300. The Sweet 35 reflect this strategy."

Ok.... these are the key points of Bianco's report... The man is entitled to his opinion... It may be right or wrong... We at ZH are likely not going to hold our breath for a 50% rally in the S&P but such is life...

The problem arises when one reads the report by Larry Hathaway, this time Head of Global Investment Strategy (they sure like titles over at UBS; wonder if Global Head of Tax Evasion figures somewhere in the org chart), in a January 9 client note.

Larry poses the following rhetorical question: "Are global equities really that cheap?", to which he answers himself "No. Given likely sharp earnings deterioration in 2009, global P/E multiples are closer to "fair" than "cheap" (Ed. uhh, David's 50% presumed undervaluation would seem to qualify to ZH as falling under the "cheap" definition.... but let's read on). Larry expounds on his rhetorical question:

"Even investors in presumed non-cyclical sectors, such as consumer staples or tele-communications, may not be able to take as much comfort in this recession as in past cycles. All sources of revenue, from developed to emerging economies, are at risk, suggesting more negative margin surprises than usual. It is also worth noting that aggregate earnings are, in fact, far more cyclical than bottom up analysts typically admit."

"To underscore the point, profit numbers highlight widespread US earnings weakness, with earnings in manufacturing (-10%), wholesale trade (-15%), retail trade (-31%), financials (-32%) and transportation & warehousing (-46%) down significantly over the past year. Only foreign earnings (+5%) remain in positive growth territory. But they, too, will almost certainly turn negative this year, given the sharp deterioration in global growth and the advent of a stronger US dollar over the past six months."

"In sum, a global recession implies a year-on-year earnings decline of around 20-30%, following a 20% decline in 2008 (Ed. David, you follow?). Assuming a 30% fall in 2009, the global forward P/E is closer to 15xessentially a ‘fair value’ multiple, not the compelling valuation suggested by a simple trailing multiple."

So in short:

David is saying a 20x P/E multiple (1300 S&P tgt based on 63 in 2009E, which btw is a 6% decline from his 2008 67) is sufficient grounds for him to recommend "unequivocally buying stocks".

Larry on the other hand, is saying 2009 earnings will likely drop "20-30%" (47-54 2009 E range), and concludes that "No. Global Equities are not that cheap. The global forward P/E is closer to 15x (Ed. 15.8x based on Jan 12 value of the S&P of 870 and assuming the high end of his 2009 E range).

Of course David's agenda is to sell the "UBS Sweet 35" index, while Larry is pitching something about Corporate bonds being cheap, so clients should go ahead and call their UBS HY salesmen and buy bonds... lots of bonds...

Looks like in the regulatory vacuum left by Spitzer wall street peddlers are regressing to their old ways... and that's fine - we believe in making a buck like the next guy. But when the same brokerage comes out with two opposite conclusions within a couple of days, well, that's just smells of bad editing.


Late on January 12, Bloomberg quoted Larry Hatheway, who, just in case clients missed his earlier note, is quoted as saying "The current global recession will be one of the longest since World War II, with deflation possible in some economies by the middle of this year. Financial deleveraging is at an intermediate stage and may extend into 2010. China's export growth has collapsed"... Larry, i think David missed the memo.
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