Hope springs eternal for some on the Street

By: PAUL JACKSON
July 7, 2008

Monkeys will fly later this year, if analysts from Deutsche Bank AG, Lehman Brothers Holdings Inc. and UBS AG are to be believed. We might even see a unicorn or two.

Why? Because equity analysts at all three firms have gone on record predicting that the Standard & Poor’s 500 Index will gain the most in 26 years during this year’s second half, based largely on the belief that corporate profits will jump 50 percent in the fourth quarter after falling for the past year — but even such rosy predictions for corporate profits, should they materialize, wouldn’t likely be enough to generate such a historic rebound in the S&P 500.

Which means that even the staid editors at Bloomberg News allowed a story covering the forecasts to to note that it “isn’t going to happen, if history is any guide.”

From the story:

Strategists at Deutsche Bank, Lehman Brothers and UBS are the most bullish and expect the benchmark for American equities to climb to a record in the second half. Binky Chadha, Deutsche Bank’s New York-based chief strategist, says the S&P 500 will end the year at 1,650, up 29 percent from June 30.

Ian Scott, Lehman’s global strategist, is predicting an advance of 27 percent to 1,630, while David Bianco at UBS says the index will increase at least 25 percent.

The S&P 500’s rebound “is going to be one of the greatest roars we’ve seen,” Bianco said. “The market has way too many fears baked into the valuation right now. The fear out there is the earnings are about to collapse and interest rates are about to surge on inflationary fears. Neither is going to happen.”

Strategists’ annual forecasts have been off by an average of 14 percentage points since 2000, according to data compiled by Bloomberg. They haven’t projected an annual decline in at least eight years.

I’ll hope against hope that the analysts here are right. I’ll also hope that if Bianco is wrong on his over-the-top “greatest roar” claims, UBS will give me his position at the firm — after all, each has about the same probability of becoming reality.

If anything, what I’m seeing from some equity analysts is old-school thinking that stubbornly believes housing isn’t important enough to merit any sort of mention in overall corporate earnings. Remember when nearly every equity analyst on the planet was saying “it’s only subprime lending, which isn’t that big” back in mid-2007? The quick learners among them have woken up and taken the time to see just how far housing really reaches in the U.S. economy.

The rest, apparently, have found jobs at Deutsche, Lehman and UBS.