Leave Sell Side Research at your Merrill


New York – A story in the Wall Street Journal article this morning discusses two senior Merrill Lynch (now called BofA-Merrill) research analysts are leaving the fold. David Rosenberg, Chief North American Economist and Richard Bernstein Chief Stock Market Strategist have both tabled their resignations. Clearly, we expect some dislocation revolving around the merger of the two research departments. Merrill had a compliment of 109 analysts, while BofA had 47 according to the article.  However, we wonder if these defections are a simple reflection of redundancy, or whether it is more aligned with the overall trend in sell-side research department staffing. The answer is probably both.

Mr. Rosenberg plans to continue to supply buy-side clients with research, though his precise plans are unknown.  Likely there will be another independent economic research provider on the street. However, he may revert back to Bay Street (that’s in Toronto, eh) and take a senior position with one of the Canadian chartered banks.

Mr. Bernstein has indicated that he will immerse himself in writing books on equity strategy and take on more courses at the Stern School of Business (NYU), where he is an adjunct professor.

The resignations come at a time when current economic conditions have created a growing demand for analysis of macroeconomic policy and strategy issues.

The continued leakage of talent from sell-side firms is virtually assured this year because of the credit and liquidity crisis that is affecting all banks, the overstaffing at firms like JP Morgan and BofA, and expected declines in overall commissions, which we expect to decline in the order of 40% in 2009.

The sell-side leakage will obviously add to the supply of alternative research over the year and much of this research will be traditional fundamental offerings similar to sell-side prop research.  In 2008, we estimate that fundamental research providers, according to the Integrity Research database represented about 39% of the revenue of the alternative research space. In addition, the number of fundamental firms is about 46% of the total number of research providers in our database. 

Contemporaneous with this increase in alternative research providers, we estimate that there will be nearly an 18% decline in research spend on alternative research in 2009. We are hearing that buy-side firms are simply shutting the door on new research at the present time, while they contemplate reductions in research spending between 20% and 40%.

So at the same time as additional supply will hit the street research spending is forecast to be reduced.  Enough reason to hunker down and wait for the markets to improve. But wait there’s more…

In July the end of the Global Research Settlement that has provided revenue for a number of alternative research firms for the past five years will end. To be clear, the majority of the settlement will end in July, while the Deutsche and Thomas Wiesel portion will continue on into the start of 2010. Research firms that are currently involved in the settlement are expecting this source of revenue to dry up and are grappling with the decision to continue with retail research, to roll out or dust of an institutional service, or to simply run their own money.

But here is the bright side, or really the less gloomy side: the share of alternative research will be expanding compared to sell-side research. So while we anticipate about a 40% reduction in research spend, we look to a less onerous 18% decline in alternative research.

The bright side some say  will come in 2010, when the return of corporate profitability in conjunction with severely under-valued share prices combine with excess liquidity in the market to fuel a sharp rally in stocks.


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