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New York – What better illustration of the importance of getting the big picture right than the discrepancy between analysts’ earnings estimates and those of strategists?  A recent Barron’s article notes that analysts estimate that earnings for companies in the S&P 500 will grow 29% in the fourth quarter and increase 15% in 2009.  In contrast, strategists polled by Barron’s had earnings falling 15% this year and 3% next.

It’s macro this time, and if you don’t get the big stuff right, sweating the small stuff doesn’t help.  In good times, investors like strategists for their investment ideas and thematic research.  Now, the demands are broader:  which assets, which markets, how bad, how long…the list goes on.

In our 2nd quarter survey of investors, 44% said they use strategists.  We wonder if the remaining 56% are reconsidering?  Studies have shown that bottom up analysis tends to be optimistically biased.  There is nothing nefarious about this, simply the natural tendency to extrapolate.  In good markets, this tendency isn’t a big problem.  Now, it is.   As of January, the consensus estimates for the 3rd quarter had earnings rising 23%, whereas the actuals were approximately -12%.

When analysts lower forecasts it is in the context of their extrapolations, resulting in incrementalism.  The current 4Q forecast of 29% earnings growth is down from a 64% increase forecasted in the spring.  The 15% growth for 2009 is down from 22% forecasted at the beginning of October.

Strategists on the other hand are driven by the factors that are exogenous to the analysts’ models.  And we are in an exogenous world right now.  Analysts have the S&P 500 earning $91 next year.  The strategists surveyed by Barron’s put the earnings at $70.  While better than the bottom up estimates, strategists can be overly optimistic also.  The low estimate of the group surveyed was $60.

What does this suggest for the markets?  As Yardeni Research points out, multiples contract during bear markets.  In the 1975 recession the trailing multiple went to 7 and in 1980 it went to 6.8.  A 7 multiple on $70 earnings is 490, nearly 50% below yesterday’s close of 919.   Keep your eye on the big picture!


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