The Bull, Bear, And Secular Case From BofAML

Tyler Durden's picture

While consensus forecasts for next year continuing to be muddle-through mediocrity with a crashtastic defensive bias, BofA Merrill Lynch provides a very succinct outline of the bullish, bearish, and interestingly secular cases for risk assets going forward. The cross-asset class implications are noteworthy and provide an excellent jumping off point for asset allocation decisions. We are not sure the seeming knife-catching perspective of "buying humiliation and selling hubris" will work out, but one thing is for sure, with this volatility, relative-value remains the critical alpha as beta chops everyone up.


The bull, bear and secular cases

With many forecasts for existing trading ranges across asset classes to hold in 2012, we highlight the tail risks that could cause major bull or bear markets, and catalysts to watch for.

The bull case for 2012

The upside risk to markets comes via a credible, coordinated policy response (ECB QE + EU fiscal contraction + Fed QE3 + China ease), and/or a recovery in the real estate, banking and labor markets. The latter would allow the Fed to raise interest rates, resulting in a “good” bear market in bonds (Chart 7). This in turn would unlock a secular bull market in equities, and allow the MSCI ACWI to break above 375 next year. Equity leadership would likely come from Developed Market (EU + US) bank stocks, Asian industrials, Japanese autos, and EM resources.



Catalysts to watch: US initial weekly unemployment claims dropping below 375k, boosting the domestic demand story; meaningful declines in EU sovereign debt spreads driven by a pro-active ECB; a supply-driven slump in oil prices.

The bear case

The key downside risk to markets would be a major banking and debt crisis in Europe that triggers a recession in the US and a hard landing in China. In this scenario earnings growth would likely have double-digit declines, and Financials would take another leg down. Bonds would outperform stocks and we would expect the MSCI ACWI to fall to 225. Within equities, this would be very negative for US cyclicals such as Tech and Resources, EM consumer stocks, and global energy stocks.


Catalysts to watch: A collapse in the Euro that kills US Tech earnings; EU bank deleveraging causing a slump in China/Asia export growth and currencies; a quick end to the current “deflationary recovery” in US consumption.


The secular case: buy humiliation, sell hubris

While the focus is on 2012, we offer a quick word on the longer-term outlook for equities.


Despite our short-term caution, in our view equities on a 2-3 year view appear compelling. Investors enter 2012 in a fearful state, but in our opinion any sharp declines in equities in 2012 should be bought. The ingredients for equity outperformance over the medium term are being put in place, and 2012 could represent the beginning of the end of the great bear market in equities. Companies are in immaculate shape, US consumer deleveraging is already under way, public sector deleveraging will accelerate dramatically in Europe, and political change is likely in 2012 in many countries.



Further, fixed income valuations may soon become bubble-like versus equities (Chart 9), and extreme volatility and correlations are destroying any public interest in equities. The secular hubris is in fixed income, not equities.

And the broad cross-asset class implications of these views are summarized in the following large table:


Once again the bull case relies heavily on government printing presses and the bear case on the reality of debt saturation breaking through.

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pebblewriter's picture

Pretty well sums it up.  Bulls need QE, jobs, inflation, Chinese bailouts and politicians with backbones.  Bears need Newton's first law to hold.

BTW, any bulls salivating over the potential inverse H&S setting up on SPX should know that we've had two previous similar setups that failed spectacularly, trapping loads of disappointed bulls.

laspeyres's picture

"Equities are cheap relative to history". When did 1996-2011 become the special benchmark era ?  Of course that era of market liberalisation, rising leverage and carefree capitalism will be a great guide to 2012 and beyond.


HedgeAccordingly's picture

S&P's pretty lathargic intra session today... 1255 to be tested

Milton Waddams's picture

Sorry but they don't provide sell-side analysts with data further back than 1980.  

firstdivision's picture

So, today's 3pm rumor should be fun.  Hopefully it'll explain the +22 point rise for today.

slewie the pi-rat's picture



even Robo_T makes more sense than these retail loonies, who correctly see that (paste):

  • "...a recovery in the real estate, banking and labor markets...would allow the Fed to raise interest rates, resulting in a “good” bear market in bonds..."
    • [did we mention Slim just left town?  and that is about the end of them being correct about anything?] 
  • furthermore, the "trigger catalyst" to know this is REAL is:"...US initial weekly unemployment claims dropping below 375k, boosting the domestic demand story..."
    • did we mention these figures are very creative, fictitous, really, and a simple assumptive hedonic tweak to the age demographics can bring this about in a few months, if not weeks?
  • so, basically that leaves us with an "economy" based on printing  (ECB QE + EU fiscal contraction + Fed QE3 + China ease) no matter how much Robo_T tells us the REITs are kickin ass

the shitheads never even mentioned either of the "R" words, did they?  may their poor, innocent "clients and customers" suffer as painlessly as possible...

...of course...


fuu's picture

The fact that BofAmylnitrate still has clients is actually very sad.

lairdwd's picture

I think both their bear bad and bear ugly estimates are too high.

There is No Spoon's picture

The title of chart 7 refutes the actual chart. Basically they're saying "buy the dip."

DrDre's picture

Typical sell side. They always need to feed some hope that there will be another bull market at some point soon. If they had studied those charts appropriately, they'd see that the next bull market is several years away NO MATTER WHAT HAPPENS TO THE ECONOMY. The point is, there is no relationship between economic growth and returns on assets. Assets are EXPENSIVE when measured on a long-term cyclical basis using the CAPE (The PE ration with 10yrs average E). 

It is ok to buy the dip, as long as one also sells the tops ...

AldousHuxley's picture

only believe research when the researcher's own money is in it. the bigger the life savings % the better.

Otherwise they are selling shit they won't eat themselves....probably because they know it is shit.

radicall's picture

Something not a lot of people are talking about is WHY the trailing multiples are coming down. The reason is secular slowing in global growth and likely increased frequency of recessions in the future. Single digit PEs might be the norm unless the world can get out of this funk.

firstdivision's picture

·         China to purchase $2 Trillion EU bonds - China Daily



Heyoka Bianco's picture

Notice how all of their chart scenarios for gold/oil are either down, barely changed, or just a squeak up instead of an upside explosion, even in the "ugly" scenario. And apparently a "collapse" in the Euro results in it still being 0.20 above parity with the dollar. Those sell-side commissions buy some good shit, don't they?

Snake Plissken's picture

"In this scenario earnings growth would likely have double-digit declines, and Financials would take another leg down"

Not sure why the word 'growth' is included in that sentence. Actually I am, they are f***** retards.

YoDudeRock's picture

If I could punch this market, I would.   Maybe it's time to put my punching bag back up.

Zola's picture

This market is ridiculous. Back and forth trip between today and yesterday. Hello? back at the same point.