Dear Mr. Berko:

Dear D.T.:

Shiller, a Robert Redford look-alike down to the mole on his right cheek, is a highly regarded Ivy League economics professor. He originated the Shiller Housing Index and is among the few who predicted the bursting of the stock-market bubble in 2000 and the collapse of the housing market in 2006. Shiller believes the market is overpriced by historical measures and bases his analysis on the value of the Standard & Poor’s 500 compared with its component companies’ earnings for the past 10, 20, 30 and 40 years. His numbers won’t predict when the S&P will decline; rather, they demonstrate that stocks are too expensive, and that a market slowdown may be accelerating.

Bianco is an esteemed equity strategist who earned $4.6 million last year providing market strategy for Bank of America Merrill Lynch (BAML). Bianco believes stocks are cheap and that the S&P has significant upside potential. Bianco is a graduate of Wharton and prior to joining BAML was the equity strategist at UBS, Credit Suisse and Deutsche Bank. He believes Shiller’s conclusion is chock-full of omissions.

If Bianco is right, the Dow Jones industrial average could rise to the 16,000 level. And I hope he is right. If Shiller is right, then the Dow could fall to the 8,000 level. I hope he’s wrong. Both men base their conclusions on corporate earnings and average price-to-earnings ratios. I won’t debate their conclusions (both are basically very simple), but suffice it to say each defines “corporate earnings” differently — and that’s the rub. We know that the placement of a comma can change the meaning of a sentence, and by the same token, the interpretation of a single word can change the direction of the stock market. So the crux of the matter is whose interpretation of corporate earnings is correct.

This is the difference of opinion between the ivory towers of Yale and the golden towers of Wall Street. Some skeptics suggest that Bianco’s numbers are tainted due to his employment by BAML. They note that “sell” opinions issued by BAML in the past dozen years are as rare as kryptonite. Certainly, in the past 12 years, a lot of selling advice was warranted.

These skeptics note that the BAML investment committee nearly never permits an analyst to recommend the sale of a stock. Nor will it allow an analyst to tell investors the market is too high or recommend accumulating cash.

Shiller, on the other hand, is an economist, most of whom, if you’ve observed Alan Greenspan, have brains molded from used Ouija board parts. They smell of Old Spice, chew Juicy Fruit, drive Volvos, are asexual and were breast-fed till they were 7.

Knowledgeable observers ask: If economists are supposed to predict trends, how is it that most didn’t foresee the housing bubble, the banking crash, the mortgage debacle, the crash in interest rates, high oil prices, the recent recession, etc.?

These skeptics chuckle at Shiller’s comments and insist he’s out to butter his own nest. Though Shiller predicted the housing bubbles, skeptics respond that even a blind squirrel can find an acorn once in a while.

However, Shiller doesn’t have an ax to grind or an investment committee to shade his opinions, nor does he have a dog in the race. And this, D.T., is the whole kettle of fish in a nutshell.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at mjberko@yahoo.com. © 2011 Creators.com