About Those Well-Paid Analysts

Two Analysts take to the Slopes

The Price of Being Wrong:

Saw the headline at the Supermarket: "Psychic's Head Explodes". She kept giving wrong answers until suddenly her head exploded.

Now if that had just happened to some of the analysts...

Those of us who watch CNBC in the morning have heard those guys trash the analysts who work for the big full service brokerage houses. The general theme is that they hold onto a buy recommendation, refusing to downgrade a stock even though it tanks. Like it at 100? You'll love it at 25. Then when they all do downgrade the same stock (which is usually after some really terrible news, and after the stock price has already declined severely), they refer to the analysts as penguins and show a clip of penguins following each other off the ice into the water.

In general, aside from complete stupidity, and a refusal to pay any attention to any technical indicators, the reason that these guys favor terrible stocks is really simple: they have a serious conflict of interest, as this link from CBS news shows. There is another study from Turtle Trader, which is longer and more scholarly. So when you look at the "research" page for a stock at Yahoo, this (and maybe some other stuff) is the junk you are getting.

And to top it off - as if everybody decided to write about this at once - Bill Mann at The Motley Fool has chimed in with an article that almost makes up for his trashing of technical analysis. It is humorous, but all too true.

April 9, 2001

From Andrew Tobias, for April 9, 2001:

Ivy Guy [reporting this]: “I'm in New York for the first Ivy League Investment Club Conference, sponsored by Goldman Sachs. The conference began today with the delegates (students from each school) hearing the Goldman Morning Call at 7:15am, the summary of all the GS analysts' calls for the day. One major point of the conference call was California’s electric utilities. There had been very positive developments on Thursday evening, and so the analysts said that the stocks (PCG and EIX) had nearly 100% upside; they were priced like they were going bankrupt, but this was a ‘near impossibility.’ To reiterate, this is at 7:15am yesterday, Friday.

The rest is history. At about 2:30, one of the scheduled speakers begins his talk by saying, ‘If any of you own PG&E, call your brokers--it just filed for bankruptcy.’ There was a palpable silence in the room. We didn't know if this was some kind of joke. We'd just heard the analysts of Goldman Sachs – GOLDMAN SACHS – talking for several minutes (a good chunk of the morning call) about how this was a near impossibility. In a word, everyone was dumbfounded.

In my opinion, this was the best lesson Goldman gave us during the day, inadvertent though it was. If you print this, please don’t use my name or school.”

Yeah - he might want to work for Goldman Sachs some time...

Analysts Photo-Op

After the Enron Collapse

Vince Rupolo posted this on another message board. The date was before the bankruptcy, but after Enron had had to restate earnings. The part I put in bold below should have been a warning to any rational person. So why did they continue to recommend the stock? Limited transparency provides a good way to cook the books.

GOLDMAN SACHS, October 9, 2001 -
Recommended List Large-Cap Growth
Price:US$33.45 Target price: US$48 S&P 500: 1051
Gas & Power Convergence

Still the best of the best. With perceptions far below reality, we see major catalysts in third-quarter results and increased disclosure in coming months. We strongly reiterate our Recommended List rating and our conviction in high and sustained growth prospects, even though we have cut 2002 EPS to $2.15 and our price target to $48. We expect Enron shares to recover dramatically in the coming months. We view the current period as an extremely rare opportunity to purchase the shares of a company that remains extremely well positioned to grow at a substantial rate and earn strong returns in the still-very-young and evolving energy convergence space.

We strongly reiterate our Recommended List rating on Enron stock. We spoke recently with top management including the CEO, CFO, chief accounting officer, and the head of wholesale services. We challenged top management on the wide range of investor concerns that have weighed heavily on the shares and believe that the majority of market speculation is groundless, and that which has some truth to it, to be exaggerated.

Misconceptions abound and perceptions are far below reality, in our view We believe that investors have virtually given up on Enron (down 60% year to date) and its prospects based on the long list of extremely negative stories about the company and its financial condition. The company's limited transparency on its sources of earnings, its cash flow, and financials in general has hurt investor perceptions as management has declined to be more specific in refuting outrageous claims that have assumed a life of their own.

We believe Enron's fundamentals are still strong despite the weak economy. We view Enron as one of the best companies in the economy, let alone among the companies in our energy convergence space. We are confident in the company's ability to grow earnings more than 20% annually for the next five years, despite its already large base.

February 6, 2002

From testimony to the Full Committee on Energy and Commerce. Excellent analysis of Enron's fundamentals, and some words about the analysts who were touting Enron:

In January 2001, we began contacting a number of analysts at various Wall Street firms with whom we did business and invited them to our offices to discuss Enron. Over the next few months a number of them accepted our invitation and met with us to discuss Enron and its valuation. We were struck by how many of them conceded that there was no way to analyze Enron, but that investing in Enron was instead a "trust me" story. One analyst, while admitting that Enron was a "black box" regarding profits, said that, as long as Enron delivered, who was he to argue! It was clear to us that most of these analysts were hopelessly conflicted over the investment banking and advisory fees that Enron was paying to their firms. We took their "buy" recommendations, both current and future, with a very large grain of salt!

May 15, 2002

From Jon D. Markham at MSN Financial:

Now that the work of analysts is on the verge of being retroactively criminalized by the Securities and Exchange Commission and New York’s attorney general, however, it’s time to reveal the industry’s dirtiest little secret. And it’s not that brokerage analysts were on the take from investment bankers or the agents of Satan.New stock picks from market professionals every day on CNBC.

The real skinny is that virtually no one who matters in the investment industry -- which is to say, portfolio managers at large pension, mutual and hedge funds -- ever took nine-tenths of research reports seriously. Only the public did. As I explained in my book in 1999 (see link at left), analysts at the major brokerages for years have been looked down upon by institutional investors as sales support staff, a pack of kids with fancy college degrees who provided little more than PR material for the retail brokerage and investment banking teams. If they were called “promoters” rather than “analysts,” the public would have had a better idea of their role in the retail investment ecosystem. The funds have their own, unbiased, independent staff analysts who never made public pronouncements...

Bear market in integrity

Bret Rekas, a hedge fund manager in Minneapolis whose misspent youth included a stint as a technology analyst at Robertson Stephens, is one pro who therefore can’t understand why the government has only this year determined that the system was rigged against consumers. What’ll they discover next, he wonders. That professional wrestling is fake? That recipes never turn out as good in your kitchen as they do in the color photos of Bon Appetit?

Well, just to put in my opinion, professional wrestling is fake, but I think Jesse Ventura has more integrity than those analysts or their companies. And when we do recipes from Bon Appetit, they turn our pretty good.

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