Wall Street Analysts: Endangered Species 12 comments
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It’s been a bad year for Wall Street analysts.
2008 started off with some of the worst earnings expectations the Street crowd have ever dreamt up. Bear in mind, I don’t mean “worst” as in “negative,” I mean “worst” as in wrong or inaccurate.
According to Bloomberg, Wall Street analysts kicked off 2008 predicting an average 22% increase in profits at banks, brokers, and insurance companies the year. Needless to say, they overshot the mark… In fact, many of the firms they predicted this growth for no longer exist.
Wall Street is not prone to apologizing. But after this screwup a number of firms admitted they were off by a wide margin. Heck, a couple Goldman Sachs’ (GS) analysts even went so far as to say they were “clearly wrong” on their recommendation of financials in early May. But these guys had nothing on the misguided directions coming from Merrill Lynch’s (MER) Guy Moszkowski, who incidentally was the top ranked brokerage analyst last year.
Between June 2 and June 11, Moszkowski changed his tune regarding Lehman Brothers four times. He first shifted his stance to “neutral” from “underperform.” He then told clients to buy twice —June 4 and June 10 — before shifting back “neutral” on June 11. Three months later, the market shifted Lehman from neutral to “no longer in business.”
There must have been something in the air, because things didn’t improve much for analysts at the close of 2Q08 either. For that quarter, Wall Street analysts only accurately predicted earnings 6.7% of the time for the S&P 500: their worst showing in 16 years.
Now, Wall Street’s ability to predict earnings has been steadily worsening ever since Regulation Fair Disclosure barred CEOs and other corporate executives from revealing inside information to analysts before the general public in 2000 — yes, up until that point it was 100% legal for execs to give the Street insider information about earnings.
However, even by post-Regulation Fair Disclosure standards, Wall Street analysts’ 2Q08 showing was truly abysmal. Again, they were only accurate 6.7% of the time. At that point, wouldn’t it be prudent to do away with earnings expectations completely? If not that, then surely you’d expect the Street to issue some massive downward revisions of earnings expectations for the remainder of 2008, right?
Nope.
In fact, analysts still expect S&P 500 earnings to increase in 3Q08 AND 4Q08. And they’re doing this at a time in which GDP growth is rapidly being revised to the negative — expected GDP growth for 3Q08 and 4Q08 is -1% and -2% respectively — retail just posted its largest decline since 1992 (the last serious recession) and unemployment is at a seven year high.
It’s simply stunning.
In light of this, I expect this earnings season — 3Q08— and the next — 4Q08 — to be full of surprises … to the downside. Earnings estimates are still too high. When reality crushes these daydreams there will be a slew of downgrades followed by increased institutional selling which will exert more downward pressure on stocks.
I’ll detail more about the upcoming 4Q08 liquidations tomorrow. For now, do yourself a favor and ignore most analyst predictions coming from Wall Street (I’d say “all” Street analysts, but there are undoubtedly some savvy operators out of the bunch).
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This article has 12 comments:
the stock market can be even thought about as a opportunity for capitol formation.....MarvinMB...
Eyeore
For the most part, analysts are just 'excuse insurance' for the brokerages. They massage their data to generate reports that are suitable for the brokerage business. Thus the lack of "sell" recommendations compared to "buy", "accumulate", or "hold" suggestions.
Anyone who was paying attention in August of 2007 could have realized conditions were deteriorating in the credit markets.
1) American Home Mortgage Investment Corporation filed for bankruptcy
2) French bank BNP Paribas stopped valuing three of its funds and suspended all withdrawals
3) Sentinel Management Group suspended redemptions for investors and sold off $312 million worth of assets; three days later it filed for Chapter 11 bankruptcy protection
4) Countrywide Financial Corporation, the biggest U.S. mortgage lender, avoids bankruptcy by taking out an emergency loan of $11 billion from a group of banks
5) Australian Hedge Fund, Basis Capital's "Basis Yield Alpha Fund" applied for bankruptcy protection
The stock market makes the first of many large single day drops, eventually rallies into November, then turns down sharply again never to recover.
How a so-called "Professional" financial stock analyst can misinterpret or completely miss such damning evidence and continue to generate 'buy' or 'accumulate' recommendations is surely a strong indication that their "work" is hardly worth the paper it is written on.
Why should you expect anything different now? They are obviously not in the game to provide honest and unbiased reports.
Not.
See how easy it is?
I believe that's what we refer to as 'volatility' in language.
Yes, it's quite apparent that there are too many poles in the right hand plane, financially speaking.
Dang it smarty, is there anything you don't know? Now I have to add "feedback control systems" to your many other areas of knowledge.
BSEE (Control Systems mostly)
MSEE (Spending Money on Schooling)
PE (Before mental rust formed)
I am impressed by the "PE". I got so rusty I gave up on taking the test. Just as well, I would rather not be responsible for other people's work.
I have actually never made use of it professionally. I took 18 months off between the BS and starting the MS and was surprised how rusty I had gotten at bookwork in the real world. Once I finished the MS I started studying for the PE exam figuring I'd never be able to do so if I waited.
I was fortunate in that there were a couple co-workers that already had their PEs to vouch for me on my paperwork and another co-worker who wanted to take the exam too. We studied and compared notes every night for about 6 months getting ready and eventually we both passed the exam first try.
Believe it or not, the application paperwork was nearly as difficult as the examination. I think my application totaled a bit over 80 pages.
He acutally uses his license in the product liability world. My chief use is for resume fodder and a small but steady drain on my income for renewals. If I had to take the exam again I'd fail miserably now, unless they've added a new limerick section.
Long life and prosperity to you.
"Righteousness prolongeth days." Proverbs
Analysts have to be somewhat bullish and therefore, we have a dearth of sell recommendations.
The best thing to invest in very soon will be commodities instead of commodity producers. It's much easier to hide or lie about earnings and other things than the physical commodity itself.
The only way for this to end is for the situation to hit rock bottom. However, we are several years away from this.
The real reason for basically all of the problems we have today is the US government and I am basically powerless to stop it.