Countrywide Financial, VTB Group: Why Are Analysts So Screwy About Sells?

I'm not sure if most readers of this site know it, but long ago I was an equity research analyst at a few brokerage firms, including TD Waterhouse, HSBC Securities, etc. That will help explain why I still follow how the home analyst team is doing-- and lately, it's not great.

First, we had the story yesterday that a Merrill Lynch (MER) analyst dropped Countrywide Financial (CFC) to a "sell" rating. With the stock off 42% this year, and down 33% in the last month, that could seem ... a little slow. Skeptics will say, where was he in February? Downgrading now might make some sort of near-term bottom for the troubled mortgage company.

More sanguine sorts might point out that four brave analysts already have Countrywide at Sell, which is true. But then again, that's the same number as last month, and the same number as three months ago -- out of a total of 15 analysts covering the stock. Not exactly a resounding vote of non-confidence for a plummeting stock.

In a post-banking world why are analysts still so screwy about Sells? Not because analysts are dumb, because they aren't. Truly. But because analysts hate being first to downgrade, and hate being last. Being first is just a recipe for irritating portfolio manager clients who you likely got into the stock; being last makes you look clueless, with the stock immediately flying higher. And if you're not first, you're always petrified you're going to be last. Public stock flogging is just not rewarding.

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Next up we have the story of Goldman Sachs (GS) and VTB Group. Goldman brought the Russian bank public three months ago, after much work setting up a Russian i-banking presence, and now Goldman's London-based banking analyst has dropped a "sell" rating on VTB's stock, saying he sees better values elsewhere.

Fair enough, one might think, but, according to a Russian newspaper, that move led Goldman CEO Lloyd Blankfein to apologize to VTB Group CEO Andrei Kostin for the "sell" recommendation. And not only did he apologize, Blankfein apparently told Kostin that he didn't share his analyst's "point of view". Nice. Thanks for the support, Lloyd.

Welcome to the world of being an analyst, where being early is not rewarded, being late is not rewarded, and sometimes saying anything at all just has your boss publicly kick you upside the head.

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More here on VTB from Bloomberg, and you can see Countrywide's analyst ratings here. And Barry argues here that credit analysts are the new equity analysts, circa 2000.

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[Reginald:]

RUSSIAN IPO INVESTOR ALERT


French holders of Russian government bonds remind investors that the Russian Federation is still in default today (July 2007) on their estimate of some US$ 90 billion owed to them since the Bolshevik, then the Soviet, and now the Russian Federation governments have all unilaterally repudiated Tsarist debt and refused any form of contact or dialogue with their legitimate bona fide creditors.

They also remind investors that in its Sep. 15th 2006 report entitled "Governance matters: a decade of measuring the quality of governance", the WORLD BANK has rated Russia's governance comparable to that of Swaziland, Zambia and Kazakhstan. Russia came 151st out of 208 countries in terms of (...) accountability, quality of regulatory bodies, and rule of law, (...). In particular, rule of law (i.e. the courts and the quality of contract enforcement) was judged as effective in Russia as it is in Ecuador, Indonesia, and Bangladesh. Nicaragua, East Timor, and China's ability to control corruption was judged similar to Russia's.

On February 26th 2007 the St. Petersburg Times, quoting a report from Vedomosti, wrote that "Surgutneftegaz managers covertly hold 72 % of the secretive oil firm" and that Deutsche UFG analysts had had to "raise its estimate number of outstanding shares from less than 26 billion to (...) 43 billion" which "implies a 40% dilution in the value of the stock".

In Paris on April 3rd 2007 to launch the merged NYSE-EURONEXT entity Mr. John Thain, the New York Stock Exchange CEO, warned that he was "very concerned about the quality of corporate governance, the transparency of company financials and the protection of minority shareholders. A number of Russian companies raise serious questions around these issues."

Despite these findings, and the main rating agencies' knowledge that Russia is in default on US$ 90 billion of Tsarist debt, Russia is rated "INVESTMENT GRADE" whereas it should clearly be in "SELECTIVE DEFAULT".

French bondholders intend to pursue their claim until full settlement at present value, by any legal means and in any jurisdiction they deem appropriate.

EVERY POTENTIAL INVESTOR IN RUSSIA MUST BE MADE AWARE OF THESE RISKS.

FRENCH CREDITORS OF THE RUSSIAN FEDERATION STRONGLY ADVISE AGAINST ANY FORM OF INVESTMENT IN A COUNTRY WHOSE SOLVENT GOVERNMENT HAS IN THEIR VIEW SYTEMATICALLY REFUSED TO FULFIL ITS NATIONAL AND INTERNATIONAL CONTRACTUAL OBLIGATIONS, REFUSES ALL CONTACT AND DIALOGUE WITH ITS LEGITIMATE BONA FIDE CREDITORS, AND REFUSES TO DISCLOSE LIABILITIES WORTH US$ 90 BILLION.
July 2007

2007 Aug 16 06:21 PM