The Two-Ton Wall Street Conflict of Interest Few Dare To Talk About

September lived up to its terrible reputation in the worst week for stocks since May. It was the worst beginning to the month since World War II according to Bloomberg. But that hasn't stopped an army of pundits from playing their favorite game especially when stocks get clobbered. Bottom picking continues to attract analysts like moths to a flame as they shamelessly, almost desperately talk their books. Attempts to justify their high fees for losing their clients' money shouldn't fool anyone but it probably does if the popularity of this practice is any indication. And the more depressed stocks get, the more intensely they compete in this game.

As I write this, I'm watching Barton Biggs on Bloomberg. "We're pretty close to a bottom," he says, clearly uncomfortable on camera. He believes we are in a cyclical bear market but if it turns out to be a secular bear, ventures that "prices could go lower."

Who is he trying to kid? That's like the captain struggling to keep his ship afloat after being torpedoed in a storm, telling his crew that if the ship explodes they could be in trouble .

Maybe Biggs is right about being near a bottom, but what if he's not?

Remember when analyst Dick Bove confidently declared "the financial crisis over" giving us a "once in a generation opportunity to buy" stocks during the week of March 21 (see our March 21-08 newsletter)? Those who took this advice and bought the S&P500 Index have lost 6.6%, which means they now need to earn 10.7% (plus the cost of commissions & fees) just to get their money back. And as the next figure shows, unless you got very lucky, buying ETFs or stocks in the most beaten down sectors at the time was even more costly. But some on Wall Street still can't seem to break that bottom calling habit.

Figure A – Here are how the six sectors most beaten up in the six months leading up to March 21, 2008 have performed since March 21. As we see, while the Electronic, Telecomm and Auto & Truck sectors did rally for a short period, they have all resumed their downtrends, as have all the "bargain" sectors. (Chart by VectorVest.com.)

But the motivation for this optimism is as understandable as it is self-serving. According to Bloomberg, Barton Briggs' Traxis Partners LLC hedge fund has lost 10% so far this year to August 31. Given the brutal September so far, chances are that this loss has since grown. And he's certainly not alone. Some have fared far worse (see article "Clarium Declines 13% ..."). It is surprising that more investors don't demand their money back but this is the last thing any money manager wants. Better instead to exude optimism that a bottom is at hand than risk a redemption run.

But few in the media seem willing to discuss the cruel reality that investors are left to face alone and that is the prospect of paying fees for the privilege of having a money manager lose their money.

So what will it take for those in the industry to admit that we might be in a secular bear market? (Be sure to check out the chart of Global Equity Returns.) Unpleasant as it may be, the probability of this being the case increases with time. And those who are waiting for the Bureau of Labor Statistics and National Bureau of Economic Research to confirm the existence of a recession are way behind the curve.

Whether we are in a recession or not is moot. As the rate of change in jobs figures and the more reliable indicators and the leading stock market sectors and indexes show, we've been in a bear market for more than 10 months now. Given that we are, 1) in the final inning of the best period in the election cycle and are facing the two-year post election period when markets have historically performed abysmally, 2) are in the throes of the bloody aftermath of a multitude of asset bubbles bursting around the global, and 3) are facing the very real prospect having of the most left-leaning, anti-corporate president in history empowered by a Democratic Congress and Senate running the country with the commensurate risk of increasing taxes and raising trade barriers at the worst possible time in the economic cycle, the market outlook must be considered challenging at best.

So how accurate have Wall Street analysts' recommendations (upon which many money managers rely for their advice) been so far this year? A report from Bespoke Investments this week discussed stock performance based on analyst ratings from the July 15 low to the August 28^th high. Not surprisingly, the decile of stocks most loved by fundamental analysts gained a paltry 2.59% while the decile most hated (with the lowest ratings) jumped more than ten times as much posting an impressive 29% gain between July 15 and August 28. This compares to a 7.1% gain in the S&P500 over the same period.

The lessons? First, it is better to use Wall Street analysts' consensuses as a contrarian indicator, especially when times are tough. Second, unless you are among a fortunate few, it is unrealistic to expect your money manager or financial adviser to tell you when to head for the exits when the time comes – that's a decision that you'll be left to make on your own.

Stock position: None.

Comments

[investor88:]

Matt is to be commended for hitting the nail on the head with his well written article but being hard headed and realistic. Some people say that at times like this, return of capital is more important than return on capital.

2008 Sep 07 06:21 AM

[Alan von Al...:]

Now in my watchlist. Thank you, sir.

2008 Sep 07 07:11 AM

[goingbankrupt:]

Why do you say Obama is "the most left-leaning, anti-corporate president in history"? He's clearly very centrist. Think of him as Bill Clinton 2, who was much better for the economy than the "right-leaning" republicans that preceded him and followed him. If you're a Republican, fine, but don't skewer your economic analysis to fit your political preferences.

2008 Sep 07 08:12 AM

[eddie6442:]

I am baffled at how "investors" continue to hang on Analysts words. Contrarian indicator is the best that can be said, since they are statistically WRONG 90% of the time. Following SEC REG FD

2008 Sep 07 08:28 AM

[Pasobill:]

Wall Street has always had a conflict of interest. They make money by being bullish and investing 100% of your money regardless of the economic outlook. Mutual funds think they are very conservative when they have 8% in cash. I have never understood why they don't raise large amounts of cash when it becomes so obvious to all that markets are not going to perform. They all brag that they do better than the S&P but who wants to lose 20% and be content. In my opinion one never loses when they raise cash and wait patiently for better days.

2008 Sep 07 08:36 AM

[basehitz:]

Thanks for voicing a much needed, but seldom heard comment from the talking heads. And let me add, when you see Maria Bartiromo interview Bill Fleckenstein on closing bell after the market has had a particular bad stretch and tough day, and especially if she looks particularly depressed, and then CNBC has AH the hand-holding panel of Dr. Phil's, it's time to get that watch list ready to go.

As far as your political comments, the policies each advocate draw a clear distinction. Obama is no Clinton. While I disagree with Clinton on social issues, he backed free trade, welfare reform, and other pro-growth policies. And most importantly, he was offset by a Republican congress led by Gingrich. Obama's campaign points are not consistent with Clinton in many regards, and Congress is moving hard left. McCain is no Bush. The biggest difference is spending restraint. We cannot afford the big govt programs advocated by standard liberal policy. But I'm afraid, short of a mircale, that's what we're gonna get.

2008 Sep 07 09:02 AM

[tginomorebush:]

another republican analyst as opposed to an analyst ...... would be nice if alpha would screen the pundits "anal"yzing for political gain!

NOmccain! NOMOREbush! NOpalin! NOMORErepublican disasters!

2008 Sep 07 09:04 AM

[Roowns:]

I loved the comparison with the ship. Nobody could say it better.
But I am sure people will easy forget about the unemployment numbers and concentrate on the Fannie and Grannie story that most likely will bring big surprises.
I look forward for the most volatile week of the year.

2008 Sep 07 09:17 AM

[David Martin:]

Spot on about Wall Street, but weird on the politics - apart from lies to grab taxpayer funds for bailing out bankers and their absurd non-performance bonuses, fighting all and sundry in wars is pretty expensive too - but Bush has just put it on the taxpayers tab.

2008 Sep 07 09:29 AM

[Econ#1:]

Some people do not realize it takes 3 to 8 years for economy to be realize. The economy Pres Clinton inherted economy was set during Reagon , GW Bush,s reign, I would have had a greater surplus: I would have cut some of the spending and that economy could have lasted into the next Reign

2008 Sep 07 09:30 AM

[notsosmart:]

i have been saying it all along.dont believe anybody about anything.all have an agenda.luck or brains?-i dont know but i bailed with my growth stock @ 14,000dj. i held my high yield stuff(8-9%) & now have the cash in low yield(sad) but safe banks.i have no idea re the "bottom" except the one i sit on.my question to all the brains on this site is-how long can a society that prints money & shuffles worthless paper survive?if you dont make a good useable end product what is your value?think of the last century & what this country produced.

2008 Sep 07 10:11 AM

[Leser:]

Basehitz wrote: "We cannot afford the big govt programs advocated by standard liberal policy."
What we can't afford are more of our government's unending and expensive wars abroad--or these two that we currently have. Return the expenditure from foreign fronts to develop the U.S. to set our.people working, to improve our infrastructure and develop the alternative fuel sources, wind turbine fields, and capturing natural gas and drilling for the oil we do have, improving our police forces, etc.
Invest in America, not in unproductive war to solve the problems we're facing. What a waste of our tax money these last eight years have been. Even our grandchildren will rue our waste of their tax money as they pay the interest on the money we threw away.
Invest in our schools, colleges, trade schools, and the American people, not in the military in this way, which is bringing us no productive growth and actually makes us ineffectual in our relationship with other nations.
We need to come back to using diplomacy to solve problems. Shouting matches and beatings don't work in domestic life, nor in international relations. And sure, Theodore Roosevelt said "Speak softly, but carry a big stick." The big stick politics only work when one does speak softly, uses diplomacy first and foremost.
Who would really vote for more of the Bush agenda at this time? How can one even consider voting for McCain? I suppose those who have investments in armaments and those who are not thinking, just voting the knee jerk reaction. Think it through. Our country needs to clean up our messes at home, keep more bridges from collapsing in our cities. We need to invest in our country and not squander more trillions in futile wars. When is the U.S. going to learn that?

2008 Sep 07 10:11 AM

[russ:]

the political comments are reckless babble from the mouth of a fool, just rewarmed bumper=sticker slogans. They destroy any credibility in economic analysis. If being 'anti-corporate' means being more concerned about the impact of policy on people than hedge funds and over-payed CEO's then count me in. We need some sensible economic policy that does not transfer our fleeting wealth to OPEC and to China. I am for free trade and understanding that the current situation is being manipulated against us is not 'leftist,' it is hard-nosed practicality and actiully more conservative than this goofus Matt

2008 Sep 07 10:22 AM

[secmaven:]

Spending on war is the antidote to continued recession. WWII proved that. I predict more war in the country's future and not less. Read "Xandu" by P.B. Shelly for a little guidance.

2008 Sep 07 10:36 AM

[John Lounsbury:]

I don't object to political discussion in SA articles and commentary. I do object to political sloganeering, which is what most political imputs are, unfortunately. Discussion of specific political actions (or potential actions) affects on markets and/or specific investments are fine. Putting out jibberish like "liberal", "conservative", "leftist", "extreme right", "tax and spend", etc. offer nothing to an intelligent discussion. The economic-political interactions we must deal with (both as citizens and as investors) are far too complex for trivial labels.

2008 Sep 07 11:19 AM

[300mph:]

user10, "Why do you say Obama is 'the most left-leaning, anti-corporate president in history?' He's clearly very centrist." No, he is as stated. I hope you would bother to check the facts before jumping to defend your favorite candidate. Just check his congressional voting record.

2008 Sep 07 11:23 AM

[ain't no fo...:]

Yah 300mph (evidently in reverse), then check George W. McCain's voting record... 95% in line with Bush's agendas... that's really encouraging.

Blackman had a good article going until he showed his (and the RNC's) true colors, namely that its all about dissing the "dems, libs, socialist-marxist Democrats" the republikaans falsely paint them as.

Just more cheap paranoid right wing political bs that in my case makes me question the entire premise of the article.

Of course, if George McCain and the nitwit hockey mom get in, the economy will be the least of our problems. Say good bye to the Constitution, our military, our moral standing in the world, and what's left of our environment.

And maybe start thinking about restocking that dusty old fallout shelter you built in the basement in the '50's... because that is one angry hair trigger old man...

2008 Sep 07 11:42 AM

[User 86999:]

This is so strange that our wages have not moved up since 2000, incidentally matching the dubya years, and prices have sky rocketed in this period; life has been sucked out of the middle and aspiring middle class, but we still fail to see that the republican policies are not in the interest of the common citizen - unless of course you are one of those making more than a million bucks a year, which is not quite rich but not exactly middle class either. I cannot see how a middle class person will consider more taxes on the corporate to be anti-corporate, if those taxes can be used to pay for your health and education, which in fact returns those benefits back to the corporate, while making sure that the employees get paid enough instead of that big fat cat sitting at the top.

2008 Sep 07 12:09 PM

[gon4beer:]

I've been in the investment business for 21 years and have learned to ALWAYS cross check fundamental analysis w/ technical analysis. Wall street didn't go to a HOLD on enron until it got in the mid teens. The charts told us that sellers were in charge of this stock starting in the hig 70's. As for the recent market troubles, the only folks who have been dead on w/ what's going on have been the Elliott Wave guys. Prechter was giving warning 16 months ago. I've been using the work of Dr. Robert McHugh ( technicalindicatorinde... ) who has done superb work in the ~ 6 months that I've been using him. I started w/ a free month , which I believe is still available) and have since signed up for the 2 year deal. I don't pretend to understand all the minutia of EW theory (isn't that why we pay experts anyway?!) but I do know that in the past 6 months, Bob has accurately called every major move almost to the day. I have no financial interest in this-just passing on my experiences. My point is, that Wall Street is simply interested in generating fee income from managing $, while those of us in the trenches are just trying to figure out how to intelligently manage our own, and/or our client's money. Analysts tell you what they think-charts tell you what the market thinks. Both are useful, and I've found that investment results are better when I apply both fundamental and technical analysis. Good luck. BTW, the market seem to be anticipating a Democratic victory, which could be a total financial disaster if all of Obabma's financial policies are implemented. I admire the man for how he's gotten to this point, but I don't think his big picture view of money is at all realistic. good luck to all

2008 Sep 07 12:32 PM

[Jimbo:]

User 10 and others seem to be drinking the fermented Koolaid and smoking Gainesville Green. I suggest they post on this site in about one year after the anticipated coronation of the Anointed One. By the way, I am no fan of George Bush.

2008 Sep 07 12:42 PM

[seffieandcoco:]

I am always amazed that those getting a government check seem to be the ones that complain about government intervention the most......and I include the investment class......without manipulation by the fed the wealthy classes in this country would have been wiped out by a stock market meltdown........it is not just tax policy but it is fed policy that is making the wealthy rich........imagine if you were living on a fixed income!!!! And if the trickle down effect is so effective why do they not give us a tax rebate when we are high earners? We will trickle down more to the gardeners and nannys so they can send more dollars to their native countries.

2008 Sep 07 01:02 PM

[Matt Blackman:]

As SeekingAlpha is not a political forum my comments about Obama being the leftist most candidate was not intended as an endorsement for one candidate over another. My leftist-most candidate comment was based on a rating by the left-of-center group Americans for Democratic Action of a perfect 100. McCain garnered a rating of 14 from the group. Obama's perfect score is the highest this group has awarded to any candidate running in any recent election. John Kerry scored 95 when he was running in 2004.

My comments were not intended to start a political debate only to point out that policies to increase taxes including income taxes, dividend taxes, capital gains taxes and corporate taxes have a negative impact on Wall Street. The same can be said for policies to increase trade tariffs and re-write free trade agreements, which Obama has advocated. History tells us that increasing taxes and trade barriers during a weak and deteriorating economy has the potential to further negatively impact growth.

From a business, corporate (Wall Street) point of view, McCain's plan to lower the corporate tax rate to 25% and maintain capital gains, dividend and other tax rates essentially where they are should be good for Wall Street and stock prices. Obama has discussed many positive policies that have the potential to be good for America. However, he has never advocated policies that favor business, so from a perspective of being good for stock prices going forward, will mean a more challenging environment for if he follows through on these promises.

If you are interested in a discussion of these policies from a corporate, stock market perspective, my recent article in SFO magazine discusses them at length. It can be read free at
sfomag.com/Article.asp...

Matt Blackman

2008 Sep 07 01:14 PM

[John Lounsbury:]

Matt Blackman - - -

I appreciate your well considered reply.

2008 Sep 07 01:49 PM

[User 86999:]

Matt, your article on sformag is well written, but your thesis starts breaking down once you start using the numbers, such as $362B, $600B, $510B, which do not fit well together. Regardless, the profits sitting overseas waiting for a money-laundry opportunity like the 5.25% tax is a taxation loophole anyway. The Code needs be tightened, so that a corporation cannot keep the profits stashed away waiting for such an opportunity and instead pays the dues every year.

The following is a quote from your conclusion:

''Punish corporations for engaging in business overseas while raising the taxes they pay to the highest in the industrialized world, and they will do one of two things: either do less global business (which then will go to non-U.S. competitors) and become less profitable in the process (which means they will be able to hire fewer Americans); or these companies will simply move away, with a similar impact on U.S. workers.''

Well ... in the first case, the higher domestic hiring is a distorted myth, so it is very unlikely to happen because the corporate greed will prevail, and in the second case, we can live without those patriots and they are free to move out of this country - just make sure to surrender the passport when deciding to move elsewhere. Bon Voyage!

I was going to comment on the article on its relevant site, but I didn't find a place where I could comment, so sorry about ranting on this forum, but I just wanted to provide my feedback from a different perspective. I'm sure you mean well, but I think we need to weigh our priorities a little more closely. The economy is way out of control because of the corporate/bourgeois greed already - a few more mistakes and we're doomed. We need to spread the wealth not concentrate it in the upper echelons.

2008 Sep 07 03:24 PM

[Kelly Liebe...:]

Kool-aid? More like some are actually dipping into the whiskey....We can all argue all day about who caused this mess and how long we think it's going to last...but meanwhile... everybody here knows how to make money no matter which way the market is headed.
If you think that the market manipulators and the govt. might be feeding you a line of BS to keep things afloat for as long as they can than hedge your bet and get your self some Gold and Silver. They have manipulated that market so low it is now ready to pop. Your choice... up or down there is money to be made....

2008 Sep 07 07:38 PM

[Fred S:]

Agree with the analysis however the prospect of a democratic president is the 'result' of the current fiasco brought on by the 'free-market' proponents you criticize as being biased. A fundamental change is needed in the political arena. The supply-side, free market, privatization, mantra HAS FAILED THE TEST OF THE MARKET.

2008 Sep 08 07:50 AM

[Danny/The D...:]

Costly military expeditions that must be paid for by future generations is one way to give the current economy a boost, but when it results in nothing positive or constructive, one has to question whether other ways of dealing with "evil" aren't more cost-effective.

I like Nixon's thesis in "The Real War" in which he suggested spending more on military research and technology; knowing that the Soviet Union would be bankrupted if they tried to match the US. Reagan implemented Nixon's thesis.

But instead of bankrupting our enemy, GW Bush et al have bankrupted our economy! And we the American people, swayed by the NeoCon fearmongering, have allowed this to happen We have no one to blame but ourselves.

Did we learn anything from Vietnam? No! Are we learning anything from Iraq? No! We're now going to beef-up war efforts in Afghanistan. If that doesn't work, we may invade Iran! Persians and Afghans aren't Arabs, but they are Muslims. And they are tired of our beating them over the head; ostensibly "to get Ben Ladin".

I didn't believe GW when he claimed during his campaigns that he wasn't interested in "nation-building". But I do believe him now! He hasn't built any foreign nation's economy and he certainly hasn't built the economy (main-street or Wallstreet) of our country.

But the Democrats were complicit with Republicans in what happened to our economy the past 8 years. Plus, Democrats did not impeach nor even attempt to censor Bush and Cheney. For that reason, I will NOT vote for either Democrat or Repulican candidates for President and V.P. It's time to vote for a third party's candidates and give them a chance to get our economy back on track.

2008 Sep 08 10:44 AM

[henarl:]

Wow, I was going to chime in with my best super cynical take on all of our current political hacks but I see that it's already been overdone.. Gotta get there earlier I guess.

2008 Sep 08 05:32 PM