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Beware Of The Analyst, Economist, And The Upgrades

The year was 2007 and the markets were in rally mode. Every economist with the exception of a handful didn't see any problems on the horizon. This was after a sharp downturn in late February 2007 when the market dropped 500 points in a single day. Yes, this was when 500 point declines was not common place. Even after such a sharp drop every economist that I heard was still saying it was a blip on the screen and everything is fine. Sub prime was fine and under control and another rally followed. Then in July of 2007 the markets experienced another sharp decline into August and even then the new Fed Chairman said things were fine. The markets rallied once again into October of 2007 as all looked well in Mayberry. Analyst's from various brokerage firms were literally fighting to upgrade Google to levels over $1500 a share when GOOG was already at a new high and $700 a share. It still amazes me that none of these so called expert analysts and economists from one of the big banks like Citi Group downgraded themselves. By the way Citi Group was over $50 a share at that time.

Then it happened, the next great leg down occurred in one of the most vicious bear markets since the 1930's. The economist's out there all said the markets are fine and will recover shortly(December 2008). The markets nose dived into March 2008 when Bear Stearns collapsed and was bought by JP Morgan for $2 bucks a share(they later paid $10/share to appease the public).

In March 2008, the market rallied after the Bear Stearns collapse which was not called by any analyst or an economist that I know of. The low on the SPX in March 2008 was 1256 and when the SPX hit 1440 in May the bulk of economist's and analyst's everywhere were proclaiming a new growth cycle. Then on May 19th, 2008 the next move down took place in a violent, and fast decline. What happened to the new growth cycle?

As we all know the market has now put in a low in March 2009. This is on the back of a global coordinated stimulus plan by all central banks, a zero percent Fed's fund rate, and money printing that the world has never seen before. What else could the market due for a few months but rally with that kind of liquidity? However, the analysts, and the economists are back in full force. Upgrades and downgrades are occurring like it was 1999 again(we all remember what happened in 2000). It still amazes me that people are upgrading JPM and the rest of the bank stocks now when these stocks have rallied 300%. Where were the upgrades when theses stocks were in the single digits or when JPM was $15 bucks. Lets not forget Goldman Sachs hit a low of $47 a share in late 2008 as well. However, the upgrades come pouring in when it hit $150 a share. Lets not forget all of these stocks have done huge secondary offerings diluting their shares so they are really above their 2007 highs in real terms. Yet the analysts love them up here and the economists say the world is on the road to recovery.

When the economists and analysts all say things are well in Mayberry it is time to get worried. This is something that much be watched. Why? Because it has called every major top in the market since 2000. I'm just waiting for someone to upgrade Lehman Brothers (that still trades on the pink sheets). Then I will know the top is certainly in.

Nicholas Santiago,
Chief Market Strategist