This is a humorous piece on Bloomberg, but not because it meant to be. Since a portion of our readers are relatively new to the investment world, I want to refer you to a piece I wrote at the end of 2007 called [Dec 5, 2007: The Games Analysts Play ... Why No One Ever Says Sell] What you have to realize is much of Wall Street (ex hedge funds who actually short) is all about selling sunshine, drawing in investors promoting how great a world it is, acquiring assets (just keep sending us money, over a 50 year time horizon you'll win!), and general cheerleading (as best seen for 2 decades on CNBC). Since almost everyone is long oriented only this is the mantra.

Analysts are in on this, and frankly the analyst role has been reduced since Spitzer came in and changed the rules - since fees from research dropped, financial institutions put less money into them. I should make a distinction here - I am speaking of sell side analysts with the comment above and below; those folks whose reports sway stocks on a daily basis... the other side buy side analysts actually have to eat the meat they kill - i.e. a hedge fund analyst, a mutual fund analyst. They have no snake oil to sell, they need to be right... different class of animal. But something you learn quickly once inside the Matrix is how infrequent outright sells are by the sell side. Studies have been done and usually it is something akin to 95% of all ratings are some form of buy or hold. Because the last thing you want to do is upset a company who has investment banking business potentially for your institution! As I wrote in 2007

Watching investors scurry like lemmings each time an analyst says boo is a bit amusing but unfortunately in can affect your portfolio. What many new investors do (as did I) was take these analyst reports as gospel. Over time, you see the games that are played and you catch on, but usually after many lessons. Myself, I like to read the why of a report, but other than that don't care one bit about the actual ratings unless its an outright sell (which is as rare as a dodo bird).

I also will give a lot more weight to an analyst who works for a research only firm, meaning they do zero investment banking and their whole business is providing research....

One must always remember what the motives are for analysts, and where they are in the food chain of a bank. There was a big fuss after the late 90s and all these new proposals were put into place to make the analyst community change to a more useful service instead of beholden to other interests within a bank. Everyone asked why is there almost never a sell rating?? As with all things regulatory in this country - this fuss was raised, fines (minor ones) were levied, we were told everything was fixed, and everything went back to business as usual within 2 years.

I really want to stress to Joe 6 Pack, or Jane the accountant reading out there, how much of a game it is...


Shrinking fees from brokerage commissions mean fewer dollars for research and more pressure on analysts to hang on to paying customers such as hedge funds. While clients care little for ratings, they covet meetings with company executives -- audiences that favored analysts can deliver. As a result, ``sell'' ratings on Wall Street are even scarcer than four years ago, when 10 securities firms paid $1.4 billion to settle allegations by then-New York Attorney General Eliot Spitzer that they used research to improperly promote stocks.

``An analyst cannot issue a sell rating because he doesn't want to lose access,'' said Tom Larsen, a former Credit Suisse Group analyst

Analysts rarely said ``sell'' before the Spitzer settlement because they didn't want to jeopardize investment banking fees. Now, they're more concerned about maintaining good relations with company management. Only of analysts' recommendations have been sell this year, 7 percentdown from 11 percent in 2003, data compiled by Bloomberg show.

Instead of saying ``sell,'' analysts have stuck with ``hold'' ratings that are less likely to antagonize the senior executives they're monitoring, Larsen said.

For analysts, the punishment for a negative rating can be as swift and unmistakable as a door slamming shut,

While a ``hold'' might be enough to signal to institutional investors that a company is in decline, retail investors follow analyst recommendations literally, according to a study published in the Journal of Financial Economics in August.

``Companies can live with a hold recommendation,'' said Larsen of Harding Loevner. ``The tacit understanding by everyone, except possibly the retail investor, is that it's a less-harsh way to say sell.''

Since I wrote that piece when I had a much smaller audience, I want to stress to newer readers - until you can invest in my fund of course - to be wary. When you see hold, that is shop talk for sell. Institutions know it, whereas the retail guy is saying what's the big deal, they still like it, just a bit less!. Just understand Wall Street is a place to take money from retail and give to institutional. I will be banned forever from the cigar club for letting you in on that, but I had surely already been banned!

Hold on, I am getting a bullet point dogma alert via instant message. Ah yes (clear throat) Wall Street = Main Street. With the influx of 401k money almost 60% of Americans are now shareholders, and we are all in this together. Buy stocks or funds at our institution - we will take care of you.

Ok back to reality; the Bloomberg article is classic. Even when these sell side analysts make a switcheroo, they are getting it wrong often. Which is why it drives me up the wall to watch the thundering herd of lemmings move stocks 5-10-15% based off an analysts siren call. It's really an amazing experiment in mass psychology. Much like the larger market.

Let's look at how listening to these folks, paraded daily on financial intotainment TeeVee, and whose calls move markets would of treated your money.

  • Anyone who did what Wall Street analysts advised last March has only losses after the biggest stock market rally in seven decades.
  • Citigroup Inc., Bank of America Corp. and more than a dozen other firms told clients to purchase European energy producers and U.S. drugmakers while selling banks and retailers, according to combined rankings compiled by Bloomberg.

Here is the kicker

  • An investor who used $10,000 to buy companies in the highest-rated industries and bet on declines in the lowest since the advance began on March 9 lost everything and would owe as much as $6,000 to cover bearish trades, the data show.

Boo Yah!

  • The recommendations didn’t work because companies with the worst earnings led the 46 percent gain in the Standard & Poor’s 500 Index since it fell to a 12-year low five months ago.

And we know that here at Fund My Mutual Fund because stupidly we tried to short companies with bad earnings. Silly us - but we certainly did not stick around and once we saw the new market order we changed strategy... unlike (ahem) analysts.

  • “Analysts are attached to fundamentals,” said Romain Boscher, who helps oversee $18.5 billion as head of equities at Groupama Asset Management in Paris. “This is a technical rally, a rally of sentiment. Analysts were too defensive. There was an inflection point and they didn’t see it.”
  • Stock returns haven’t been tied to profits during the five- month rally in global equities. S&P 500 companies that reported a drop in second-quarter earnings have risen 8.4 percent on average in the past month, compared with a 7.2 percent advance for those with increases, data compiled by Bloomberg through Aug. 17 show.

The above bullet point is what I suspected. Remember in a 'student body left', HAL9000 environment - everything goes in the same direction. Profits or no profits... good or bad fundamentals. Which is why I say constantly guessing the direction of the market is now more than half the battle. It is sad, but true - knowing about individual companies - especially the past half year, has been a waste of time. Adjust or die.

  • Securities firms that failed to foresee that the hardest-hit stocks last year would recover fastest steered investors to drug and energy producers, which have trailed the MSCI World Index by more than 24 percentage points, the data show.

You might think the Bloomberg study is unfair because it shorted stocks with the lowest ratings... well even if you exclude that analysts fell flat on their faces.

  • Even without shorting, someone who sold stocks rated below “buy” would have missed the biggest rallies.
  • U.S. industries with the highest percentage of “hold” ratings, financial institutions and retailers, beat the S&P 500 with advances of at least 58 percent since March 9. The groups in the MSCI Europe with the most “holds,” banks and commodity producers, surged more than 55 percent in the past five months.

And that's the story my friends. Buy side analysts don't have to be correct, they just have to make executives happy (so their firms can get secondary and bond offerings along with M&A activity) and get paid very well for being chummy. Sort of like an army of yes men you might know at your corporate office. Further, they get cool rankings in financial magazines about whose the best, they get to move stocks (ego boost!) with new coverage or an upgrade from strong buy to even stronger buy, they get to smile for CNBC (as long as it's bullish talk of course), and I assume also get shiny plaques for good work. (please note I am of course generalizing and as in any profession there are a subsect that stand apart from the crowd)

On the other hand sell side analysts actually must be right, or they tend to lose their job. You don't hear about them...

With that said, this is the game - and the lemmings react to the buy side... so whatever the truth is outside the Matrix, we're stuck inside it. But don't get stuck drinking the Kool Aid.

**************************

Buy Side Analyst: I give this posting a Hold.

Mark: Shocker.