Froth? Systemic Bullish Bias? Naaaah

Whenever anyone asks me why I don’t run more Bullish commentaries, I give them a three part answer — a) one the time is right, I will; 2) last time I was very Bullish no one wanted to hear it (October 2002 and May 2003).

And, iii) pretty much the rest of Wall Street — and a large swath of the financial press — do that already. 

Look no further than today’s WSJ for signs that the bias towards "Buy recommendations" — long seen as sign of Research cowtowing to iBanking — is still rife on Wall Street.

"The froth is back. After the brokerage scandals involving biased analyst recommendations in the 1990s, Wall Street was supposed to start warning more often about stocks that could fall, rather than just giving upbeat views. But Mike Mayo, who covers bank and brokerage stocks at Prudential Financial Inc.’s Prudential Equity Group, thinks the research reforms of 2003 haven’t fundamentally changed Wall Street’s bullish bias.

In an article prepared for the May-June issue of CFA magazine, Mr. Mayo notes that Wall Street analysts have 193 "buy" recommendations on the 10 U.S. stocks with the largest market values. And how many sells? Just six.

One source of "systemic bias," Mr. Mayo writes, is "the threat from covered companies to punish analysts with negative opinions by shutting off their access to management." (emphasis added).

Note that Pru does not do any investment banking, and is freer than their competitors to address this . . .

UPDATE:  May 7, 2006 6:08am

To be fair, picking only the 10 largest names is not a complete analysis.

I’d like to see the breakdown for the 100 largest names (and hence,
the most banking business), then the S&P 500, and then the next 2000
names or so . . .


Analysts Retain a Bullish Bias, Issue Precious Few ‘Sell’ Ratings
WSJ, May 6, 2006; Page B3

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What's been said:

Discussions found on the web:
  1. Robert Cote commented on May 7

    Question, who are they talking about?:
    This Month, analyst recommendations
    Strong Buy 4
    Buy 2
    Hold 6
    Sell 4
    Strong Sell 1

    Last month:
    Strong Buy 6
    Buy 2
    Hold 7
    Sell 1
    Strong Sell 1

    Ans: Toll Brothers

    ‘Nuf said?

  2. wcw commented on May 7

    Much as I like to rag on sell-side analysts, one data point isn’t quite the indictment for which you might hope.

    FD: not short TOL, but BZH and BHS

  3. Barry Ritholtz commented on May 7

    To be fair, picking only the 10 largest names is not a full analysis.

    I’d like to see the breakdown for the 100 largest names (and hence, the most banking business) — the S&P 500, and then the next 2000 names or so . . .

  4. john commented on May 7

    And we follow analyst recommendations for …? Fun, recreation, amusement …? Certainly not to make money.

    By the time the analyst knows – the “price” knows and if you aren’t following “price” then you probably shouldn’t be in the game.

    The only analysis that is any good is your own – you know why you came to your conclusion, what your agenda was, who you work for, and why you started looking at that stock in the first place. If you need someone else’s opinion always keep in mind – opinion’s are like assholes – everyone has one and they all stink.

    I love the commercials that say – your money is very important – so why don’t you let us watch it because you’re too stupi….uh….tired, yeah that’s it, tired to do so.

  5. D. commented on May 7

    I’d blame the brokerage firm’s management before blaming the analysts. It’s them who want the business. I’d say eternal optimism is probably one of the top hiring criteria when a brokerage firm is looking for an analyst. Can’t blame the analysts for being too optimistic, for most of them, it’s in their nature!

  6. trader75 commented on May 7

    This is probably a cultural / socio-genetic thing. How many employees are bearish on the prospects of their own company, not counting the ones expecting to bail or get fired.

    On a recent plane trip there was a girl in the window seat behind me who worked in sales support, or something of that nature, for AOL (America Online).

    She was waxing eloquent to her row mate why AOL had turned the corner, why the things looked incredibly bright, and why she was incredibly excited and motivated to be participating in AOL’s future. And it sounded like she believed every word.

    Anyone who isn’t a student of psychology and sociology is heavily influenced by group and culture bias. Even if you are aware of existing biases, it’s incredibly tough to fight your own natural wiring. Just the simple act of having conversations with the companies they cover all day is probably enough to ingrain a sympathetic bulilsh bias in the average analyst.

    The fact that the typical Wall Street analyst has no real dark side duties–no career impetus to spend time looking for good shorts or bearish stories–probably creates a bullish lean as well.

    It’s quite possible for an individual to believe they are totally objective (which is false as total objectivity is impossible) even as their belief systems are shaped and molded by hundreds of individual filters each and every day. It could come down to something as subtle as facial expressions. Imagine you are a new analyst bringing ideas to the sales meeting every month. When you have bullish ideas, you get imperceptible signs of approval from the sales guys. Positive facial tics. When you have bearish ideas, you get the cold shoulder in a myriad of small, subtle ways. Negative facial tics. Before you know it, your subconscious mind is gradually steering you to the ideas that give you a sense of well being. Group acceptance becomes a significant factor in your analysis and you don’t even know it.

    A lot of ‘rigorous studies’ are superfluous, in my humble opinion, when a hypothetical question can be logically answered, or at least skillfully analyzed, with the help of knowledge from other disciplines. The silo effect of academicians focusing on ever more narrow niches really has made us all the poorer for it.

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