There’s an old joke on Wall Street:
Analysts: You don’t need them in a Bull market, you don’t want them in a Bear market . . .
I was reminded of that when I saw these two headlines cross the tape:
• U.S. Stocks Drop on Bank Downgrades; American Express Declines (Bloomberg)
• Downgrades Hit Financial Stocks (WSJ)
Those of you who are active in the markets — what do you make of FinAns? Do you rely on them, fade certain ones, or just ignore ’em all?
What should the role of Financial Analysts be to investors?
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What say ye?
Ignore em all
In the end they are part of the business of selling stocks to the public. How many times has Dick Bove flip-flopped on Citigroup and the banks? And why do downgrades come after the stock has already dropped a ton? Citigroup, Google, etc, etc. Being part of the business makes analysts blind to the business.
ok Barry, now throw up a 3 trillion$ budget thread….
you KNOW you want to!
(rubs hands w. glee)
I’m the only analyst I trust.
I suppose if I paid their salaries and approved of the macro models under which the analyses were done, then I might trust them. Maybe.
The crowd that was still predominantly ‘buy’ in 2000 ain’t worth what’s left of the food they ate, to put it gently.
The only one I trust is Dick Bove. He got you out last Fall and got you in 2 weeks ago.
He is genuine with no ax to grind.
everyone needs reassurance and then someone to blame if it goes wrong or someone not to include in gratitude when it goes right
human nature
if the cannon fodder want it give it to them at both ends
rgds pcm
There are three kinds of lies: lies, damned lies, and statistics, and I’ve come loaded with statistics, for I’ve noticed that Financial Analysts can’t prove anything without statistics and to prove my point, 42.7 percent of all statistics are made up.
– Mark Twain
For the most part, analysts are not very helpful. Too much investment banking bias, too much B-school bias, not enough independent thinking. But I will also say that when you find a good analyst who does ORIGINAL research, he or she is worth their weight in plutonium.
I watch the game, not the cheerleaders.
24/7 had a good take a little while ago on the analysts who were sticking to outrageously high price targets for the financials while they were tanking. I only saw one analyst recommend a short on Citi, and that was right before some Saudi prince stepped in to stop the bleeding. A comment I heard in those days which made a lot of sense was that unless an analyst is screaming “buy” as loud as he can, whatever he says really means just hold tight or sell.
Dick Bove got Citi horribly wrong, Meredith Whitney did much better. As a former analysts I can tell you if you get more than 50% of your calls right you will be doing better than average.
A large part of the problem is that as humans we are poor predictors of the future. The Black Swan should be required reading for all new analysts.
Analysts are especially poor with their earnings forecasts at cycle turning points. Go back 6 months ago and S&P500 operating earnings were expected to grow 10% in 4Q07. They are now expected to be -22%. 4Q08 S&P500 growth is expected to be over 50%, mainly because of easy comps. What’s the bet that will be slashed by more than half by the time we get there? FY08 earnings growth are forecast at 17%, that forecast won’t even be close.
Bottom line look at trailing earnigns for a gauge of how cheap/expensive the maret is as forward earnings projections in times like these are practically worthless.
I find them very useful but you must use them for the right things. If I’m just looking at a company they can get me up to speed quickly. If there’s something weird about the company’s financials like the tax rate suddenly changed or margins dropped a lot 5 quarters ago they’ll have the answer. They are also useful for getting management meetings (in person, conferences, etc.). And they are useful for understanding what others things of a stock. If I’m bullish then what are his/her bear clients saying and what are they looking for.
Seems to me like the only usefulness that the analysts have is in setting up the forward estimates for a company that helps us value the shares. Even this is hard to trust, but their upgrades and downgrades are silly.
I just listen to Cramer and follow the herd.
I keep tabs on a few analysts and usually read through an analyst report or two before buying a stock. I am looking for trends or connections I wouldn’t otherwise see myself. However – 90% of what is written is pure dreck. I am a veteran of a dozen public companies. Some of the reports written about companies where I have worked belong in the fiction section.
@anon
I’ve seen mad money a few times and can understand the (sometimes rabid) hatred of cramer. Outside of those few times I just don’t watch his show or any analysts’ shows. However I do keep tabs on his writings. Say what you want about the guy but he does explains connections and trends better than most. Looking at my portfolio about 1/3 of the stocks in it happen by him saying something about an area that I hadn’t looked before (not the specific stock he was talking about but the industry or trend).
The effectiveness and reliability of the analyst depends
1) On the independence of the analyst and the firm
2) Whether the analysis is based on strictly quant models (short cut) or is fundamental in its approach.
3) Specialist or generalist
4) Willing to incorporate Human Behavior
Examine the commodity/gold sector(s) and just look at all the analysts calling for a collapse in commodity prices for years. The analysts were either handcuffed by their firms stated positions (derived from whatever purpose) or they relied on historical trends which much like the BLS birth death model, miss turning points. Whether it be oil, gold, grains… only a handful of analysts accurately forecasted the strains in the supply and demand curves. Meredith Whitney should NOT have been one of the few that accurately predicted Citi would be forced to cut its dividend, yet her call was greeted with shock by most other analysts. Their reaction is a case study of those analysts that drink too much kool aid and naively rely too much on conventional data releases as is without critically challenging the figures.
For my areas of interest, gold, commodities, energy… Sprott Asset Management get the goods.
Agree Bove got Citi somewhat wrong but in the whack-a-mole game the guy has been almost 80% on the right side.
I knew the guy back in the 70’s and I am not his cheerleader. I just like to acknowledge good honest talent.
Let’s have a contest and figure out who all the GOOD analysts are today. I could use the help. Most of the ones I trust have retired some time ago.
‘Financial analyst’ is yet another occupation that can be eliminated completely with absolutely no effect on the rest of the population.
Analysts are hype artists. They are bagging on banks now so they can buy them on the cheap. They will eventually say they are cheap, so their investment can payoff. If you go counter to most analysts, you can profit nicely.
I follow some independents, like ISI. Largely ignore wire houses. Most sources are via other sources, TSC, Bloomies, TBP general media when they are interviewing someone I think has a bead….Jim Rodgers for example. I like helene M., Chris Edmonds (where’s he been?), David Merkel, Marcin, Kass…..
To paraphrase Montier, “Why would an analyst rate a stock as a ‘hold’ at $40 per share and not a ‘buy’ one month later at $20 per share?”
In general, analysts are prone to the same human traps as everyone else.
I second the preceding comments that suggest doing your own homework.
Stated philosophically, we should choose our own path — it’s the only “right”one…
I’m really bummed Stephen Kim is no longer prognosticating homebuilder stocks. Fading his upgrade of builders due to a slight increase of model traffic was the most profitable trade ever.
Other than knowing what the mean earnings estimate is there is no real need for analysts or most financial journalist for that matter. Mainstream journalists are the worst. What if there were no downgrades today, but the market still crumbled. What then would the journalist say? I suppose whatever Wall Street firm operating at the time wants them to.
Analysts are great!
They are a “gift” from Wall Street. You know, Wall Street, the selfless epicenter of brotherly love and genuine concern for the other guy.
Who else but those wonderful social philanthropists from Wall Street would pay fat salaries to employees who then give away the results of their toil and hard work for free. What a country!
One for the brain trust….
Since we talking economic health and leading indicators, analyze this if you would….
http://www.federalreserve.gov/releases/h3/Current/
Also noteworthy, the Fed changed the definition of it’s Net Free or Borrowed Reserves in December to remove TAF numbers from inclusion in its graphs. Hmmm. Bueler?
Only for comedy —
Seriously, some are good and some are bad. My main gripe with most of them is they are unwilling to say “sell”.
“What should the role of Financial Analysts be to investors?”
Be objective, realistic and honest.
When I was CFO of a public company (retired now) I had constant dialog with the buy-side analysts who were way above average compared to the sell-side.
The sell-side analysts are too conflicted and hand cuffed on their buy/sell/holds. However, they do good work in their earnings models, so its often a decent starting point for valuation.
I follow the ones on the II list very closely , especially ones who operate from a global platform … the best ones ask the right questions on the conference calls …. many move to the buyside these days , so the challenge is harder than ever … my internal guys are great , and understand the catalysts for each sector they follow
Mark Watkins wrote, “Since we talking economic health and leading indicators, analyze this if you would….
http://www.federalreserve.gov/releases/h3/Current/”
Seems straightforward enought – when you have to borrow reserves to keep open the bank’s front door, lending standards tighten, credit card applications are denied, HELOC is denied or lowered, mortgage down payments are required…all those things that are happening now and will continue.
If you put it to music, it would be the Credit Crunch Concerto in BBB flat.
If you check the list of things Institutional Investor survey participants (buy side PM’s, research directors, etc.) consider important in a sell-side analyst’s work, earnings estimates and buy/sell/hold recommendations are somewhere around #10 and #11 on a 12-item list (just above “Managing ethical conflicts of interest” – ?!?!?). What they seem to want, if the survey is to be believed, is industry knowledge and an accurate perception of how macro, regulatory, etc. trends will impact their selected industry. The recommendations are a waste of time – they’ll usually use a quant model for buy list candidates (or potential shorts) and then do their own in-house research.
Great.
I was thinking of making a jump from the pharma industry (scientist) to the financial industry as an analyst. Now that I see the general opinion I’m not sure that this is a good move.
Any analysts or former analysts out there willing to speak up?
Andrew
what are the qualifications for being an analyst, anyway?
it seems like a dream job to me:
1) wake up
2) screw up
3) spend all day convincing people 2+2=31923
4) repeat #2
5) collect fat check
6) go home
even i can do that. for *half* the money.
seriously, where can i sign up?
You don’t need economists either;
Economist’s Corner: The Housing Bubble Myth
“When you strip away all of the white noise around a housing bubble, what you find is a robust market for housing that is undergoing several profound changes all of which manifest themselves in higher home price indexes, none of which adds up to a housing price bubble.”
By Carl Steidtman, chief economist and director, Consumer Business, Deloitte Research – July 2005
http://www.deloitte.com/dtt/article/0,1002,sid%253D15288%2526cid%253D87952,00.html
Magic 8 Ball sez:
Upgrade! Downgrade! Buy! Sell! Hold!
Come on! Roll the Dice!
Keeping a job as an analyst seems to be something akin to making a living as a confidence artist. You can go on teevee and recommend a sell on stocks you never recommended buying, you can say anything really as superficial as your analysis. It would be interesting to keep a running tab on the analysts’ buy/hold/sell recommendations. Start each with $100,000 and update with target prices and hold/sell recommendations. Keep a running tab. Call it “analystwatch.com”
They’re useful as a shortcut to building your own earnings model (i.e. knowing how much of their EPS comes from XYZ source, and then tweaking that according to what you think). Also useful in knowing what other buy-siders are thinking, what generally moves a stock, and what things to watch for in the next few days/weeks/months.
Price targets and actual recommendations? useless.
What information are analyst privy to that’s not available to the public?
analyst aren’t worth their weight in pork bellies. I’ve been to an MBA brief at Haas and Stern and out of an entire room of soon to be ibankers/analysts not a single one knew anything about options or swap spreads.
Since analysts have to rely on data provided by the companies they cover, and since no company with a pulse would pass up an opportunity to massage the data, Winston Munn has it spot on when he says that he watches the game, not the cheerleaders. After that big telecom blowup (MCI? Bernie Ebbers?) a few years ago, I remember reading an article that profiled a top telecom industry analyst. If memory serves, this guru had a staff of a few dozen +/- accountants and lawyers who spent their pathetic existences poring over SEC filings and financial statements of a plethora of telecoms large, small, and insignificant. They swore the Boy Scout oath that they had no clue about the impending MCI trainwreck – this from a company with literally dozens of bean counters.
I’m a pure technician. I don’t read WSJ, don’t follow The Street, Cramer, Fast Money, or Briefing. I follow this blog to unwind. My long-held belief about the markets is that only price and volume tell the truth – and they usually tip their hand well in advance of any gasbag analyst’s flatulence.
Two examples:
Got a long signal for NFLX on 3/28/05. On 5/19/05 WMT announced that it had selected NFLX as it’s DVD rental partner.
Got a long signal for CY on 6/14/07. Checked the SOX. Nothing happening. Why CY? Did I care? Come to find out a few months later that CY was being pumped as a Solar Energy player.
You could substitute “analyst” for “lawyer” in this hoary chestnut:
Q: What do you call a thousand analysts drowned in a shipwreck?
A: A good start.
And that’s all I have to say about that.
They are about as useful as Yahoo message boards for gleaning information about a company and its prospects. That is to say they are not totally useless but they come pretty close.
When ever I hear an analyst upgrade or downgrade my radar goes up and I wonder is some big money client at their firm is looking to dump some stock
case in point:
THIS VERY DAY Morgan Stanley upgraded the airline industry before the opening bell and the shares of CAL proceeded to dump almost 5% after first rising almost the same at open making it a 10% swing in a few hours. Bizarre and too often coincident timing if you ask me
What is my opinion of analysts?
Let’s see …they originally predicted 12% earnings growth in Q4 …and 14% for Q1!
Bwa ha ha ha ha!
What is the color of the sky in the world in which they live? It must be an alien world.
Put it this way:
…they are about as smart as Ambac or MBIA underwriters.
…they are about as bright as the bond raters at Moodys or S&P.
…they are about as sharp as the executive management of Countrywide and Citi or WaMu.
I think the whole GD bunch were asleep at the wheel as the train came off the tracks.
Ignore the analysts. One has to remember that they get paid to ‘pump’ whatever the firms are selling. Possibly the only good ones are the ones who have their own money in the game, and are tracked regularly for their results. And these tend to be…(gasp) some of the ‘newsletter writers’. Hulbert does a good job of seperating the wheat from the chaff and telling you who to follow…
Many analysts fall into the trap of getting caught in the weeds of financial analysis, focusing too much on bottom-up financial forecasts. The more factors they have to tweak in their models, the more incremental their adjustments to all of those assumptions. That inhibits them from incorporating insights from the macro perspective, which some of them may have, into their specific companies.
Addressing looming threats is particularly difficult, as the identification of them is the easy part; correctly calling the inflection point created when those threats start to matter is such a dangerous game, most just take a pass.
Plus, they’re all total dorks.
The market is a bargain at these prices. If you buy now, you might be able to retire in 6 months.
i think the problem with most analysts is that they don’t think like traders.
plus they still seem to have a huge bias to not putting out sell recommendations. i was watching bloomberg TV last week and they were talking about how McDonald’s had been falling…they then showed the analyst recommendations, and off the top of my head it was something like 26 buys, 14 holds and ZERO sells.
my guess is they are part sheep, part corrupt, part just plain dumb.
Sell is still a four letter word to an analyst. They never met a stock that you couldn’t buy.
one of the best examples is when one of them “downgrades” (doesn’t mean what it used to IMO) and gives a raft of reasons why, might even change the price point down a few dollars but the overall rating is from “buy” to “hold” or my favorite one is from “buy” to “accumulate”.
It’s akin to this; “all those share I told you to buy the last two months?……hold them” usually after some haircut of 10%
Worthless profession….there are some good ones but the bad ones are really bad and take the shine off the good ones.
FinAns – requisit overhead for pump/dump trading
“remove TAF numbers from inclusion in its graphs” – troubling indeed
“What should the role of Financial Analysts be to investors?”
I don’t know, do they clean windows…..?
Econolicious
They always know a lot about the companies they follow so reading their reports is generally educational. But I frequently use their market moving calls to either buy on a sell call or sell on a buy call.
As a buy-side analyst for one of the top performing funds in NYC I can say that I find sell-side analysts extremely useful.
For one, they help create all the wonderful long/short opportunities I make money on!
They are pretty good at giving a general description of a company or industry, which I use to start my research process. Also, their biases tell me quite a bit about what Mr. Market is thinking.
Finally, I enjoy letting them take me out to expensive restaurants around midtown and then have them pick up the tab.
Okay, I can understand all your points and I agree with some of them. But now, I think this debatte goes a little far off.
As one of the low-life sell side analysts, branded here, I now ask myself after your comments: Then why do investors still call me all day? Why even bother with my opinion? At first, I absolutely agree with you on two points.
1) Our incentive system is far from unbiased. Well? The same goes for fund managers, or managers in general. .
2) We do a lot of mistakes. The estimates have huge standard deviations. But that is the nature of financial market predictions, be it analyst forecasts, option pricing modells or other financial models.
I would support every action to change the incentive system or similar things. Suggestions are greatly appreciated.
Anyway, these are the points that I absolutely agree with you. But the other comments, I find completely unfair to say the least. What do you think it feels when a stock you recommendet to pension funds, etc lost 20% or more over the last months? Do you really think that we don’t care what we recommend to people who manage your savings, we just give a stock a ‘buy’ because corporate finance told us so?
Sorry, but I think that had to be said and I hope the comments could return to a more reasonable debate.
It seems the buy side analysts who actually pay the sell side find them useful. The average joe on the street doesn’t. Hmm. I wonder why that is…