Schwab: We Don’t Need Your Stinkin’ Analysts

Charles Schwab is raises an interesting issue regarding analysts:

"When Wall Street’s almost 1,800 equity analysts figured U.S. earnings growth for the third quarter of 2007, they were 8.2 percentage points too high. Forecasts for the fourth quarter were wrong, too, overestimating profits by 33.5 percentage points, the biggest miss ever.

It’s no wonder investors don’t trust analysts, says Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees $1.4 trillion for clients. Merrill Lynch & Co., Bank of America Corp. and the rest of the securities industry aren’t losing credibility because of anything sinister. The problem is they didn’t get their math right after credit markets froze nine months ago.

As Alcoa Inc. kicks off first-quarter earnings season [Monday], analysts say 2008 will be the best year ever for U.S. profits, data compiled by Bloomberg show. Earnings for companies in the Standard & Poor’s 500 Index will rise 10.7 percent, even after Federal Reserve Chairman Ben S. Bernanke acknowledged that the economy may fall into a recession and banks reported $232 billion of writedowns and losses, the forecasts show. . .

The S&P 500 dropped almost 10 percent in the first quarter, the worst start to a year since 2001, as increasing unemployment, record mortgage delinquencies and a retreat in consumer confidence signaled that the economy is falling into a recession. Even with the decline, analysts’ recommendations to "buy” or "hold” U.S. shares climbed to 94.5 percent, the highest rate in more than five years."

There’s an old Wall Street expression about analysts: You don’t need them in a bull market, and you don’t want them in a Bear market. The latter half of that expression is usually because of the earnings downgrades adding to stock price action weakness.

Question: What will happen to equity prices if and when analyst downgrades start coming ?


What say ye?


Schwab Asks Who Needs Analysts After Biggest Flub
Michael Tsang and Eric Martin
Bloomberg, April 7 2008

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What's been said:

Discussions found on the web:
  1. Ross commented on Apr 21

    Bill Fleckenstein has a good take on analysts. He calls them ‘dead fish’.

    If you can find a really really good analyst, and there are some, hold on to them with both hands.

    Never trust anyone under 60!

  2. Marcus Aurelius commented on Apr 21

    If recent behavior is any guide, the market will skyrocket.

  3. AGG commented on Apr 21

    Schwab declares that incest is not best. It’s like the old lawyer skilled prevarication joke: The judge asks the lawyer, “Do you deny the allegations?”. The Lawyer answers, “Your honor, I not only deny the allegations, I represent the alligator!”.
    Seriously Barry, with 70% plus block trading in the markets coming from pension fund and hedge fund managers (most of it NOT their money) with easy access to leverage, how can anybody know what a stock is worth ?
    When analysts are penalized ($$$$$) for issueing ratings more than 5% plus or minus from a stock price, then you can start trusting their ratings. Forget the buy, sell, hold crap. Make them give you a number.

  4. Rich Shinnick commented on Apr 21

    What I can never figure out is if people sell on a downgrade because of what the analyst said or because they think that other people are going to sell on the downgrade so they sell in anticipation of that?

    It seems like the sales take place when the headline crosses too, even before a reasonable person would have time to read and reflect on the opinion.

    Also, these upgrades, downgrades, always seem to happen while I am tying my shoe-you blink, downgrade happens, you lose 5%, too late to react.

    I always assume it is an insiders game: wink, wink.

  5. whipsaw commented on Apr 21

    Well, I think analyst == salesman who doesn’t have to actually close any sales, just set them up, essentially a rainmaker. But I have some trouble understanding how the cheerleaders expect to keep their jobs (altho I know that they will) because:

    -I keep hearing something like a consensus that there will be around a trillion dollars in writeoffs.
    -I lost track of the current tally, but I don’t think that more than 275 billion of that has surfaced yet.
    -I haven’t seen too much comment about it, but my understanding of the recent G7 meeting was that the gnomes told the private bankers that they had 100 days to fess up about what was dead on their books and to provide reasonable assessments of other assets.
    -If that means that we can expect full disclosure in July without any Level 3 bullshit, then the game is up and at least a couple of big banks fold.

    So, what happens then?


  6. RW commented on Apr 21

    By the time most analysts can no longer avoid downgrading a stock it is probably forming a bottom but in this investing climate I wouldn’t want to bet on how long any bottom might last. But then I really haven’t been in a betting mood for the past year or two: Short a home builder or mortgage lender here, go long a gold junior there, not unprofitable but pretty tentative when all is said and done. Lousy sponsorship everywhere IMHO and I’m no better.

    But Yeats said it with far more elegance (naturally):

    Things fall apart; the centre cannot hold; …

    The best lack all conviction, while the worst
    Are full of passionate intensity.

  7. lets go mets commented on Apr 21

    Too many analysts are too interested in playing video games and hanging out in chat rooms, they have never done physical labor for even a day, what do you expect? they are pampered little children.

  8. whipsaw commented on Apr 21

    Nice, RW, your quote can be applied to so many things in life. I am tucking that one away.


  9. Mike M commented on Apr 21

    When analysts downgrade, buy!!!!!!!!!!!!

  10. Winston Munn commented on Apr 21

    There used to be a saying around these parts that you don’t invest in an oil well unless the geologist has $100K of his own money in it – that very well may go for stock analysts, as well.

  11. clipb commented on Apr 21

    ’08 and ’09 eps comparisons are messy because of the late ’07 bank/broker/builder write offs. comparing the 4th q of ’08, the s&p eps will look pretty good (probably) y/y. same for 1st q ’09. but what does that mean? it means ignore all the street bs about “earnings growth” and try to figure out what “normalized” eps would have been for ’07 and will be for ’08/’09.

  12. Owner Earnings commented on Apr 21

    Who care what happens “the day” an analyst rates a company “sell” instead of “hold or buy.”

    Stocks are priced to return 5% annually That’s all you need to know.

    While you’re waiting for stocks to become fairly valued go get something good to eat and enjoy life.

  13. craig commented on Apr 21

    i’ve worked for a while on the buy-side, so i deal directly with sell-side analysts. many are poor at their job, provide no value-add insight, and don’t do enough unbiased analysis to spot major changes in fundamentals. In short, they are pretty poor as stock pickers.

    Some analysts are incredibly good at every aspect of stock picking, financial analysis, finding good/new information, providing timely calls on fundamental changes, etc. unfortunately the good/great ones are about 10-15% of all analysts.

    the investment bank/sell-side research business model is driven by corporate finance fees generated from public companies, not trading fees from investment firms or tracked stock picking performance…..hence, the analysts that work for investment banks have tremendous incentive to please their paying customers even if their stock picking track record is quite poor.

    I don’t see the model going away though because there is so much incentive to keep it as is.

    If you were to assemble a team of great stock pickers you’d probably make far more money by acting on the picks and running an investment fund as opposed to the money you could make from trading commissions you’d get from advising buy-side shops.

  14. Francois commented on Apr 21

    “Never trust anyone under 60!”

    Darn! Meredith Whitney is already 60?

  15. Winston Munn commented on Apr 21

    Now here is an analyst for whom I hold respect: Warren Buffet

    Quote: “Let’s revisit some data I mentioned two years ago: During the 20th Century, the Dow advanced from 66 to 11,497. This gain, though it appears huge, shrinks to 5.3% when compounded annually.

    Think now about this century. For investors to merely match that 5.3% market-value gain, the Dow – recently below 13,000 – would need to close at about 2,000,000 on December 31, 2099.” End Quote.

    Dow 36,000 I spit on you! Ptiu! Ptiu!
    Dow 2,000,000 or bust!!!

  16. craig commented on Apr 21

    i missed the point of BR’s question. equities probably won’t do all that much based on analyst downgrades, the analysts will probably be late to the game and frustration of equity holders will have already taken hold and set prices to wherever they are going. sell-side analysts IMHO have a very, very small price impact long-term and anywhere from no impact to a huge impact in the short term (1-6 months). if history is any judge, when sell-side analysts are puking sell ratings all over the street it’s probably close to a time to take a good look at stocks

  17. newenglin commented on Apr 21

    Used to say: If you put all the economists end to end they wouldn’t reach a conclusion: The good old days.

    Pay the analysts by performance. What would you do with your CFO if his his reliabilty were on a par with W-Steet analysts? Give his a pink slip and a tin cup as severence.

    And what excuse do any of us have for paying the least bit of attention to them after the era of dotcom media hysteria.

    I’m going down to the corner to see the gypsy lady. She’s just as full of it, but at least there’s that nice crystal ball.

  18. Bob A commented on Apr 21

    Analysts are just tools buy-and-hold brokers used to sell the crap d’jour to people who know nothing.

    Crap d’jour? People who know nothing?

    What does he mean? Well look at the stocks highlighted on Edward Jones homepage and then look at the poeple who let Edward Jones manage their money.

    Class dismissed.

  19. John R commented on Apr 21

    I can’t see the entrails for the guts!

  20. Andrew Horowitz commented on Apr 22

    There was a report out a month or so ago published by Prof. Woolridge of Penn State, Smeal College of Business that went back and did a well researched piece on this subject.

    He found that in almost all cases, analysts showed overconfidence in the numbers, except after a trough. We had him on a recent podcast in March:

    (Sounders was on podcast episode 29, in September.. )


  21. Lance Kilgore commented on Apr 22

    IAE(?) 4Q07 statistics show US savings rate has hit ~0%, falling negatively -15% in real terms against a basket of currencies, as the personal equity share of real estate fell to 50%, falling negatively -20% in real terms at auction, … but we could survive that, until today’s announcement that the price of ales will spike by 20%, once the weather warms up.
    Good beer spiking 20%! Life is meaningless!

  22. MarkTX commented on Apr 22

    Question: What will happen to equity prices if and when analyst downgrades start coming ?


  23. Ed commented on Apr 22

    Having been both a broker and a fund manager over my 30 years in the market I would say that investors get the analysts they deserve.

    The majority of investors are obsessed with the short term, and always have been, whether they are pension managers (or plan sponsors), hedge fund managers or private individuals. Furthermore those clients obsessed with the short term generate the vast majority of the revenues!! The volatility of equities always appears to offer the possibility of outsized returns in any individual quarter so analysts are expected to forecast what’s going to happen this quarter. The only reasonable route to meet this requirement is to use some form of momentum strategy.

    Therefore why bother emphasising fundamentals when they are little help in predicting this quarters returns in an industry?

    Of course there are investors who take a long term view and there are analysts who focus on understanding the fundamental drivers of their industries.

    Ross commented above that you should never trust anybody under 60!
    Whilst age does not necessarily bring wisdom (certainly doesn’t appear to have in my case)it does provide evidence of an analysts genuine interest in their industry rather than the job as a route to a large salary.

  24. kio commented on Apr 22

    The problem is – Is there an objective possibility to predict the evolution stock market? My answer is – yes. (I predicted the fall in November 2007 back in April 2007, and published in July 2007)

    Do market analysts know the way to predcit big market swings? My answer is – no. So, whatever these analysts saying about big turns (I mean above 10%) should be ignored. So, investors have to decide themselves about big returns (negative or positive) and use analysts to trimm small earnings in times of low volatility.

    Following my estimates – it’s time to buy. No doubt.

  25. Dave Darcy commented on Apr 22

    P/E = Valuation

    Somethings gotta give….

  26. OB commented on Apr 22

    It should be relatively easy to construct some kind of ranking of analysts’ accuracy. Does this exist, and if not, why not?

  27. cinefoz commented on Apr 22

    BR asked:

    Question: What will happen to equity prices if and when analyst downgrades start coming?

    Reply: The same thing that will happen to rainbows and shamrocks when leprechauns begin to openly walk among us.

    Downgrade compared to what? There’s always an expectation to exceed, no matter how low it had otherwise been set. Viola .. upgrade due to having beat the analysts. See the definition for ‘circular reference’ for more details.

  28. Steve in TN commented on Apr 22

    For the last 25 yrs I’ve succeeded in the stock market.
    I do not watch ANY business TV shows.
    I see an analyst’s comments on the internet only by mistake.

  29. Ivo commented on Apr 22


    I know there are several equity hedge funds trading based on self-made / bought analyst rankings.

  30. bdg123 commented on Apr 22

    Such stupid comments today

  31. OB commented on Apr 22

    Thanks for the info Ivo,
    Though you would think that ranking analysts is the kind of thing the financial media would/should want to do, and it would take an intern, say, an afternoon to process the data… At least its the kind of information I would like to have in hand when reading analysts’ pronouncements in the press. All we usually get is some anecdote à la ‘Whitney-who-got-something-else-right-in-the-fall…

  32. TM commented on Apr 23

    Analyst earnings forecast are quite high for this year. I mean really, it’s pretty obvious.

    I wrote an article about the market not buying analysts’ forecasts:

    Low Multiples Mean Market Undervalued?

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