It's a great quarter guys

My colleague Don shared this.   Apparently, more often than not, equity analysts will tell CEOs "it's a great quarter guys".

It is pretty common for "great quarter" stocks to tank shortly thereafter.

The fact that the analysts are so cosy with the CEOs of the companies that they cover says it all.   As I used to say to my students in my equity analysis course - you don't work for the company and you don't owe the company anything.  Your analysis must be at arms length, otherwise you risk suffering from Stockholm syndrome.

Morgan Stanley's analyst report on Lehman, June 2008

"Not Broken, poised for profitability"...Yeah right.

via Reformed Broker.

A couple on investment banking...

...from my colleague, Craig Newmark's most excellent blog.

First, what you need on your resume if you want to work on Wall Street.  In particular, note the importance of excel skills, quant skills (math, stats) and the CFA designation.

Second, what high powered advice gets you.   Notably, even the evil geniuses at Goldman Sachs can't predict the market.

Why analysts hate to give sell ratings

Felix Salmon discusses why analysts don't like to give sell recommendations.  As I've said in class, analyst stock recommendations are largely useless.

Conflicts of interest. A case study....

A commenter on this blog provided this link on the seekingalpha site. Very well worth reading. The basic idea can be summarized in this quote from the article...

Ah, good old circular conflicts of interest. To summarize: i) Merrill, which is probably not too happy with having loaned Kimco $707 million on its credit facility, underwrites a $720million (including a 15% overallotment) stock offering for which it gets $20 million, ii) Merrill's analyst changes the stock from a Sell to a Buy, causing it to pop 30% in one day, and allegedly allowing participants in the offering to sell their shares at a 30% gain in a day, a mindblowing annualized return, iii) Kimco uses the proceeds to repay Merrill's credit facility, cleaning out any credit risk exposure Merrill might have with respect to Kimco's underperforming properties and operations.

It makes my head hurt. I'd say that this kind of stuff gives Wall Street a bad name, but I think it's too late.

How good are analysts?

The Investor Insight website has an interesting study that shows that analyst earnings forecasts basically lag the actual forecasts.

This chart is particularly interesting:



Basically it shows that analysts change their earnings forecasts after the market has started deviating from the trend.

As a side note, the weekly newsletter from John Maudlin (from this site) is excellent.