Thursday, March 18, 2010

Wall Street Analysts

Most days I go to a meeting to hear a Street analyst talk about their coverage universe.

The topics of these meetings vary widely. Just this past week, for example, I went to hear different analysts talk about their views in the following sectors: paper and forest products; food and drug retailers; asset management; and life insurance.

I also receive "blast" voice messages every morning from analysts talking about the most recent developments in their coverage universe.

I find these sources very helpful in my investment work. For someone working at a relatively small bank, these analysts give me both qualitative and quantitative views about a whole variety of industries that I would simply be unable to duplicate on my own.

That said, I almost never make a buy or sell decision an analyst's stock rating. For a variety of reasons, Wall Street almost never puts a "sell" recommendation on a stock. It's not that the analysts can't make a decision; rather, when you work for a firm whose business is to sell stocks and bonds, it is usually not a good career decision to tell customers not to buy what your firm is selling.

So when I go to hear an analyst, I recognize the constraints that they are operating under, and make my decisions accordingly.

This is no different that how I treat recommendations from any vendor. For example, if I am looking to buy a car, and I ask the car salesman for research recommendations, I fully expect that the report will be favorable to what he is selling. The same is true for research from any source - you have to consider the source.

Put another way: if I am getting free research from someone, I can hardly expect the source to not have a bias.

The Wall Street analyst community has been under intense scrutiny for more than a decade. When markets started to turn lower in 2000, the applause that had greeted Street analysts turned into boos, and in some cases even worse.

It is always easier to blame your stock broker for poor investment results than to look at the face in the mirror.

The difficult stock market environment lead to numerous new regulations and restrictions on analyst recommendations. In my opinion, most of these new rules did little to help the investor community, who was desperate for help in making investment decisions. Instead, it has lead to more and more published research become very wishy-washy, since analysts have become reluctant to come out with a firm opinion.

The SEC has finally come around to understanding this, and has proposed loosening some of the restrictions that had been put into place. However, this is very controversial, as the post from today's Wall Street Journal indicates:

SEC Tried to Ease Curbs

Judge Rejects Bid by Agency, Wall Street to Soften Landmark 2003 Analyst Deal

The Securities and Exchange Commission joined 12 Wall Street firms in seeking to scrap a key portion of a landmark 2003 deal that put strict curbs on stock analysts, a move that could heighten the ongoing debate about a broad overhaul of the financial-regulatory system.

In a ruling Monday, U.S. District Judge William H. Pauley III in New York rejected a proposed change to the legal settlement put in place to end abuses on Wall Street. The proposal would have allowed employees in investment-banking and research departments at Wall Street firms to "communicate with each other…outside of the presence" of ...