Tuesday, July 3, 2012

Are Wall Street Analysts An Endangered Species?

Being an analyst on Wall Street investment bank has always been tough work.

Investment bankers want analysts to write glowing reports on prospects and customers so they can generate more business.  Putting even a "neutral" recommendation on a stock could raise the ire of company management, and cost the firm millions of dollars in investment banking fees.

On the other hand, there are the clients:  institutional money managers and individual investors.  They want objective research ideas, including "sell" recommendations, but are reluctant to pay higher commissions to pay for quality research.

Oh, and thanks to earlier Wall Street scandals, analysts today are subject to a myriad of federal and state securities laws.  Violating any of these can not only be career-ending, but could stick an analyst will significant legal problems.

Finally, there is the difficulty of stock picking itself.  Although correlations have dropped significantly so far in 2012, the rise of index funds and exchange-traded funds (ETFs) have made it difficult to find stocks that will outperform like stocks in a given sector.

CNBC had a post about the difficult times facing security analysts ahead:

With markets continuing to move in lockstep to every headline out of Europe, China or the Fed, the days of individual stock analysts may finally be numbered.
Getty Images

“There is an old saying about analysts among the gray hairs of Wall Street: ‘In a bull market, you don’t need them, in a bear market, they’ll kill you,’” said Nick Colas, chief market strategist at ConvergEx Group. “And in a flat market, it seems, both apply.”

... With most stocks moving on these big picture headlines, rather than their individual merits, it’s made the job of a single-stock number cruncher that much more difficult.

“In this type of situation, it doesn’t make sense to spend time analyzing details of specific companies when most movements are lockstep with the prevailing risk appetite,” said James Iuorio, managing director at TJM Institutional Services. “This type of trade should continue as global markets work their way through unusually large event risk.”