Sunday 13 September 2009

Wall Street analysts fear wrong bet, follow the herd

All of Wall Street’s bank analysts were caught out by Lehman Brothers’ collapse - and few have redeemed themselves since.

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Guanyu said...

Wall Street analysts fear wrong bet, follow the herd

Elinor Comlay
13 September 2009

All of Wall Street’s bank analysts were caught out by Lehman Brothers’ collapse - and few have redeemed themselves since.

Just a handful have dared to issue a “buy” on bank stocks that have surged since March - after they all failed to slap that “sell” on Lehman before it went bust.

“There’s a group-think disease on Wall Street,” said Robert Lutts, president and chief investment officer of Cabot Money Management, who started buying financial stocks for his US$400 million fund this year.

Even star analysts such as Meredith Whitney - famed for calling Citigroup’s troubles in 2007 - and prominent bear Mike Mayo, just caught a whiff of both this year’s turnaround and Lehman’s problems.

Only 45 per cent of bank analysts beat an index of commercial banks or capital markets firms with their recommendations last year, Thomson Reuters’ ratings firm StarMine said. And it is hardly better this year, with just 46 per cent beating the market.

It is expected that analysts would know their own industry better. Think again. A herd mentality and a concern that controversial calls could damage their careers are holding them back from greatness.

“There’s a fear of publicly being wrong,” David Ellison, chief investment officer at FBR Funds, said. Anonymous researchers at fund companies had an easier time making edgy calls because they worked behind closed doors, he said.

It is also tricky to highlight risky business practices or slam misguided strategy at other banks if your own firm is doing the same stuff.

It was best to make predictions that sounded reasonable at the time you made them, said Henry Blodget, the once celebrated but later reviled dotcom analyst who now runs news site The Business Insider.

“Analysts who stick their necks way out, especially on the negative side, often get their heads chopped off,” he said. “Analysts who never stray from the safe middle ground, meanwhile, often enjoy long, profitable and stress-free careers.”

Blodget, who made famously bullish calls on internet stocks, but got into hot water when he dismissed some stocks in private, became the poster boy for the flawed analyst.

Of course, it is tougher than ever to cover the market. Complex derivatives and high leveraging have raised the unpredictability factor.

“Banking is a black hole, there’s no way you can really analyse any of these institutions and know what you’re looking at,” Ethan Heisler, of Hexagon Securities and former debt analyst at Citigroup, said.

But some analysts who have beaten the market. Sandler O’Neill and Partners’ Jeff Harte and Bank of America’s Guy Moszkowski had made the most profitable calls this year, StarMine reported.

Harte is modest about his success. “After how bad 2008 was, it’s hard to be too excited about having picked some stocks that worked in 2009,” he said. “It’s been a hard environment.”

Investors may find picking the top analyst is just as tricky as picking the top-performing stock. They may be best served by taking Ellison’s advice - using the analysts’ consensus view to do exactly the opposite.

“When the analysts become all bullish is when you should be worried if you own [financial stocks],” Ellison said. “You should short them when they’re all bullish and own them when they’re all bearish.”