The rise of the bearish analyst
TEN years ago it was easy to make your name as a securities analyst. Take a technology stock, think of a number, double it and then announce that as your price target. Time it right and your call would be a self-fulfilling prophecy, as investors worldwide would regard your views as a buy signal. Mary Meeker of Morgan Stanley and Henry Blodget of Merrill Lynch ruled the markets.
More... text
1 comment:
Profits of doom
The Economist
July 31st 2008
The rise of the bearish analyst
TEN years ago it was easy to make your name as a securities analyst. Take a technology stock, think of a number, double it and then announce that as your price target. Time it right and your call would be a self-fulfilling prophecy, as investors worldwide would regard your views as a buy signal. Mary Meeker of Morgan Stanley and Henry Blodget of Merrill Lynch ruled the markets.
Nowadays you establish your reputation by being as gloomy as possible. Meredith Whitney, a banking analyst at Oppenheimer, scared the markets last year by sounding a warning about the financial health of Citigroup. Kathleen Shanley, an analyst at Gimme Credit, recently caused a brief flurry by opining that creditors were withdrawing funds from Washington Mutual (which the company quickly denied).
The same trend can be seen for those analysts who cover the overall markets and the economy. The cheerleader for the late 1990s boom was Abby Joseph Cohen, an upbeat strategist at Goldman Sachs. The current downturn has burnished the fame of David Rosenberg, a gloomy economist at Merrill Lynch, and Teun Draaisma, a Morgan Stanley strategist who has made a couple of successful bearish calls. Albert Edwards, a strategist at Société Générale who has been predicting stock market doom for a decade, is consistently placed at the top of European institutional-investor polls.
In part, this simply reflects the way the markets have moved over the past decade. Anyone who bought American stocks in 1998 will not have much to celebrate. Perma-bulls have steadily lost credibility. The same thing happened after the 1970s. By the end of that terrible decade for financial assets, the dominant strategist on Wall Street was Henry Kaufman of Salomon Brothers, who delighted in the moniker of “Doctor Doom”.
The rise of hedge funds has also played a big part. In the 1990s, few people were interested in stocks that were likely to underperform or fall. Analysts tailored their views to fit the market; there were nine buy recommendations for every sell.
But hedge funds need to have “shorts”, stocks that they believe will go down, as a basic part of their strategy. Finding shorts is a tricky business, and they are willing to pay fat brokerage commissions to analysts who can come up with the goods. And hedge funds are nowadays critical to a brokerage business. Last year, according to Greenwich Associates, they accounted for 30% of American equity-trading volume.
Another constraint on analysts in the 1990s was the need to keep corporate clients sweet. The big money was in advising companies on takeovers and share issues. Unless its analyst had a buy recommendation on the stock, an investment bank had little hope of persuading a company to award a mandate. In addition, companies would lean on analysts that were not “with the programme”. They could be cut off from the information needed to devise their forecasts.
The reforms introduced earlier this decade by Eliot Spitzer, then attorney-general of New York state, may have done something to make analysts more independent. They have helped create a market for independent research houses such as Gimme Credit. But it may also matter that there is less corporate-finance business around at the moment. The biggest area of business is bank capital-raising, and success there may be a mixed blessing, given recent underwriting losses.
Will the fame of the gloom-mongers be as fleeting as that of Ms Meeker and Mr Blodget? Making forecasts about the earnings potential of dotcom stocks was a real shot in the dark. Both the industry and the business models were new. That made it hard to challenge predictions. Although it was implausible to argue that internet companies in aggregate could do as well as forecast, it was possible that individual companies might live up to the hype.
Making bearish calls, in contrast, usually involves a lot of analysis of balance-sheets and cashflows, analysis that needs to be robust enough to stand up to the hostility of the companies concerned. If you get the facts wrong, you will be found out pretty quickly. Indeed, you can get the facts right and still be defeated, in the short term, by market euphoria.
Bearish analysts are not all heroes. Sometimes they merely shout “Fire!” in a crowded theatre and feel vindicated when panic ensues. But their prominence is a healthy long-term sign for the markets, which proved as gullible about the health of mortgage lenders in 2005 and 2006 as they were about dotcom stocks in 1999. The best will survive, especially if they have the flexibility to turn bullish when the fundamentals improve.
Post a Comment