G&G Associates Tax & Financial Consulting
Dear G&G Reader,
Wall Street is often little more than the envy of Las Vegas.
There’s an entire infrastructure designed to milk retail investors. To coerce them into sending in any excess earnings, whether in the form of retirement accounts, a monthly commitment to dollar cost averaging, or a new sexy initial public offering (IPO).
Wall Street’s version of “diversification” is a lot like having a craps table, a roulette table, and good ole’ fashioned one-armed bandits. I'm in Las Vegas right now so I thought this fit perfect for this discussion...lol. The point is, no matter what happens to you, win or lose, the house always makes a little something.
At the end of the day, stock market performance is often driven by a small group of people known as analysts.
They’re like the folks who tell you where to find the loosest slots in town, and where you can get a race sheet before going to the horse track. In the second quarter of 2009, we’ve seen a lot of companies exceed analyst expectations and these companies are richly rewarded with a rapid rise in the share price.
After all, if the professionals underestimated the company, it’s got to be a great investment. Right?
Hardly. Just ask an analyst to downgrade a company and see what happens.
Odds are, if you’re the kind of analyst who has the objectivity to move past the gambling mentality and offer a genuine opinion, you’ll be the scorn of the financial community.
In at least once case, it led to death threats…
I’m talking about Meredith Whitney, the CIBC analyst who had the gall to downgrade Citigroup on October 31st, 2007. It’s not that she just cut the rating to “underperform” (CIBC’s equivalent of a “sell”), nope, she went further saying that the company would face a dividend cut (it did), and would have to cannibalize assets to reach adequate capital levels (it did).
And even then, she wasn’t completely right.
When that report came out, Citigroup traded at $41.90, and she expected a price in the low-thirties. The stock began a long painful decline, bottoming in March of this year at $0.97, getting a major bailout along the way and seeing the dramatic exit of senior management.
From the First Sell Signal to the Bottom, Only One Analyst saved you From a 98% Loss
Meredith Whitney is a rare analysts on Wall Street, having also issued sell recommendations early on in the Enron debacle, and more recently, CIT. Naturally, she no longer works at CIBC.
Nevertheless, most Wall Street analysts remain cowards.
They don’t stick their necks out, and there are no red badges of courage. Most analysts tend to cluster around one recommendation for a given company, and any upgrades or downgrades tend to happen around the same time. It’s similar to the inability of the credit ratings agencies to act independently of each other either.
What’s the smart investor to do?
Recognize that the game is rigged—but also recognize that there’s a way to profit when the analysts get it wrong. Also recognize that there are a small minority of good analysts out there, the ones who do stick their necks out. Sure, they may get it wrong sometimes, but at least they’re not part of the problem.
Tax & Financial Consultant, RFC
866-361-3872 toll free fax
"Not to know is bad, not to want to know is worst"
LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. Also, please note that due to our commercial relationship with Publc Gold, G&G Associates may receive compensation from a membership purchased at www.publicgold.com/gngpreciousmetals.