Thursday, October 29, 2009

Stock Analysts Blow it Again

As a former analyst it never ceases to amaze me to see all of the hype associated with companies beating their typically low-balled earnings estimates. For example, according to one of my buddies at Goldman Sachs, 80% of the first 260 S&P 500 companies reporting earning this quarter exceeded consensus estimates, well above the more typical 65%. Indeed only 13% of the companies missed their consensus estimate, compared to a more normal 20-25%.

What gives? They blow it every quarter! The current quarter more so. It reminds me of what the late Howard Cosell would say when the Dallas Cowboys were having a particularly bad night, "never have I seen such continuing ineptitude." It seems to me that there is absolutely no adaptive learning in the Wall Street analytical community. The reason for this piss-poor behaviour is that most analysts suck up to company management and strive to keep their estimates in line with what they know is low-balled company guidance. In order to be in the flow of information and have access to company management they have to play ball.

The managements of Wall Street firms understand this and they do NOT compensate analysts on the basis of the accuracy of their earnings estimates. If they did, analyst salaries would be alot closer to the minimum wage than seven figures a year. Everybody in the institutional community knows the game. Unfortunately the public doesn't and it is a disgrace of the business press and especially CNBC for not informing the public the fraud that is being perpetrated on them.

As a final point a 12 year old could beat Wall Street analysts every time by taking the midpoint of a given company's earnings guidance and add 5% to it!

No comments:

Post a Comment