Articles Posted in Analysts

It is often said that one critical statement to a child offsets 10 positive ones. The same effect can be found in the stock market, where an analyst’s downgrade is worth, in dollars and cents, sometimes ten times that of an upgrade. Take for example the price movement of shares of shoe company Skechers (SKX) which today fell almost 8%, over $70 million in market capitalization, after an analyst downgraded the stock.

For the most part, the law protects opinions from prosecution or law suits. But shouldn’t regulators be allowed to look behind reported opinions to determine whether action is warranted? Huge damages can result from inaccurate opinions. The best example is bond ratings by recognized services, with mega-billions recently lost on investments which had been deemed ultra-high grade. But losses can also result from negative opinions.

There is no proof, evidence or even insinuation that an analyst at Sterne Agee had any nefarious goal to cause holders of Skechers stock to lose $70 million today. Nor is there any information to link this downgrade to the short interest in Skechers’ stock, last reported at one-fourth of the stock’s float. Yet, those short the shares collectively profited by about $10 million today.

When BP oil spill in the Gulf Coast first became news, the company’s shares started to drop. According to the Huffington Post, the unfolding crisis incited a mad dash on Wall Street, with dozens of securities analysts encouraging investors to “buy, buy, buy” BP (BP.L: Quote, Profile, Research, Stock Buzz) (BP.N: Quote, Profile, Research, Stock Buzz).

Among those to jump into the fray were Credit Suisse, Citigroup, and Morgan Stanley. Thomson Reuters says that of 34 analysts that rated the BP shares as recently as May 11, 27 gave “buy” or “outperform” ratings. 7 rated the shares with a “hold.” None of the analysts gave the shares an “underperform” or “sell” rating.

As estimates of how much oil was being spilt grew and was coupled with news of BP’s unsuccessful efforts to stop the leak, BP stock kept dropping, destroying some $100 billion in shareholder wealth. Unfortunately, when Wall Street makes mistakes, it is the investors that end up losing money.

Some experts saying that with so many analysts making the wrong call, the BP crisis has exposed the problems that continue to plague the sell-side analyst community despite all the reform that has been implemented in the last 10 years. Some investment firms are afraid to be left out, which can contribute to what appears to be an existing “group think” mentality. Analysts may also be unwilling to challenge companies for fear of jeopardizing their relationship with leading executives-a classic case of conflict of interest.

Meantime, the analysts are coming to their own defense. They say that the Deepwater Horizon oil spill was unprecedented and therefore it was hard to predict its outcome and related financial ramifications. Granted, as the risks became more obvious, many on Wall Street downgraded their buy ratings to more cautious notes. Natixis and Goldman were among those that lowered their ratings from “buy” to “hold” or neutral.” There were also a small group of analysts that did accurately call the effects the oil spill would have on BP’s stock prices.

Related Web Resources:
Wall Street Said ‘Buy, Buy, Buy’ BP Stock As Gulf Crisis Unfolded, The Huffington Post, June 18, 2010
BP Stock Sinks Back Near Oil-Spill Low, The Street, June 22, 2010
A Timeline of the BP Oil Spill Crisis,, May 6, 2010 Continue reading

Founded 99 years ago, Moody’s Investors Service claims it “is among the world’s most respected and widely utilized sources for credit ratings, research and risk analysis.”

Standard & Poor’s traces its origins to the 1860 publication of Henry Varnum Poor’s History of Railroads and Canals in the United States, a precursor of modern stock reporting and analysis. S&P claims it ” is the world’s foremost provider of independent credit ratings, indices, risk evaluation, investment research, data, and valuations.”

For a century or more these two icons of the securities industry were respected as the gold standard for credit standards. Sadly, each has recently become just another Wall Street prostitude, peddling its opinions to anyone willing to pay them. Move over defrocked analysts Jack Grubman and Mary Meeker. Apparently, “POS” and “AAA” have much the same meaning when it comes to rating agencies.

NASD levied a fine of $250,000 against Wells Fargo Securities LLC and $40,000 against its former research director, plus other sanctions, for failing to disclose that the lead analyst on reports issued on a company had accepted a position with that company.

The research reports concerned Cadence Design Systems, which designs semi-conductors for use in the global electronics market. According to the NASD, the analyst had applied for a job with that company prior to issuance of a report in 2005, and had two job interviews prior to issuance of others, none of which was disclosed in the reports.

The NASD’s sanctioning order states that the analyst was then offered a position at Cadence to earn over $300,000, plus Cadence stock and options, which she disclosed to the Wells Fargo and its head of research. Yet, weeks later Wells Fargo published a third research report favorable to Cadence, without disclosure of the hiring.