8.14.09

8.14.09

          Many Investors got excited over the seemingly endless chain of companies reporting better than expected earnings reports over the last three weeks. The key word here is ‘expected”. Analysts were projecting lower earnings than the companies reported, thus a surprise to the upside. If all these companies are doing better than they were expected too, it might be an indication that the economy is doing better and therefore a good time to be putting money back into the market. It makes sense doesn’t  it ? Or does it ?

          If the Analysts, were to intentionally lower their expectations, it would result in additional business for their firms. In times like these when many folks are afraid to be in stocks, Wall Street firms can sure use the extra business. But they wouldn’t do that, would they ? Let’s go back in history and check it out. After all, you see them on TV every day handing out ‘free advice’. Following this free advice can be detrimental to you financial health. They do it to promote business, not out of the kindness of their heart.

          Let’s go back to the biggest stock market disaster ever, the 1929-32 bear market, Congressional investigations dominated the headlines, the first ever regulations were imposed, and the Securities & Exchange Commission was established (with admitted stock market manipulator Joseph P. Kennedy as its first Chairman) to police the securities industry. But not much changed thereafter. New methods of scamming were soon developed. In its history, the SEC has always been headed by a Wall Street insider.

          Now lets fast forward ahead to 1987. After the 1987 crash, Congressional investigations determined that program trading associated with the strategy of "portfolio insurance" had caused what should have been just a well-mannered and normal market correction to accelerate into a crash. So restrictions on program trading were imposed, including 'collars' that limited program trading any time the market moved a certain amount within a day. Has it worked to limit program trading, or cause it to be so ineffective that it faded away? Not hardly. Program trading now accounts for an amazing 26% of total trading volume on the NYSE, with an additional substantial amount taking place off the floor. 

          While we're on the subject of the kind of analysis and recommendations investors are receiving when they pay attention to the steady stream of Wall Street spokesmen, mutual fund, and money managers, etc., on CNBC, CNNfn, Bloomberg TV, etc., according to Investars.com, since 1997, a four year period, following all the recommendations by brokerage firm analysts where the firm had assisted in the IPO would have created losses averaging 51%. 

          Given the super-star status now being accorded by the media to analyst James Cramer, co-founder of theStreet.com, (the no-earnings internet company whose stock was promoted up to 25, only to rapidly plunge to 1 1/4), and hedge-fund manager who decided to 'retire' from his hedge fund. A commentary by Alan Newman in an issue of Crosscurrents is interesting: "We feel obliged to point out the outrageously wrong forecasts of analyst Jim Cramer. At the 5th Annual Internet and Electronic Commerce Conference in New York on February 29, 2000, Cramer said, "You want my top 10 stocks for who is going to make it in the new world?" Cramer then insisted on listing the entire group as if offering the rarest gems. The list included Ariba, Digital Island, Exodus Communications, Infospace, Inktomi, Mercury Interactive, Verisign, and Veritas. Cramer concluded by claiming he loved his list so much he would rather not own any other stocks. Just eight trading days later the Nasdaq peaked and crashed. Ariba, Infosapce, Digital Island, and Exodus are down more than 90%. The best performer in Cramer's list, Mercury Interactive, has lost 'only' 38%."

Newman goes on to say proof that the mania has not yet reached its final end can be seen in the way that Cramer is still listened to. In fact, CNBC hired Cramer upon his 'retirement' from actively managing people's money, to provide investment advice to its viewers in prominent formats and round table discussions. Do they even try to get the best people to provide advice and commentary, or just look for 'personalities' and media showmen who can put on the most exciting 'show' for viewers.

          The Securities & Exchange Commission  issued an "investor alert" in June 2001 cautioning investors to be wary of Wall Street analysts' free advice for buying or selling stocks. It warned that investors need "to understand the potential conflict of interest that analysts have," and went on to warn that analysts might use positive-sounding reports and buy recommendations to help support shares that the analyst's brokerage house helped bring public. Or the analyst could be issuing favorable reports to boost one company's stock in order to lure other companies into investment-banking relationships with the firm. The SEC even points out that (gasp) at some firms analysts' pay is significantly affected by how much the analyst is able to help the firm's much more lucrative investment banking business [even at the expense of the company's brokerage business customers].

          Are the patterns of hyping stocks mindlessly the result of decisions by individual analysts, or part of the business plan of their employers and Wall Street in general? Financial TV shows have tried to give an appearance that they're involved in a fix of the situation by instituting rules that money managers and analysts appearing on their shows to hype stocks must reveal whether or not they own the stocks. Any viewers thinking that is any help are so caught up in the hype they must be delusional.

          Congress to the rescue? Congress has appointed a subcommittee to hold hearings to look into how Wall Street analysts operate. As mentioned earlier in this commentary, the SEC is issuing "investor alerts" warning investors to understand the conflicts of interest that analysts have, as a stop-gap while they try to come up with a fix. But don't get your hopes up.

          It is advisable to look on free advice provided by Wall Street and the media with a healthy dose of skepticism, asking "Why are they being so good to me, providing such valuable advice free?" 

          Until the hype is over, investors need to be extremely cautious. Wall Street firms have a long history of trying to separate you from your money.

          For now, we remain 100% in CASH

Till next time