Fundies Blow Delphi Call
I find the debate between fundamental and technical analysts to be one of the sillier things on Wall Street. As noted previously, if a tool has value and works for you, then why not make it part of your arsenal? This includes technical, fundamental and quantitatative approaches.
Which brings me to the recent gleeful TA bashing at RM: Wachovia, which acquired Prudential not too long ago, laid off the entire Pru Technical department. This was somehow taken as proof that "Technicals don't work."
Not explained was the similar move by Wachovia closing their Economics department; I guess that means Economics doesn't work either.
Since turnabout is fairplay, I want to direct your attention to the now bankrupt Delphi Automotive: Yesterday, the WSJ "Tracking The Numbers" column took a fascinating look at the Fundies who covered Delphi. Many of these fine folks maintained their Buys on the firm, even as it careened straight into bankruptcy:
"Right until Saturday, when the world's biggest auto-parts supplier filed for bankruptcy-law protection, some Wall Street analysts maintained "buy" or equivalent ratings on Delphi stock. At least two issued bullish reports within the two days preceding Delphi's Chapter 11 filing, citing the possibility that the company's prior owner, General Motors Corp., might bail it out.
As of early last week, the consensus rating of 17 analysts who covered Delphi stock was "a little better than a hold," said John Butters, a research analyst at Thomson Financial in Boston. The analysts' mean was 2.9 on Thomson's five-point scale, in which one is a strong buy and five is a strong sell."
I can assure you folks who are enmeshed in this debate that chart readers were not long Delphi, which had long since given many a technical sell signal. Indeed, anecdotally there were quite a number of shorts in DPH, due to the technical signals.
Meanwhile, Analysts maintained a "buy" or an "overweight" rating on Delphi, even as the stock "tumbled into the single digits."
Apparently, this is not a first time occurence. The Journal notes that "Analyst also have held positive views on other stocks before they skidded into bankruptcy, including energy firm Enron Corp. in 2001 and, more recently, Northwest Airlines Corp."
This example will not resolve the Fundie/TA debate, which is quite silly. I suggest to readers that they sidestep the entire issue, and use what works for them.
My friend Kevin Lane is the Chief Market Strategist at "Techni-mentals" -- an independent research firm that combines Technicals with Fundamentals (Get the name?). Their track record is superlative. Its proof enough for me that ignoring any tools that can help your performance is simply bad for returns, and reflects questionable judgment . . .
Despite Delphi's Spiral, Some Analysts Said Buy
Bullish "Experts" Cited Possibility of GM Bailout Days Before Bankruptcy
THE WALL STREET JOURNAL, October 11, 2005; Page C3
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Tracked on Oct 18, 2005 12:49:01 AM
The problem with your analysis is to presume that sell-side analysts that had buys on Delphi were applying fundamental analysis (or indeed are proper proxies for the entire set of fundamental analysis). In fact, they were making a technical trading call based upon the optionality inherent in the stock versus a positive catalyst such as a union agreement or a GM buyout. Any true look at the fundamentals would have seen a tremendously overvalued equity. In addition, in light of the fact that double digit yields were available on Delphi's bonds, you could not make a case for the stock on a relative risk-return basis either. Believe me, there were plenty of fundamentally focused investors that were short this dog.
Posted by: JDL | Oct 12, 2005 11:49:43 AM
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