Analysts' Profit Forecasts: Worse Than Ever!
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"At the start of the year, profits at banks, brokers and insurance companies were projected to rise 22 percent in 2008, according to the average estimate of analysts surveyed by Bloomberg. They're now expected to decline 48 percent."
-Bloomberg's Chart of Day
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How bad are fundie analysts as a group? Well, as the chart up top shows, the earnings forecasts of Wall Street Analysts "missed the mark by the biggest margin in at least 16 years last quarter," according to Bloomberg data.
How often did the Street get it right? Try 6.7% for the companies in the S&P500 Index in Q2. That's the worst showing since Bloomberg began tracking this data way back in 1992.
While some blame the credit crunch, Oil, and Housing as the problem, a more likely source of error is Reg FD. Analysts have been increasingly wrong since the adoption in October 2000 of Regulation Fair Disclosure. The regulations barred CEOs and CFOs from giving the inside dope to the outside dopes. No more whisper numbers to favored bankerd or their pet analysts.
What does this mean to investors? Well, traditional Wall Street Research seems to be of minimum value to investors. Its no surprise that the fastest growing form of analytics (yes, I am talking my own book here) is quantititive -- no C-level execs needed.
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Previously:
Follow Analysts at Your Own Financial Risk (June 2008)
http://bigpicture.typepad.com/comments/2008/06/follow-analysts.html
Schwab: We Don't Need Your Stinkin' Analysts (April 2008)
http://bigpicture.typepad.com/comments/2008/04/schwab-we-dont.html
Source:
Analysts' Profit Forecasts Missing More Than Ever: Chart of Day
Lynn Thomasson
Bloomberg, Aug. 20 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ar9FYyyXfzdo
Friday, August 22, 2008 | 08:45 AM | Permalink
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as an institutional investor, sell side research is very useful for some things, very useless for others. on the useless side of the ledger: earnings estimates, buy/sell calls, target prices. on the useful side: industry and company overview particularly in unique or complex sectors, comparative analysis to other companies in the same sector, street chatter.
Posted by: joe | Aug 22, 2008 9:20:05 AM
Macroeconomics should also be applied. Quantitative analysis often requires projecting years worth of future earnings, inflation, risk premiums, etc. One look at the housing and credit charts tells me to avoid all stocks. I don't need to try to figure out Google's earnings 5 years from now.
Posted by: Steve Barry | Aug 22, 2008 9:22:33 AM
Analysts forecasts are basically worthless because at the end of the day they owe their first allegiance to their clients not to investors. Unbelievably, there are a still load of analysts out there with "buy" recs on Fannie/Freddie/LB. Self interest is a much more powerful factor than the decline of the grapevine.
Posted by: John(2) | Aug 22, 2008 9:26:59 AM
BR:
Speaking of analysts, what do you think about Dick Bove's comments that Lehman is a hostile takeover candidate? I respect Bove, but disagree with his assessment. I love how Yahoo Finances headline right now is "Stocks Point Higher on Prospect of Lehman Buyout." I'm thinking: Who the hell can afford AND want to to buy LEH at this point? I'm just waiting for the long-only rumor mongers to tell us that Warren Buffet or the Federal Reserve will buy up the wasteland of RMBS's and save the day.
Posted by: HCF | Aug 22, 2008 9:27:06 AM
I am sure there will be a thorough SEC investigation into the rumors.
Lehman Rises After Korea Bank Says It's `Open to' Acquisition
BLOOMBERG:- Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, rose 15 percent in New York trading after a report that Korea Development Bank is ``open to'' an acquisition.
Lehman climbed $2.03 to $15.75 at 8:30 a.m. before the official open of the New York Stock Exchange. Shares of the New York-based company dropped almost 80 percent this year before today, the worst-performer on the 11-company Amex Securities Broker/Dealer Index.
``We are studying a number of options and are open to all possibilities, which could include (buying) Lehman,'' a Korea Development Bank spokesman said, according to a Reuters report.
Lehman, the largest underwriter of mortgage bonds before the subprime market collapsed, lost the confidence of investors in the past year as it struggled to pare debt holdings. The bank has reported writedowns and credit losses of $8.2 billion in the past 12 months, according to data compiled by Bloomberg.
Posted by: Barry | Aug 22, 2008 9:34:46 AM
I assume you're being sarcastic about the SEC "investigating" this rumor. I mentioned this yesterday. Why is it just A-OK for someone like Bove to throw out rumors that HELP the stock (and a stock he likes/owns, right?) but when the short-sellers do it the other way, it's criminal?
Posted by: Jeff M. | Aug 22, 2008 9:47:40 AM
I also assume that Cramer will decry these rumors about Lehman as well? Nevermind.....
Posted by: Jeff M. | Aug 22, 2008 9:48:36 AM
According to Liesman at Jackson Hole, the one thing the Fed is sure of is that housing is key to recovery.
They are either lying or in extreme denial. They are trying to make us believe that some freak, once in a generation housing problem is to blame for everything...when in fact housing is just an outgrowth of 60 years of disastrous Fed policy that hooked us on debt, scrapped all regulatory oversight of lending and fueled the greatest credit bubble of all time.
Posted by: Steve Barry | Aug 22, 2008 10:11:20 AM
Didn't KDB walk away from the table saying that LEH price was too high for a deal? What brought about the change in attitude? Is it that the SEC can't touch KDB? Will KDB do the same thing as BoA did with Countrywide? Anyone have an answer to any of these questions?
Posted by: Juhuti | Aug 22, 2008 10:13:09 AM
Analysts are like economists, very few of whom do anything other than look at past trends and project them forward (Roubini, Meredith Whitney, and a few others being notable exceptions). Any idiot can do that.
It takes a prescient understanding of forces that might affect global and local markets to create a forward-looking analysis that carries any value. I'd take a good long-view market historian over most Wall Street analysts or economists any day.
Martin Scholes, the Nobel Laureate of LTCM fame, recently acknowledged (with his new venture facing a few challenges) that the credit crunch was severe and not going away any time soon. I don't know if that should be tantamount to a contrarian call that the credit crunch must be about over (given the value of his previous insights), or is just a statement of the obvious, with no value whatsoever in understanding how things might evolve. Either way, I think, I'll just ignore it.
Understanding risk and worst-casing everything is the best route for those whose principle concern in investing is the return of their principal.
Posted by: Donkei | Aug 22, 2008 10:15:09 AM
Seems to me that the title of the chart might need to be reversed... Were analysts better at predicting actual results, or were actual results better at matching an estimate?
Posted by: Farnja | Aug 22, 2008 10:15:52 AM
Correction: That should have been "Myron Scholes", not "Martin."
Posted by: Donkei | Aug 22, 2008 10:19:04 AM
My assumption has always been that Analysts and many of Wall Street's leaders don't get out of the office much and have never even visited the companies they cover; except maybe some steralized and orchestrated "analyst presentations."
I could be wrong, but that would mean they have no excuse for their ignorance of the real world and are just idiots....but who am I to judge.
Posted by: Rich Shinnick | Aug 22, 2008 10:24:43 AM
Saying this is a credit crunch or crisis, is kind of like saying oil is in a bear market after its recent down move (which some are saying BTW). This is a long, painful return to a more sustainable credit environment from a ridiculous bubble. I guess it is easier to say "crunch" than "long, painful return to a more sustainable environment from a ridiculous bubble." Unfortunately, the very scope of the bubble indicates this will be going on for a decade or so....calling it a crunch gives the hint that it may pass soon.
Posted by: Steve Barry | Aug 22, 2008 10:25:46 AM
@Steve Barry: Agree wholeheartedly, which means the financial services industry as a whole is going to contract in a big way during that time. Unfortunately everyone in the industry is STILL in denial about this......
Posted by: Jeff M. | Aug 22, 2008 10:35:58 AM
I hear what you're saying about the joke that is fundamental analysis, but don't the Quants have their fingerprints all over the current mess that we are in?
Hyper-Securitization..."AAA" tranches...Tens of trillions of CDOs..."Borrower default models"...30-50X leverage...doubling/tripling and then "one more last one" of a quadruple down on a bad bet...
The "Fundamentalists" certainly blew it by being fundamentally oblivious.
But if the Fundies were enablers, the Quants were the pushers.
Sensitive dependence on initial conditions. It's the one area on which too many quant models are stupefyingly insensitive.
Yes, too many of the Fundamental Analysts are quacks, peddling placebos.
But,
Too many of the Quants...well, damn...they are just dangerous. They remind me of Big Pharma---peddling hyper-concentrated doses of Oxy to treat a the minor headache that is simple portfolio maintenance.
Posted by: Dan Duncan | Aug 22, 2008 10:36:37 AM
That was a specific type of leveraged, black box, quant fund.
What I was referring to was the analytic process of using market mathematics (trend, price, volume, short interest, money flow, inst ownership, etc.) to determine what to own and what to avoid --- as opposed to listening to CEOs/CFOs, looking at old earnings data, relying on lagging information, etc.
We don't use a "black box" -- humans take the output, and then exercise some judgement. We agree with the philosophy of mathematician Baruch Spinoza on using PCs as tools rather than substituting machine judgements over humans...
Posted by: Barry | Aug 22, 2008 10:51:52 AM
Steve Barry, in this headline-driven "what have you done for me lately", "tell me something I don't already know" society we live in, I doubt the credit crunch can maintain it's center stage position in the public consciousness for a decade or so. More likely, there will be a very slow but steady healing process in the credit markets - which will ultimately feed upon itself - as people and businesses go back to borrowing money to acquire things for which they don't have the upfront cash to purchase outright.
Posted by: Frank | Aug 22, 2008 10:53:16 AM
Frank...good point...that probably explains why they couch it in terms of housing always. That is something that can hold the public's interest indefinitely.
Posted by: Steve Barry | Aug 22, 2008 11:20:08 AM
"The regulations barred CEOs and CFOs from giving the inside dope to the outside dopes."
Hilarious.
"No more whisper numbers to favored bankerd or their pet analysts."
For a second I thought you were creating a new derogatory term for bankers, before I remembered "asdf". But "banktards" or "bankherd" might still fit.
Posted by: yathrib | Aug 22, 2008 11:33:47 AM
Is the problem Reg FD or the end of the Bull Market. Looks like the projections got better the longer the bullmarket of the 90's and worse the longer the bear market.
Posted by: john | Aug 22, 2008 11:34:53 AM
Steve, true regarding housing, but at some point, people are going to realize and accept that the market has priced their house at certain level. They will then make their buy, sell or hold decisions based on that price level as opposed to the expectation that prices will dramatically fall (or rise) from that level. The $64,000 question ($64 million in inflated dollars) is when that price stabilization point actually occurs...which is anybody's guess right now.
Posted by: Frank | Aug 22, 2008 11:38:09 AM
BR - "bad are fundie analysts as a group?"
Let's take that a step further.
How bad are the forecasts of the majority of analysts, regardless of specialty, right now?
Answer: Terrible. Look at Bloomberg's group of 78. They missed big earlier this week. Huge miss. EIA's analysts missed big on oil inventory this week. Just name any group of analysts and track their performances.
Why are analysts projections so screwed up? Do they not get out very often? Do they lack real world experience? Have they forgotten how to do real research? Or are they aliens?
It's a pathetic state of affairs.
The standard BS excuse: "We were surprised..."
What they should say: "We are stupid beyond your wildest dreams...but keep paying us."
I have never seen the situation any more embarrassing. Professionals, my ass. It's a clown show.
Posted by: Movie Guy | Aug 22, 2008 11:40:38 AM
I have investigated over 100 earnings restatement matters, usually for audit committees. One thing that nobody has mentioned is the decline in "earnings management" activity. Less companies giving guidance, less tolerance by auditors for quarterly games and scared executives. Trust me, SOX, SEC enforcement, Enron et al and the demise of Andersen made a difference!
Posted by: chris | Aug 22, 2008 12:09:53 PM
Nevermind.
its all bullish news anyway!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by: NOR | Aug 22, 2008 1:31:49 PM
