Is Analyst Research useless?

Despite reforms after the 1999 bubble, most Wall Street research analysts are still simply “talking the book” for their firms. The so-called “Chinese Wall” between research and investment in most of the firms is nearly worthless.

Still the community of naïve investors appears to eat up every upgrade and downgrade that rolls off the street. Many of the herd are greatly concerned with the average analyst rating for a stock, not recognizing that these figures have nearly no correlation with stock pricing, or at best are a lagging indicator.

Sophisticated investors totally ignore Wall Street analyst ratings and perform their own research. This serves as their edge on the market. The only factor these investors hunt for are the number of analysts covering a stock, less is better.

The press is finally recognizing that most Wall Street research does not hold water, and the recent bear market has brought forward a slew of articles questioning if analyst ratings have any value whatsoever.

Worthless Wall Street Research

One Day Left to Vote: Make your voice heard

Agricultural commodities have been hot over the past few months. Will this trend continue for the remainder of 2008?

Vote Now in HingeFire survey at the top left corner of the Blog.

How will agricultural commodities as represented by the DBA ETF perform in 2008?

Does Cramer still believe that Bear Stearns is just fine?

Jim Cramer is fine for amusement. I rarely watch him, but as a proud Nittany Lion alumnus caught the recent show at Penn State on CNBC. Pure entertainment and nothing more, anyone who takes investing advice from Cramer will not do very well in the market over the long term. Websites that properly track his picks (meaning not TheStreet.com) demonstrate that he has always under-performed the market.

Even worse, the recent sequence of shows where Jim recommended Bear Stearns on Tuesday March 11th and then eliminated the buy recommendation from the Street.com website after the fact makes it clear that there is no integrity in the investing results from his rants. A video on YouTube outlines the BSC stock pick situation and demonstrates the alteration of the website after the stock crashed.



Patrick Byrne the CEO of OverStock..com (also a controversial figure with a public campaign against naked short selling) recently outlined his thoughts on Jim Cramer. The Jim Cramer is a Complicated Man post provides some excellent detail and thoughts.

The lesson here is that you should not believe the buzz from Wall Street pundits about their overall returns. This includes media clowns, fund managers, and analysts – the results for most of these “super-stars” have been spiced-up by the magical elimination of bad picks. The same holds true for most “get rich with my trading system” scams propagated on the web.

Enjoy the Haircut

The Muni Auction Rate market continues to decline. Firms have been scrambling for a solution, but so far none has appeared. The next step is to ask for a Federal government bailout to put liquidity back into the muni auction rate market. If Bear Stearns can effectively be bailed-out for $30B then how about a few billion for the auction rate market?

If this trend continues soon the Fed will be providing liquidity in every sector to hold off financial calamity. This brings up an image of a carter greasing the wheels of the wagon to keep it moving, while in actuality the entire wagon is collapsing without him noticing.

Earlier HingeFire articles discussed the Auction Rate fiasco (see More Credit Turmoil: The Muni Auction Rate market freezes and Auction Rate Stress Continues: Muni Bond Funds Impacted). Today UBS placed a stake in the heart of customers holding auction rate securities when the firm marked these securities to market giving many holdings a 20% haircut. Customers had been told previously that these securities could not be sold at the regularly scheduled auctions but they retained full value.

So much for integrity in the markets, customers were sold these investments by brokers who promised they were a safe alternative to cash offering a slightly higher yield. This markdown of auction rate securities is expected to spread to other Wall Street firms this coming week, leaving a trail of furious wealthy investors in its wake.

Quick Takes: Rising Taxes, Home Equity Crisis

Many people hold the misguided belief that their taxes will go down during a recession. If everyone is spending less then won’t the government need less? Unfortunately it never works out like this. During recessionary periods, government spending is normally in crisis as sales and income tax revenues drop, this leads to outsized tax increases to support rising spending as social program needs increase. The longer a recession lasts, the higher taxes tend to get.

MarketWatch outlines 9 reasons your taxes are going up. Facing a huge national debt load, it is unlikely that taxes will retreat. Irrespective of which party is in office, the entire situation will result in taxes being raised. There is no other possible real alternative to dig out from under the mountain of debt at the federal, state, and local levels of government – except for tax increases. (Nobody should be so naïve to believe that government spending will drop).

Taxes are not the only problem for consumers. The credit crisis is about to fold over to another sector, home equity loans are under pressure. Americans owe over $1.1 trillion on home equity loans. Many of these loans were unwritten during the bubble period with lax standards. Many home equity loans did not require income verification or were combined in “piggy-backing” deals for no cash down. All the questionable practices over the past few years in the mortgage market equally apply to the home equity loan sector.

A good portion of these home equity funds will not be repaid to the lending institutions. Especially in markets where housing prices have dropped significantly, second-lien holders are being left with nothing in short sale scenarios. The percentage of delinquent home equity loans was up to 5.7 percent in December, the figure is expected to be over 7% by the end of March.

Equity Loans as Next Round in Credit Crisis

Consumer Confidence Expectations hits the lowest level since 1973

The Consumer Confidence Expectations measure by the Conference Board dropped to 47.9 from 58.0. This is the lowest reading since 1973. Many will remember that 1974 was a very painful downside year for the U.S economy.

Consumer confidence crumpling proclaims the headlines in many papers across the U.S. today. The commentary from analysts adds a sense of despair to most of the press.

"Yes, weaker than in the last four downturns," BMO Capital Markets analyst Sal Guatieri said of the latest expectations number. "Ouch!"

Consumer confidence, he said, is "now buried deep in recession territory" and it is now "only a matter of time before personal consumption follows suit."

Of all the headwinds facing the economy -- faltering consumer confidence, which will drive a drop in retail sales representing two-thirds of the overall economy, is the largest threat. This has driven the federal government to take tax rebate measures to boost the consumer. However in an environment with a credit crunch, falling home prices, rising unemployment, high fuel prices, and increasing necessity costs --- it is not likely the government action can stop the downward spiral.