11.30.2007

A Sucker's Walk Down Wall Street

by Jeff Siegel

At the beginning of March, the guy who runs the second-biggest home builder in the U.S. told a stock analysts conference: "I don't want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year."

This week, that company's stock closed near its four-year low, and it has lost one-third of its value this year. That's when an analyst downgraded it – from buy to hold. Apparently, it's still not time to sell the stock.

Welcome to the shell game that is today's Wall Street. Never in the 30-some odd years that I have followed the stock business have I seen such shameless pandering by analysts. This is even worse than the go-go Enron days, when some analysts were on the company pad. These days, though everyone is supposed to be on the up and up, the quality of the analysis doesn't seem to be any better.

Consider McClatchy, which owns 31 newspapers, the Real Cities internet franchise, and various other web companies. Its stock is at its 52-week low (about $13.30) as I write this, and it has lost two-thirds of its value this year. This week, one analyst cut the company's target price from $25 to $15 – even though McClatchy hasn't seen $25 since the end of the summer.

What's going on here? Plain and simple, analysts are shilling for stocks. There's no such thing as a bad stock: the market is full of unlimited promise, and all setbacks are temporary. There are any number of explanations for this approach:

• The conspiracy-minded will point to consolidation in the investment business, which means fewer independent voices. In addition, despite attempts over the past decade to build better Chinese walls between the brokerage and analyst divisions within companies, every analyst knows that panning a stock is going to cost the brokerage side commissions.

• The change in cultural attitudes towards the stock market. It's not just that more of us, thanks to IRAs and 401Ks, have money in the market, but that we feel entitled to prosper from those investments. An analyst who actually recommended dumping a stock received death threats from clients who blamed her for the stock's subsequent collapse. That she was correct in her call seemed to matter not at all.

• There's the increase in business news, and especially the various cable channels. It's like watching ESPN: No one there is going to tell you that sports is a waste of time, and that you should spend it with your family or a good book. Is anyone at CNBC or FOX Business going to tell viewers that the market is overpriced and that they should get out?

• A lack of institutional memory. The last bear market came in 2001-2002, and, for the most part, wasn't all that bad. Traditional bear markets, like those in the mid-1970s, early 1980s, and even 1987, are bad. In 1974, the Dow-Jones average fell nearly 45 percent to the bottom of a 20-year range. So some analyst shilling may be because they don't know any better. All they have seen, for the past 20 years, are mostly good times.

So what's an investor to do? Read a book called A Random Walk Down Wall Street by Burton Malkiel, who described the market thusly: "It's like giving up a belief in Santa Claus. Even though you know Santa Claus doesn't exist, you kind of cling to that belief.

Finally, keep in mind John Maynard Keynes' perspective about a key piece of stock market wisdom: In the long run, the market has always gone up. Noted Keynes: "In the long run, we are all dead."

(Editor's Note: For more examples of the parallel dimension that is Wall Street, please note the market seemed to take little notice of Federal Reserve Chairman Ben Bernanke's gloomy speech on the nation's economy. For additional background on this, please see: "On Wall Street Reality is Relative.")

(Photo of the New York Stock Exchange by zoonabar via Flickr, using a Creative Commons License.)


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2 comments:

Anonymous said...

The stock market used to be about supply of capital to businesses and it used to have very traditional models to assess the value of a company

when 401k laws were created, suddenly huge volumes of dollars flooded investment markets and eventually much of that money started chasing stocks.

When Supply and demand overtook normal methods of stock valuation, the irrationality we know today crept into equity valuation.

This house of cards will keep going until the supply and demand relationship changes and that will happen in the worst case when the amount of people retiring grows to a higher number relative to new workers entering the market.

Then you are going to see a stock market revaluation that will be scary.

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