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Too Close? Bank Analysts Stink at Bank Stocks

Friday, 06 Jun 2008 10:39 AM

Want to lose a ton of money fast in the stock market? Just listen to Wall Street analysts, at least when it comes to picking their own.

A new report ranks Wall Street's top analysts and finds that investors who bought and sold financial industry stocks on their advice in the past year lost an astounding 17 percent on average.

That was twice the decline of the Standard and Poor's 500 Index of negative 8.5 percent, Bloomberg reported.

Relying on external rankings of analysts, like respected monthly Institutional Investor, did you no better. Its top pick, Merrill's Guy Moszkowski, landed right on the average — negative 17 percent, Bloomberg said.

Thirty-one of 38 analysts tracked by Bloomberg turned in stinker years, based on their recommendations to buy, sell, or hold stocks of big financial companies, the banks and brokerages where they themselves work.

Bloomberg's analysis presumed that investors would buy on the buy calls, sell on hold calls and sell short on sell calls.

Much like the tech stock debacle of the late 1990s, analysts could be blamed for being too close to their clients, a line that was blurred during the tech days, when analysts sat in on board meetings and group calls with top management.

And there's plenty of asleep-at-the-wheel thinking to go around. The big ratings agencies — including Moody's and Standard & Poor's — gave these same banks top ratings for bonds that were later revealed to be stuffed with high-risk mortgage debt.

The top ratings agencies this week agreed to divide their fees in order to cut down on conflicts of interest. New York Attorney General Andrew Cuomo had charged that high ratings had become a way to curry future jobs from the big banks.

Under the new terms, the agencies would be paid for service, and all of them would get paid, even if the deal in question does not close.

But it goes deeper than that, say some.

Richard Bove, of Ladenburg Thalmann in Miami, did well in the Bloomberg study, making hefty profits on sell calls on Merrill, Morgan Stanley and Goldman Sachs.

Problem is, analysts continue to rely on the accuracy of financial reports put out by the companies themselves, Bove told Bloomberg, but they also face new pressures.

"Ten years ago, the expectation was that analysts would simply avoid the worst excesses,'' Bove says. "The idea was just to beat the benchmark. Today, analysts have got to make you money in both up and down markets. You don't have any excuse."

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Want to lose a ton of money fast in the stock market? Just listen to Wall Street analysts, at least when it comes to picking their own.A new report ranks Wall Street's top analysts and finds that investors who bought and sold financial industry stocks on their advice in the...
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