Do analysts serve investors or firms?
Do analysts serve investors or firms?
Crises supposedly bring out the best in people. Sadly, the credit crunch hasn’t done so with most Wall Street stock analysts. Their calls have been little help to battered shareholders, mostly filled with Pollyanish sunshine rather than helpful portents of doom.
True, a few saw trouble brewing and alerted their clients. And in any case, analysts have a certain amount of responsibility not to set off stampedes. Financial institutions are built upon confidence.
An irresponsible call can set a panic in motion, hammering a stock. Yet there is a difference between shouting “fire" in a crowded theatre and sending out notes that explain why investors should ignore billowing smoke.
Take Wall Street’s opinion of Fannie Mae and Freddie Mac. The two mortgage giants have about $5 trillion (Rs218 trillion) in obligations, which means they are levered up around 50 to one.
Housing prices are falling, and there’s no end in sight due to the large number of vacant homes.
The US treasury has essentially said any eventual bailout will hurt common stockholders. Yet the majority of analysts still rate both government-supported enterprises as a buy, with average target prices more than double current market values.
Other examples abound, such as Wall Street’s calls on troubled insurer American International Group Inc., or AIG. Its shares have lost almost two-thirds of their value this year. In May, it raised $20 billion in capital. And now analysts think the company will soon be forced to raise significantly more, due to losses on credit default swaps.
Yet even tough-sounding analysts take relatively sanguine views of the company’s troubles.
“AIG’s businesses are so complex that management may not even know the extent of the company’s ultimate exposures, let alone losses," was how one Goldman Sachs Group Inc. analyst just put it.
Yet the same analyst has set a target price of $23 a share, which implies AIG’s shares were fairly valued. Other analysts are far more bullish—the average target price for the shares is around $39.
Of course, as Yogi Berra said, it’s tough to make predictions, especially about the future. But their repeated, ludicrously sunny views should make any observer question whether analysts view their true constituency as investors—or the companies they cover.
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