FOOL ON THE HILL
The Post's Snow Job

The last time most Wall Street analysts agreed about the direction of the stock market preceded the massive crash we're still mired in today. But I guess no one informed the folks at The Washington Post about this, as they dedicated the front page of their business section to the fact that analysts' conflicting calls confuse investors. What's really confusing is why the Post thinks we're listening to analysts at all.

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By Bill Mann (TMF Otter)
December 6, 2002

It's a snow day here in Washington, D.C.

That's a nice coincidence, given the snow job earlier this week in The Washington Post's business section.

Their highest profile article on Wednesday, "'Buy!' 'Sell!'," laments the fact that  -- get this -- stock market analysts' had conflicted messages about the direction of the market.

On Tuesday, chief Wall Street strategists from two banks came out with recommendations on stock market holdings. J.P. Morgan's (NYSE: JPM) thought the stock market would rise. Merrill Lynch's (NYSE: MER) thought differently -- that investors should trim their stock exposure. Author Jonathan Finer summed up this conundrum with a rhetorical, "What's an investor to think?"

My first thought was to try not to lose my breakfast.

This article is so divinely lacking in merit, so full of claptrap that I couldn't believe Finer wrote it, and I couldn't believe the Post dedicated a single column-inch to it, much less the prime real estate of front page, center of the business section. We can get to the nitty gritty in a minute, but I just wonder if anyone responsible for "'Buy! Sell!'" had any recollection of what happened the last time all Wall Street analysts agreed on the direction of the market.

It was 1999, and Abby Joseph Cohen of Goldman Sachs (NYSE: GS) was whipping bulls into a frenzy. Merrill's Henry Blodgett was still taking high fives over his Amazon.com (Nasdaq: AMZN) call, the Post's own James Glassman's book, Dow 36,000, sat high on the bestseller list, and Prudential's Ralph Acampora predicted the Nasdaq would hit 6000. Jack Grubman was in the process of collecting 15 million clams for being the most expensive cheerleader in America. For every 'sell' rating, Wall Street had more than 600 'buys.'

I needn't remind anyone how all that cheery consensus worked out.

In as much as I care about what stock analysts think, I'm pretty happy to see some disagreement among them. Ostensibly, this should mean we're getting actual opinions, not a bunch of Grubmans shilling stock for their investment-banking clients in exchange for entry into some exclusive kiddie school or for a better table at Bouley, or whatever. Still, these guys are talking about the next 12 months.

In the time I've been investing, I have yet to see much aptitude from analysts in predicting 12-month performances on the granular stock-by-stock level, but apparently some people take their overall market-level predictions seriously. My hope is that these people are limited to the staff of the Post.

This is the same Washington Post business section that publishes a Sunday feature called, "Quoth the Mavens," in which the editorial board prints the least-meaningful nuggets of wisdom they can find from market commentators and newsletter hawkers from the previous week. Each time I read the 'Mavens' with ever-lowered expectations, the experience still underwhelms. I think they're looking for a better six-letter word that starts with 'M,' frankly.

 I do have great respect for the balance of the Post's business coverage. Their recent multi-part series on the collapse of the stock market bubble is not to be missed. (It includes a wonderful expose on analysts, which Finer seems to have missed.) It just so happens that Finer's piece was chock full of platitudes, generalizations, and all the gobbledygook that passes as insight somewhere south of Canal Street, but little place else. Worthless. High profile, and worthless.

Let me boil down the essence of the article. Analysts are releasing contradictory opinions. The markets are confused. That's a bad thing.

No, it's not a bad thing at all. Markets are supposed to be confused. That's why there are buyers and sellers in each transaction -- divergent opinions. While one investor believes the worst thing is to hold a particular stock for a single minute more, another investor has decided there's no better place for her money than in that same stock.

The meat of the article's discussion is that while Merrill's Richard Bernstein recommended reducing portfolio percentages in stocks from 50% to 45%, Christopher Wolfe at Morgan raised his same ideal percentage from 45% to 47% stocks.

So while Finer may be correct that there's plenty of confusion about these recommendations, I think the confusion is of a different tenor than he does.

Here are the points I would like clarified:

1. Why, after all the scandals, all the emails, all of the exposed conflicts of interest (and I, for one was shocked), does Finer think investors should give a damn what Wall Street analysts think?

2. OK, Mr. Wolfe -- I'll up my stock ratios to 47%. What if my entire portfolio was currently 100% United Airlines (NYSE: UAL). Should I just buy more of that?

3. Merrill Lynch's report noted that Wall Street analyst sentiment was "historically bullish," which "is a good contrary indicator that things are about to change." How can analysts be both "mixed" and "historically bullish?" Need I point out the delicious irony of a Wall Street analyst pointing out that Wall Street analysis isn't worth a damn?

4. Another analyst from Merrill pointed out that companies tend to be straying farther away from generally accepted accounting practices (GAAP) when reporting their results as a reason to be pessimistic. Well, that is a problem, but it's hardly new. Should we look forward to something really helpful from Merrill, such as a list of the companies whose non-GAAP compliant reporting is to be avoided? No? Well, how about a list of downgrades so we can make sure that the companies that are fudging their numbers aren't included in our 45%?

5. Mr. Bernstein noted that the recent rises in the Dow, S&P, and Nasdaq would have been "robust" for a full year, much less a 2-month period. Should we assume that somewhere else in your report, you cover whether the values of companies at any point in this period were justified?

6. One of the "explanations" given by unnamed institutional investors is that the differing advice must be tailored to each individual investor's circumstances. How do you "tailor" contradictory advice?

In fact, the only useful nugget in the entire piece came in the very last paragraph. Someone should've recognized that it repudiated the article's premise. Jay Mueller of Strong Capital Management said investors shouldn't treat any class of assets as a monolithic entity. That's it, in a nutshell.

A global recommendation to "buy stocks" or "sell bonds" is stupid advice. After all, both Wal-Mart (NYSE: WMT), with annual revenues of $219 billion, and Genemax (OTCBB: GMXX), with revenues of $29, offer equity, just as both the U.S. government and bankrupt WorldCom offer bonds. What to choose? Apparently it doesn't matter, as long as your percentages are right.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann's so nice, there are nursery rhymes written about him. He owns none of the stocks mentioned in this article. He is managing editor of The Motley Fool Select, where you can find his best Foolish stock ideas you won't find anywhere else. The Motley Fool has a disclosure policy.