Re: Two reasons for the drop today

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By TMFCzar
January 17, 2001

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"Another reason: Smith Barney lowered its target price from $55 to $45."

Would this not mean that NOK is dead money for 2001? Any thoughts.

WARNING: Ridiculously long philippic follows.

The whole concept of "dead money" is generally one that's used to induce fear and greed, thereby fueling trades for brokerages. It doesn't really make sense when you consider that trades aren't without friction in the form of commissions and taxes. When you take into account the conflicts of interest between brokerages and their clients, it makes even less sense. If you'll indulge my elaboration....

Having made my money "the old-fashioned way" for three years before joining the Fool, I can assure you that Smith Barney's analysts don't have a crystal ball. My guess is that on this morning's research call (there's one every day where research spoon-feeds pitches to brokers) the reduction in the target for Nokia was accompanied by an "interesting opportunity" in another stock with an increased price target.

Maybe the new recommendation was AT&T, a company that's recently shown some signs of life after taking a pounding. (AT&T, not coincidentally, is also a company that's about to generate no small amount of investment banking business when they break up their company into four parts.) Maybe Corning is the "interesting opportunity" because it's in a sexy industry and has sold off a bit recently. There's always something.

After listening to the research call, brokers pull up client records of all the people who own Nokia, and start making calls to share the "news" about the lowered price target. They suggest that Nokia is "dead money" for the next twelve months (enter fear)... maybe the client should think about selling now. Once they've got the client worried about their current position, they introduce hope in the form of "an interesting opportunity" (hello, greed). This new opportunity might be AT&T, or something else that the broker heard about on either the research call or the sales call (which, at the heart of it, have the same goals, just different approaches). In any case, they'll cite that research has a price target of a billion or something on the stock, and the client should really get in now if they don't want to miss the boat. If the broker is good, the call ends with two orders: one to sell Nokia, and one to buy the newest "interesting opportunity."
Let's take a look at that conversation:

Broker (wolf): Good Morning, (insert client name here)! How are you today?
Client (sheep): I'm doing great, (broker name), how are you?
Wolf: GOOD! GOOD! Say, (insert sheep's name here), the reason I'm calling is that I have some news to share.
Sheep: Oh yeah, what do you have?
Wolf: Well, you're one of my best clients, so I called you first to let you know that our research desk lowered the price target on Nokia from $55 to $45.
Sheep: Really? Shoot.
Wolf: Yeah... Nokia's CEO announced that handset sales were down* last year, and so we think that Nokia's dead money for the next twelve to eighteen months.
Sheep: Wow... but I thought that wireless phones were the future?
Wolf: Well, they are the future, but maybe further into the future than we thought... let me ask you, do you know anything about fiber optics?
Sheep: Fiber optics? No.
Wolf: No? Super! Let me tell about a really interesting opportunity we have with Corning.
Sheep: The fiberglass people?
Wolf: Yep... that's them**... except they don't just make fiberglass these days... they're also building fiber optic cables that are used on the Internet. I just put a boatload of my own money in them.***
Sheep: I thought that Internet stocks were bad.
Wolf: They are, (sheep's name here), but Corning's also a biotech company, plus they have a strong spokesman in the Pink Panther. The research guys are really hot on this Corning company. They say it's an "infrastructure" play, like selling shovels to the gold miners.
Sheep: Do I need a shovel?
Wolf: You definitely need a shovel, (sheep). Why don't we shift some of your exposure from Nokia to Corning?
Sheep: Do you really think that's best?
Wolf: I sure do, (sheep), Corning's down a little bit, but we think it's going to rebound really strong this year. It's already up 20% this week. The research guys put a $90 price target on it -- that's 50% upside from here. You don't want to miss this. So, I've got you down to sell Nokia and buy Corning, right?
Sheep: Well, if you think that's best.
Wolf: It's definitely the thing to do... you won't regret this.****

* Handset sales were not down, as I've heard some people say... 128 million units represented a 64% increase over last year and was more than the number of handsets sold by their two closest competitors combined. "The street" was expecting between 130 and 140 million units sold, so mere 64% growth was considered a failure.

** Actually, Corning (GLW -- the fiber optic people) and Owens Corning (OWC -- the fiberglass insulation people) are two different companies. OWC was formed in 1938 as the Owens Corning Fiberglas Corp., a joint venture between Owens-Illinois Glass Co. (OI) and Corning Glass Works. In 1987, they made legal history by becoming the first company to trademark a color (pink), and recently filed for chapter 11 bankruptcy protection due to asbestos litigation. The law gave them pink, but took away the green. ;-)

*** "I've got my own money in this," or "I've got my whole family in this," are commonly used sales tactics. Sometimes it's actually true.

**** Should read, "Actually, I have no clue what I'm doing. You'd be better off throwing darts than taking my advice. Mostly, I need to generate some commissions to make my car payment this month."

[Editorial note: I don't have much opinion on Corning either way... I just picked it as an example. Sometimes it's easier to sell things that people don't fully understand, especially when you can tie them to words they think they should understand, like "Internet" or "biotech" or even (dare I say it?) "wireless."]

Lest you think that all brokers are scumbags, let me assure you that there are some brokers who really do have their clients' best interests at heart. Some are the old-school buy & hold guys, who still do commission-based business but don't churn their clients. I had the pleasure of working with a few of these good guys and learned quite a bit from them.

Some other good brokers do fee-based business, whereby they make a fixed percentage of assets regardless of the number of trades made. With these brokers, their incentive is to convince you to first transfer your assets to them, and then to keep those assets with them. The better the performance they garner for their clients, the more likely it is that clients will tell friends about the broker, and the more likely they'll stay with the broker. I know a few really good brokers who do fee-based business, so I had to make this part clear. Like one of my broker friends says, "Finding a good broker is like finding a good lawyer... there aren't many good ones out there, so you'd better hold on when you find one." ;-)

So, not all brokers are bad people, but the system in which they're working generally gives them incentives based on how well the brokerage house does, not how well their clients do. To help the brokers make money for the brokerage house, the research desk provides them with useful tools, like buy, sell, and hold recommendations, or target prices. There are a few who look past this junk and do right by their clients, but these, as noted, are few and far between... be careful out there.

To summarize...
* Most brokers (and brokerages) make money on trades, not on performance.
* Target prices are bunk... don't believe the hype.
* Don't be afraid.
* Don't be greedy.
* Not all brokers are evil... just most of them.