You know, it would simply be too easy for a Fool to make a huge amount of hay about the fact that Citigroup (NYSE:C) laid off its entire department of technical analysts.
Too easy to chirp a bit about the absurdity of buying a stock regardless of its value based upon some wiggles on a stock chart.
Too easy.
Citigroup made the move as part of its push to control expenses, and a company spokesman said that it had no intention of replacing any of the analysts. Instead, Citigroup intends to invest more money into areas involving fundamental analysis.
We at The Motley Fool are business-focused investors. We don't tend to buy and sell in rapid fire: We believe that the stock market is a derivative of business performance, not the other way around.
Technical analysts, on the other hand, believe that the stock market is a story of supply and demand; that price trends and chart formations can tell a trader what a stock or other security is likely to do next. They follow trends; they speak a language of formations and patterns. There are some who utilize both technical analysis and fundamental analysis, but for many, it's nothing short of a religious war. To fundamental investors, technical analysis is soothsaying. To technical traders, fundamentalists are the slow-footed oafs who don't know what's happening until it's already happened, at which time the traders are long gone.
That's the theory, at least. My own opinion is that someone can get by extremely well as an investor by committing oneself to focusing on a value discipline, seeking never to overpay for a company, without ever once peeking at a chart. The important part is the middle: It is easy for chartists to point at fundamental investors as such easy marks when so much of what passes as investing wisdom seems to be built not so much on fundamental research, but simply on horrendous logic. Given the choice between whether chartists or good fundamental investors have the advantage with Travelzoo (NASDAQ:TZOO), for example, I think that the chartists would win by default. You'd have a hard time finding a good fundamental argument for holding a company at 30 times sales that isn't a pre-approval biotech. It's not so much a competition as it is an abdication.
And the alternative is...
Anyhoo, back to Citigroup. I suppose that it would be reasonable for us to make some noise about this being a victory for fundamental research over technical analysis. It would be reasonable, except for one thing:
Jack Grubman.
Yes, you remember Jack Grubman, the Citigroup telecommunications analyst who, as the Securities and Exchange Commission complaint states, provided ratings on companies like WorldCom, XO Communications (OTC BB: XOCM), Level 3 (NASDAQ:LVLT), AT&T (NYSE:T), and so on. For some companies he was simply wrong; for others it seems he had based ratings not so much on what the fundamentals of the companies were, but on what investment-banking business Citigroup wanted, or on getting his child into the best preschool.
L'affaire Grubman cost Citigroup plenty and was one of the triggers of the Wall Street settlement that brought about the rise in third-party independent research now provided by groups like TheStreet.com (NASDAQ:TSCM) and Morningstar, among others. While we on the outside cannot say that the analyst conflict scandal broke the ties between Wall Street analyst research and its investment-banking interests, we can say with some authority that research once again became more of a cost center for brokerages than a source of advertising for investment banking. All across Wall Street, sell-side analyst budgets have dropped. Goldman Sachs (NYSE:GS), Merrill Lynch (NYSE:MER): Across the board, their analysts have taken on a much lower profile than they had during the rock-star 1990s.
And where was the most logical place for any one of these companies to shave their budgets? No, not in the areas where the analysts offer the worst performance: That had nothing to do with it. They cut the analysts and coverage practices that have the lowest level of demand from their clients.
The technical group at Citigroup was headed by Louise Yamada, who had worked at Citigroup for more than 25 years, including the last several years as a recognized market commentator with an extremely high profile whose work on interest rates and commodities has been quite prescient. The quality of the technical group's work at Citigroup, its accuracy, or whatever other qualitative standard you would like to call upon is quite beside the point. What matters is the bottom line: If clients don't consume the research enough to justify the continued employment of the technical group, then it will cease to exist.
Beyond this, given recent history (see Grubman above), it should be clear that Wall Street firms will sell whatever hokum that investors will buy, or whatever will bring in banking revenues. We've been highly critical of the quality and usability of Wall Street's research for years based on the myriad conflicts of interest in the full-service brokerage model. We cannot thus turn around and say that the dissolution of the technical analysis group at Citigroup is some great moral victory for fundamental analysis. First of all, this isn't a moral battle, and second, it is at any rate a tale of profit and loss and strategic decision-making, nothing more.
By the same token, one has to wonder why it is that technical analysis at a big investing house is not in greater demand. My distinct impression is that business-focused investors, the traditional buy-and-holders, are in the minority among market participants. You can oftentimes find the core of an investing trend in the roots of its most recent trauma. In the late 1990s, the latest traumas had been the collapses in 1987, 1994, and 1998, so investors were all about "buying on the dips." Today, folks are "selling all the rallies," a recognition that the last time people held too long and got too greedy, they had their heads handed to them.
Again, I happen to think both of these strategies, taken in aggregate, are garbage, preferring the strategy of "buy cheap, sell dear, and short crap." But if such short-term phenomena are such a large part of peoples' strategies, why isn't a technical group at Citigroup in demand enough to justify those jobs? The best explanation I have -- which somehow doesn't seem satisfying -- is that charting software has grown substantially more powerful. Online brokerage TradeStation, for example, has programs that can chart prices in intervals as few as five minutes that go back years.
But whatever the reason is, fewer people were buying what the chartmeisters at Citigroup were selling, and on Wall Street that's a fairly unforgivable mistake. To overstate the importance of this move, though, is to give way too much credit to the overall quality of fundamental research coming out of Wall Street.
See also:
- Jeff Fischer's "Your Broker Misled You"
- Bill Mann's "Wall Street Gets Off Light"
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Bill Mann does use maps, however. He holds shares of none of the companies mentioned in this article. For a complete list of holdings, please view his profile . The Motley Fool is investors writing for investors .
