One of the strange aspects of running a quant shop is watching some of the fundie guys downgrade previously beloved names long after they have been spanked. Let’s cherry pick a few charts and work our way through them.

We’ve noticed this with GM, AIG, and many others recently. Today’s silly downgrade is US Steel.

I don’t want to pick on any one analyst. Since Goldman Sachs are supposed to be the smartest guys on the street, let’s start with them.

Here is their US Steel (X) chart:

US Steel, 2 years

Goldman Sachs current analyst

Source: FusionIQ, Bloomberg

The Buy was made well over $100, the down grade to hold was around $40, and the sell was at $30. Really, thanks for nothing, Goldy.

Here’s our quant system chart:


US Steel, 6 months

Source: FusionIQ


Because trend and price action are integral to the ranking system, we simply do not let these disasters run too far away from us to the downside. The first sell was at $180, then a neutral near $160, and another sell at $135.

We use neutral as a “unwind your previous position” for active traders. For long only investors, think of it as a “Hey, tighten up your stop” signal. We don’t generate an actual sell short signal, but active traders use the sells as a short signal.

Lastly, let’s look at the Deutsche Bank call on X: How much value add is buying all the way up, and buying all the way back down?

This is what we like to call the Cape Matterhorn trade: Buy Buy Buy!


US Steel, 2 years

Deutsche Bank current analyst

Source: FusionIQ, Bloomberg


I’m not sure this is even a fair comparison. We do research and manage assets with one the goals of managing risk, avoiding disasters, maximizing gains, and protecting capital. The poor bastards who work for big firms have all sorts of other issues to deal with: Size, banking, clientele, bullish bias, institutional demands, herding, etc.

Fundamental analysts: You don’t need them in a raging bull market, and you don’t want them in a bear market.

Category: Quantitative, Trading, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

44 Responses to “Fundamental Analysts Belated Downgrades”

  1. I-Man says:

    Barry, you guys are just ahead of the major paradigm shift that will arise out of this in wealth management. Too many people are still playing the dumb old game where you are either a fundamental value guy or a technical trading guy… no middle ground. That model is dead, and it never made any sense to begin with. People in the near future will demand that their “advisors” implement EVERY tool at their disposal to manage wealth through the capital markets.


    Sell X… here??? Now??? Thats just downright criminal. What a bunch of pikers.

    And these guys are supposedly the best the analyst community has to offer?

    What the hell are they putting in the water at Wharton, or Yale, or wherever the hell these nitwits got their MBA’s… But, oh its cool. They have CFA’s so they are infallible and MUST be smarter than you are…

    Sad part is, most of those guys ARE very smart they’ve just had their common sense stripped from them somehow and been taught that “trading” the market is bad, and its just their job to watch the fundies in one small niche of the market and ignore the rest. Thats how we end up with this drivel disguised as analysis… that people actually pay for.

  2. leftback says:

    They are all tools, I-Man. The reason they made those calls is someone told them to. It’s called “PUMP AND DUMP” and they all do it, Cramer included. BUY BUY BUY (and he will sell it 10 minutes later…)

    We are getting closer to burning down the house with each passing day.

  3. blackbox says:

    Goldie’s oil to $200 call over the summer was what made me stop and think about the real damage these guys can inflict on the rest of us. While the real US economy was being hurt by high oil prices driven by fund speculation, these guys come out and call for oil to $200. The credibility they had in the marketplace at the time (thankfully it’s significantly diminished), helped maintain the oil bubble and contributed to further damage to the US economy. Their analyst calls are not only silly, they can inflict real damage on the rest of us.

  4. jmborchers says:

    Blackbox, the best way to make money shorting the entire market was to call for Oil to $140. People believed it. It was brillant.

  5. jmborchers says:

    Yeah, the systems f’ed.

    “WASHINGTON (Dow Jones)–A commercial real estate debt index plummeted Tuesday after a Credit Suisse research report warned that two loans included in a debt deal sold this year could already be heading for default. “

  6. tranchefoot says:

    so goldman is becoming bullish on X. that’s good to know…

  7. leftback says:

    My biggest regret is that after identifying SRS long long ago I didn’t sink a big chunk of cash in there and sit. I lost my way a bit during the shorting ban, as I think did many others, but it was clear that nobody was going to save those commercial real estate vermin and now it seems like the banks are being left to twist in the wind as well.

    So it’s not all bad.

  8. scorpio says:

    dont confuse fundamental analysis w sell-side analysis

  9. DP says:

    S&P840 was broken a couple of hours ago with no big bounce back this time, so far at least. Uhoh.

  10. scorpio says:

    is there anyone good out there talking about next yr’s SPY eps? i keep seeing v wide ranges, using GAAP non-GAAP operating v reported etc etc from $50 to $95. if it’s $50 then why isnt SPY 450 at 9 X in the cards? gets us back to the 2-yr period 12/92-12/94 before the leveraged lift-off in Jan ’95. complet this double-top

  11. scorpio says:

    bloomberg kathleen hayes says GS out w forecast GDP -7% in 4Q? is that right? depression baby.

  12. JasRas says:

    Thank you BR!!! Using point and figure via Dorsey Wright (also available for free at a person would have clearly cut bait in July and would have harvested most of their profits. I am sure most well followed technical systems would have guided in a similar fashion.

    After the tech bubble, most brokerages got rid of their technical analysts. Few listened to them anyhow. I loved to listen to Jeff Weis on the box when I was at PaineWebber/UBS. He pleaded with people to listen to him. If you had listened to him and Art, you would have avoided much pain…

    Only the small regionals still have technical gurus on staff. It is better to DIY or subscribe to something like BR’s service.

  13. Patrick Neid says:

    Citibank is not acting well today. I wonder if it and UBS are the final shoes.

  14. Patrick Neid says:

    Watch Citibank and UBS………

  15. mhm says:

    The real trouble with Sell rating is that some funds are required to liquidate positions even if they know they shouldn’t… they could hold and be ok. Now they have to buy into another overvalued stock which still has a Buy rating. Repeat until 401k becomes 41k…

    (nothing specific to the companies in the post)

  16. I-Man says:

    Looks like we get a little surge into the close today…

  17. JackInTheBox says:

    A couple questions:
    1. Since there is no signal after the “130″ sell ( is the call made before or after the close? Made a huge difference on both the sell signal days), does that mean it’s still a sell (as it is with sell-side analysis) [BR: yes, it stays a “Sell” until a “Neutral” signal occurs] or was one to sell everything on the sell signal day and be out of the stock entirely until the next signal? If the latter, why is the first sell signal followed by a neutral which you mention is understood to mean “unwind your previous position” (you should have none)? If the former, how is your current stance on the stock any different than Goldman’s which you label silly?

    2. Now that core inflation is both above expectations ( they don’t cook the numbers afterall) and above headline, will you give the fed some credit for not listening to your past monthly “core understates inflation” comments and correctly understanding the nature of the rise in energy and sticking to what makes economic sense for policy input?

  18. gbug208 says:

    BR- This is a little disingenious. There’s a major difference between fundatmental analysts and SELL SIDE analysts. Its long been acknowledged sell side analysts, regardless of their process as a group add no value.

    Whats more, quants as a group have gotten crushed this year as the trend followers we likely loaded up on whats lost the most since July


    BR: 1) That is a very fair point: Honest value, Graham & Dodd, fundies is very different than SELL SIDE analysts. I overstated the case, and I concede that point to you good sir.

    2) Black box’ problems is the lack of risk management and capital preservation strategies. They let the box tell them what to do (we dont)

  19. constantnormal says:

    One should never use fundamentals to tell you WHEN to buy or sell, only to tell you WHAT to include in one’s portfolio. The WHEN is a matter of current market conditions, which typically is where the emotion is concentrated, and fundamental analysis says nothing about that.

    Once can use fundamentals to guesstimate where prices might be at some distant point in time, based on superior operating performance, but even that is not going to offer anything more than dartboard performance. But in selecting which darts to throw over a lengthy period of time, fundies beat TMA (in my humble non-back-tested opinion).

  20. leftback says:

    The black box is only as good as the algorithm you feed into it, and that has to be based on “rational expectations”. Of course rational expectations are a moving target, as Scholes found out in 1998, and astonishingly this time around as well. (Why would anyone let him manage money??).

  21. I-Man says:

    I and I think this might help stimulate the discussion a little more:

    What is the difference between a buy-side analyst and a sell-side analyst?

    And also:

  22. constantnormal says:

    And in any event, whether TMA or fundies, brokerage analyst opinions are as toxic to one’s portfolio as any CDO filled with busted mortgages. Brokerage analysts (IMHO) ALWAYS have interests other than their retail clients at heart — ESPECIALLY the (now extinct) broker-dealers. I suspect the same holds true with mutual fund company analysts.

    One of the nicer aspects of your blog, Barry, is that you aren’t touting particular positions and raising my inner alarms.

    Call me cynical, but I assume that EVERYONE is front-running their public pronouncements.

  23. OkieLawyer says:


    Maybe I am making the logical fallacy of equivocation, but exactly what — other than fundamental analysis — can an individual investor use to determine if a stock is a good buy or bad? Since most of us would be buying or selling stock based purely on publicly available information, isn’t that really the only way to determine value in a stock?

  24. SWMOD52 says:

    It’s a scandal.
    From now on I will alwasy be 50 – 50 bonds and SP500 index. Adjust every two months. That’s it.

  25. constantnormal says:

    Okie —
    allow me to put words in others’ mouths (I’m sure that “others” will speak up presently) — the goal of trading to to maximize profits by capturing the incremental gains/losses in interim moves, with TMA providing clues as to whether the current price is ahead/behind the trend, based not so much on fundamentals like price/sales or net cash flow but on the price action itself.

    Everyone has their own tolerance for risk/volatility, as measured by their ability to sleep at night with their exposure in the markets. Thus “value” becomes an intensely personal thing, chained to one’s own beliefs and opinions, and not so much to any arbitrary system of analysis.

    Even Ben Graham’s methods will be found wanting in the event the news background is of a killer asteroid impacting in the next year or two. But Ben’s methods do provide a very conservative methodology that seems to work very well over time horizons that are years or decades long.

    But when your time horizon is measured in terms of weeks, months or quarters, then market emotion comes into play, and the best tools for surfing the waves of emotion are to be found in the sometimes-fallible TMA arena (also known as “witchcraft”, or “charting alchemy”).

    In fewer words, if your time horizon is only a few months, I suspect you will find that fundamental analysis comes in a distant second/third/fourth/… to other methods (with the “best” method moving around according to whatever works at the time).

  26. I-Man says:


    …”the sometimes-fallible TMA arena (also known as “witchcraft”, or “charting alchemy”).”

    I believe that “Chart Hoodoo Voodoo” is the preferred nomenclature. :)

  27. Joe McCann says:

    When will FusionIQ have its services available? Anyone know…every time I go to the site it says coming soon.

  28. MWS says:

    Let’s look at two reasons why sell-side analysts deserve watrboarding instead of your respect:

    *Wall Street is a business, and despite the irony in the name, sell is not a recommendation that is in the firms’ (greedy) interests, that is undrwriting, which is often a part of intertwined firms.

    *Accuracy of forecasts are not going to get a sell-side analyst paid more, but recognition of their recommendations are. “Buy” is unfortunately well regarded recommendation because it makes money for the firm.

    I recommend for all you fundamental bashers to consider Vitaliy N. Katsenelson as he may resonate well with more technically oriented guys. He’s a traditional value cat with a twist, very interesting. I myself am a value guy in the traditional Graham/Dodd sense, but personally I feel it is the logic behind the model and the strict application in following that to be the important driver, whether its a chart or a PV calculation or whatever.

    In other words your model is only as good as the inputs adopted to it. If important considerations are left out then it will be fatally flawed.

  29. tranchefoot says:

    Hey Barry:

    How have you approached the problem of off-exchange transactions? My understanding is that there is quite a bit of price and volume action in the so-called “dark pools”. Are you able to access info on these trades and incorporate it into your analyses?

  30. DDInvestor says:

    The archive is the revenge of the small investor – LOL.

    GS put X on their conviction buy list on Jun 23, 2008. The next day X topped at 196 and since then the stock knows only on direction. Here is the funny link

  31. Jurgen says:


    You should stress that you were talking about a sell-side analyst (rear-view research for retail). They (sell-side analysts) always issue upgrades at a top and downgrades at a bottom, and often their recommendations are completely 180-degrees opposite of buy-side analysts (research for mutual and hedge funds).

    P.S. Bespoke has a nice illustration as to how the market is oversold (32% below 200-Day MA) and what to expect looking a few years forward – “In the 1930s, and even following the big declines in the 70s, 80s, and early 2000s, the spread turned violently positive in the months following the ultimate low in the 200-day spread.”

  32. Bruce N Tennessee says:


    What do the analysts have to say about the value of the USD over the next 6 months?

    What would happen if in our 14 trillion dollar economy we spend, say 7 trillion on the bailout by March?

    Financial Crisis Tab Already In The Trillions

  33. bri says:

    barry, these charts are fantastic. so funny.

    i’d say this should be a recurring feature, but sell-side research is over. actually sell-side is over.

    well done.

  34. Jurgen says:

    Bruce N Tennessee, “we spend, say 7 trillion on the bailout”

    This statement is misleading because as Bernanke pointed out today, none of the funds were “spent” but the funds were “lent” (there is a collateral) and “invested” into banks (preferred shares purchased) – most of the funds are recoverable (+ interest and possible profits).

  35. leftback says:

    Jurgen, if the bank stocks go to zero, the funds will not be recoverable. Please see the history of Japanese zombie banks for the likely trajectory of the capital injections performed by the central bank.

    We should do what Barry and Chris Whalen have suggested, and flush 90% of the existing banks and start new ones capitalized by Buffett and others who have saved their cash. This avoids moral hazard, punishes the guilty and allows for new banking capital to go to work in the economy.

    UYG < $6 now, another few weeks and it will be at zero….

  36. babycondor says:


    if the bank stocks go to zero, does the bank not still have physical assets, customers, employees, and some role to play in the real world economy? therefore are not the loans at least theoretically recoverable, if the bank changes its game plan? if we flushed the existing banks, who would staff the new banks? employees and management of the old banks, right? same old wine , new bottles, new playbook.

    there seems to be this huge disconnect in many traders’ minds (understandably) between “stocks” (virtual casino chips) and actual companies. i imagine this is why the stock market is acting so schizo these days.

    re zombies: most large Japanese banks were only able to comply with capital standards because regulators were lax. the banks engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers. thus, the normal competitive outcome whereby the zombies would lay off workers and lose market share was thwarted. i do not see the same situation occurring here.

  37. AmenRa says:

    What if the lows in 2002 aren’t the lows from the dot com bust? The housing bubble was inflated before all of the air left the dot com bubble. This is what has me worried. The actual low from the bubble has yet to be reached.

  38. Winston Munn says:


    If you are so confident of the quality of these “loans”, I will gladly allow you to pay for my share of the bailout “investments”, let you take over 100% of the winnings and 100% of the losses.

    Shake on it?

  39. Bob_in_MA says:

    I has a put spread on US Steel of like 160/140 for JAN 2010. It cashed out a couple months ago. I made 60-75%, but talk about leaving money on the table! That steel bubble was probably the last great short opportunity of this market. Oh, well. Better luck next crisis…

  40. DP says:

    Not a bad thing to take money off the table while there’s still a table.

    I can’t find a single article, person, blog commenter or “expert” who says it is time to buy financials. Maybe that means it is time to buy financials.

    Not a recommendation, I also smoke and used to sky dive :)

  41. Bruce in Tn says:


    I was just kidding about the bailout gathering steam. NOT. So you don’t think every pig isn’t muscling his way to the trough who can do so?

    My grandkids will probably dig me up so they can pee on my remains……

    CEOs urge $500B stimulus from Obama

  42. Bruce in Tn says:

    OK…good morning…hump day.

    The Big Picture is that the future for employment in the US is for lower wages and when this happens, we’ll have jobs, but people will have to work harder, and longer to provide.

    A Sea of Unwanted Imports

    Our labor pool and wages will be affected by immigrants and lower labor costs overseas…just as they are now…but in order to compete, we’ll do the recycling of paper products here, and the things talked about in this article will come back to our shores…or we won’t be competitive, and I don’t think that will happen. Of course, people in business for themselves will still do well, but people who work for others will continue to see stagnant wages and harder working conditions. Occam’s razor, this is the simple solution….

  43. Bruce in Tn says:

    One final thought before going to the salt mine…

    We still have one tax that needs to go into effect immediately….tax on imported oil…we need the governmental revenue, delays Obama’s personal tax hikes, and continues us down the path of renewable energy and less foreign dependence on oil…need this one tax implemented now….{74F9D1AD-46D8-4BA9-8B2A-CB15C097425B}&siteid=yhoof

    Alternative energy bulls face bear market.

  44. aidyn kussainov says:

    wow, selling X here – at the end of a perfect (as perfect as the get) 5th wave… down another 10%, possibly – then up to 100% gain.