Posts filed under “Analysts”

Regulation AB: Downgrading the Ratings Agencies

We know the major ratings agencies suck. We know their business model was payola. We know they sold ratings for cash, committed fraud on structured product investors. We know they hid significant modeling errors, and then hid these problems from the public and regulators.

Might their free ride be coming to an end? The SEC is tightening existing regulations that might restrain the big 3′s worst instincts.

First, a reminder of how criminally corrupt they are:

“In early 2007, according to the S.E.C., a Moody’s analyst discovered a significant flaw in one of its ratings models that inflated the grades assigned to a new type of debt called constant proportion debt obligation notes. Roughly $1 billion of these securities had been issued — carrying high Moody’s ratings — when the flaw was detected.

Rather than own up to the error, Moody’s officials fixed the model quietly, the S.E.C. said, leaving the inflated ratings intact. Because the notes were performing well in the market then, a Moody’s downgrade would have raised many questions and might have pushed Moody’s to disclose the existence of a problematic model. Recognizing the harm this would cause its reputation, Moody’s covered up the problem, the S.E.C. said.”

That is but one reason why Moody’s senior management, IMO, should be in Federal prison.

The SEC’s latest attempt to reign in the Rapings Ratings Agency is an extension of Regulation AB.

What is Regulation AB?

-Boilerplate offering statements (shelf registrations) are no longer allowed. Individual disclosures are required;

-Complex securities cannot be sold without adequate time for investor investigation;

-Requires increased disclosures and more detailed data about assets in the pool;

-The cash flow waterfall — the order of loan cash flow disbursements to investors — is required upfront, and must be made available to the public;

-CEO certification: prior to any issuer/sponsor making a shelf offering, their CEO must certify asset quality (the pool is “as advertised”). This creates a Sarbanes-Oxeley like liability.

-New disclosures MUST show prior securitized failures. Prior pool asset of originators/sponsors that were repurchased due to failure must be disclosed, with actual dollars amounts of losses/repurchases revealed;

-Independent parties must monitor the pools post-sale to see if the securities are performing as forecast;

-Most important of all, structured product registration can “no longer be based solely on the fact that its securities have received an investment-grade rating.”

In other words, the Ratings agencies are being downgraded by the SEC.

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Source:
BB? AAA? Disclosure Tells Us More
GRETCHEN MORGENSON
NYT, September 4, 2010
http://www.nytimes.com/2010/09/05/business/economy/05gret.html

Category: Analysts, Bailouts, Credit, Legal, Really, really bad calls

Are Wall Street Analysts Contrary Indicators?

‘Boy these companies look pretty good, earnings are OK, they have plenty of cash. What if there’s a double dip?’ ‘I’m no macroeconomist, but . . .’ > Here is an intriguing possibility, one that should make any investor holding 80% cash a tad nervous: The Buy/Sell/Hold crowd of analysts are excessively cautious: “For the…Read More

Category: Analysts, Contrary Indicators, Corporate Management, Earnings

MISH vs ECRI

I hate it when two people I know and like do battle. This week, it is Mike Shedlock of MISH’s global economic analysis squaring up against my friend and work neighbor, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI). Mish ripped ECRI in an unsparing critique this morning: ECRI Weekly Leading Indicators at Negative…Read More

Category: Analysts, Cycles, Economy

Who Steered You Wrong About the GS Case?

Amongst the regular complaints I have about the financial media is the lack of accountability of alleged experts. The bad stock picks, the terrible market calls, the unsupported opinions, all blithely made and forgotten. Yet the same experts are trotted out week after week to give more money losing advice. The silver lining to this…Read More

Category: Analysts, Financial Press, Legal, Regulation

Corporate Cash: Top 20 Firms = $635 Billion

I mentioned earlier that corporate cash has been piling up since 1982. The number that is being bandied about (via the Fed) is that the 500 largest non-financial firms have $1.8 trillions dollars in cash. I wasn’t sure how the Fed came up with their number, and I wanted to look at the data in…Read More

Category: Analysts, Federal Reserve, Valuation

James Montier Resource Page

Tim du Toit is the editor and founder of Eurosharelab. He has more than 20 year of institutional and personal investing experience in emerging and developed markets. Tim is based in Hamburg, Germany. More of his articles can be found at Eurosharelab (www.eurosharelab.com).

Republished here with permission.

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I met James Montier at a value investment seminar in Italy in 2007 where he presented. We had long discussions later the day and into the evening on value investing and investment strategy.

James was kind enough to put me on his distribution list and I really looked forward to each of his articles as they always taught me something.

Unfortunately James decreased his writings since taking a position with the asset manager GMO in 2010.

I decided to put this resource page together so Eurosharelab visitors can also benefit from James’s investment wisdom.

James Montier’s Amazon Page shows all the books he has authored as well as the following short biography:

James Montier is a member of GMO’s asset allocation team.

Prior to that, he was the co-Head of Global Strategy at Société Générale and has been the top-rated strategist in the annual Thomson Extel survey for most of the last decade.

Montier is the author of four market-leading books:

• The Little Book of Behavioral Investing: How not to be your own worst enemy (Little Book, Big Profits)

Behavioral Finance: Insights into Irrational Minds and Markets

Behavioral Investing: A Practitioners Guide to Applying Behavioral Finance

Value Investing: Tools and Techniques for Intelligent Investment

He is a Visiting Fellow at the University of Durham and a Fellow of the Royal Society of Arts.

2010

In this May 2010 article called I Want to Break Free, or, Strategic Asset Allocation does not equal Static Asset Allocation James Montier talks about in the beginning investing was a simpler and happier.

The essence of investment was to seek out value; to buy what was cheap with a margin of safety. Investors could move up and down the capital structure (from bonds to equities) as they saw fit. If nothing fit the criteria for investing, then cash was the default option.

But that changed with the rise of modern portfolio theory and, not coincidentally, the rise of “professional investment managers” and consultants.

In March 2010 Miguel Barbosa in his Simolean Sense blog interviewed James Montier about his book Value Investing: Tools & Techniques For Intelligent Investing.

In the second part of the interview Miguel talks to James about his other book The Little Book of Behavioral Investing – How Not To Be Your Own Worst Enemy.

In this February 2010 article, the first since joining GMO, James Montier asks Was It All Just A Bad Dream? Or, Ten Lessons Not Learnt from the financial crisis.

2009

In November 2009 article titled Only White Swans on the Road to Revulsion James Montier makes the argument that that the housing bubble and the crisis following its collapse was not an unforeseen event but rather the result of over optimism and the illusion of control, two classic human behavioural mistakes.

This article is the text of a speech called Six Impossible Things Before Breakfast, or how EMH has damaged our industry which James Montier delivered at the at the August 2009 CFA UK conference on “What ever happened to EMH”. Dedicated to Peter Bernstein (EMH = Efficient Market Hypothesis)

Here is the video recording of the above mentioned speech by James Montier: Six Impossible Things Before Breakfast. The video is 42 minutes long, but well worth watching.

The financial times in this 24 June 2009 article EMH, AMH: Edwards and Montier ride again motions James Montier leaving Societe Generale to join US investment manager Grantham Mayo Van Otterloo & Co, just after he and Albert Edwards won the Thomson Extel European analysts award in May 2009 as the top global strategy team.

In this 2 June 2009 research paper Forever blowing bubbles: moral hazard and melt-up James Montier explored the bubble phenomenon and what happens in the future after a bubble pops. He explores the possibility that all the government rescue packages initiated in 2008 have the possibility to again inflate a substantial bubble.

In this 24 June 2009 Financial Times article called Insight: Efficient markets theory is dead. James Montier explains why the efficient markets theory is dead but still lives because of academic inertia.

In June 2009 James Montier’s published this list of his Favorite Investment Books as well as a Summer reading list of more recent titles.

In May 2009 shortly after the market started its recovery from its March 9 2009 lows James Montier in this article titled Sucker’s rally or the birth of a bull? asks if this is a suckers rally and if so what investors could do to protect themselves. He also gives a few short ideas from his shorting screen.

In this 27 January 2009 article Clear and present danger: the trinity of risk, James Montier writes about the three primary and interrelated sources of investment risk; Valuation risk, business or earnings risk and balance sheet or financial risk.

Read More

Category: Analysts, Contrary Indicators, Investing, Valuation

Wall Street Still (Always) Too Bullish

Barron’s Alan Abelson points us to a rather intriguing — and sadly, none too surprising — data point: “Week in, week out, Bloomberg taps Street analysts for their prognostications of where they expect the S&P 500 to wind up the year. Despite the turmoil in the markets, those stalwarts—13 of them—have steadfastly held to their…Read More

Category: Analysts, Investing

Goldman on FIFA World Cup

> Be sure to check out the Goldman research piece on World Cup Soccer World Cup and Economics 2010 It is a surprisingly fun approach to economic research . . . >

Category: Analysts

McKinsey: Equity Analysts Are Still Too Bullish

> Surprise! Analysts remain too Bullish: “Exceptions to the long pattern of excessively optimistic forecasts are rare, as a progression of consensus earnings estimates for the S&P 500 shows (Exhibit 1). Only in years such as 2003 to 2006, when strong economic growth generated actual earnings that caught up with earlier predictions, do forecasts actually…Read More

Category: Analysts, Investing, Valuation

“Bonds are for Losers” Revisited

When Dave Rosenberg and Jim Grant squared off for a debate — dubbed “Bonds are for Losers” — in late March, the 10-year was sitting at about 3.90 and the 30-year at about 4.75.  The room was overwhelmingly on Grant’s side (yields have nowhere to go but up), although Rosie did sway some opinions during…Read More

Category: Analysts, Fixed Income/Interest Rates, Markets