Posts filed under “Analysts”
‘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 first time since at least 1997, fewer than 29 percent of ratings for stocks covered by brokerages worldwide are “buys,” according to 159,919 recommendations compiled by Bloomberg. Analysts are turning more pessimistic even as they push up estimates for profit growth among Standard & Poor’s 500 Index companies to 36 percent, the highest since 1988. . .
More than 54 percent of ratings for companies in the U.S., U.K., Japan and Brazil are “holds,” the highest level since Bloomberg began tracking the data in 1997. While the proportion of “sell” ratings in the U.S. has fallen to 5.1 percent, half the level of 2003, the total combined with “holds” reached a record 71 percent last month, the data show.”
As we have noted so many times previously, following the Wall Street crowd of analysts is rarely the way to make money.
Collectively, the analyst community has turned excessively bearish, versus their typical excessively bullish outlooks.
Why so many bearish stock calls from equity analysts? Fear of a double dip. Slowing growth. Concern that joblessness will weaken consumer spending. Uncertainty. Negativity on the economy. Credit issues. Lack of economic catalyst.
In other words, all of the general economic concerns trumpeted in the media each day — that these analysts have precisely zero expertise in identifying, anticipating and responding to. In fact, most stock analysts would have a hard time dissecting BLS employment data or understanding how GDP is calculated. Its outside of their roundhouse.
Historically, analysts typically “lag behind events in revising their forecasts to reflect new economic conditions.” A McKinsey study found that analyst forecast error is too bullish — except during downturns, when it is too bearish. Actual earnings from S&P 500 companies “only occasionally coincide with the analysts’ forecasts.”
As the chart below shows, most of the time the analyst community is too bullish by double — they expect earnings growth of 10 to 12%, compared with actual earnings growth of 6%.
However, the earnings recovery following a recession –like now — has analysts under-estimating earnings.
Bullish and Bearish at the Exact Wrong Times
Ultimately, excess pessimism amongst the analyst crowd may be a bullish contrary signal. It should make dedicated bears nervous . . .
McKinsey: Equity Analysts Are Still Too Bullish (June 2nd, 2010)
Sell Signal on 36% Profit Gain Has Analysts in Denial
Rita Nazareth and Lynn Thomasson
Bloomberg, Aug. 30, 2010
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
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
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
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.
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)
He is a Visiting Fellow at the University of Durham and a Fellow of the Royal Society of Arts.
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.
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.
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
> 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 . . . >
> 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
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
Q: How did Wall Street manage to convince the rating agencies to slap investment grade ratings on Junk? A: They had cheat codes ! Here is Gretchen Morgenson and Louise Story in today’s NYT: “One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit…Read More