"At the start of the year, profits at banks, brokers and insurance companies were projected to rise 22 percent in 2008, according to the average estimate of analysts surveyed by Bloomberg. They’re now expected to decline 48 percent."
-Bloomberg’s Chart of Day
How bad are fundie analysts as a group? Well, as the chart up top shows, the earnings forecasts of Wall Street Analysts "missed the mark by the biggest margin in at least 16 years last quarter," according to Bloomberg data.
How often did the Street get it right? Try 6.7% for the companies in the S&P500 Index in Q2. That’s the worst showing since Bloomberg began tracking this data way back in 1992.
While some blame the credit crunch, Oil, and Housing as the problem, a more likely source of error is Reg FD. Analysts have been increasingly wrong since the adoption in October 2000 of Regulation Fair Disclosure. The regulations barred CEOs and CFOs from giving the inside dope to the outside dopes. No more whisper numbers to favored bankerd or their pet analysts.
What does this mean to investors? Well, traditional Wall Street Research seems to be of minimum value to investors. Its no surprise that the fastest growing form of analytics (yes, I am talking my own book here) is quantititive — no C-level execs needed.
Follow Analysts at Your Own Financial Risk (June 2008)
Schwab: We Don’t Need Your Stinkin’ Analysts (April 2008)
Analysts’ Profit Forecasts Missing More Than Ever: Chart of Day
Bloomberg, Aug. 20 2008
This morning’s guest post is from PIMCO Managing Director Paul McCulley.
I got to spend some time with Paul at David Kotok’s Shadow Fed meeting earlier this month in Maine, and found him to be an engaging fellow. His commentary this morning is quite interesting, and hits upon some favorite themes of ours: Was it Bear Stearns that was rescued — or JPMorgan? (who really cared about Bear anyway?) Can the world truly decouple from the US, the biggest global economy? (No). Can we overstate the significance of Real Estate to the economy and broader financial system? (No).
“Has the world grown smaller?”
– Around the World in Eighty Days, Jules Verne, 1873
Not much has changed, yet everything has changed since Andrew Stuart, befuddled by Phileas Fogg’s outrageous proclamation, asked one of the most ignorantly pertinent questions of his time. The decades of the mid-nineteenth century witnessed major advances in transportation technology, including the completion of coast-to-coast railroads in the United States and India, and the opening of the Suez Canal across Egypt. In the 130-odd years since, the world continued to shrink in temporal terms, with air and space travel taking the place of steamers and rail. NASA has designed airplanes to circumnavigate the world in just two hours, and commercial jets can now make the 80-day trip circa Jules Verne in less than 24 hours. While not much has changed in terms of our rate of progress against time, neither Stuart, nor Fogg, (nor the ECB for that matter) could have predicted the effects of a far more important advance underway, where everything has changed.
Information technology, more specifically the development of parallel processing, “gigabit-terabit-petabit” bandwidth and networking logic, is changing the way we conduct our lives today. While jet-setting executives (or policymakers) of this decade can be present in more places in less time than any predecessor, corporate information, corporate processes and corporate controls can now be shared around the world in real time via information superhighways. These advances in information technology are catalyzing the globalization of business and finance in ways far more important to global central banks than something as basic as physical transportation. These advances are driving the age of financial networking, and what has been described by some as leading to the vastly narrowing ecologies of finance.
In particular, information technology advances are dramatically increasing the number of “connections” we are capable of achieving and maintaining in our everyday lives. These connections allow us to specialize and super-specialize not only our manufacturing processes, but increasingly also our service-based processes, predominantly so in financial services. The mobility of capital combined with the mobility of information across countless interconnected nodes, hindered occasionally by politics and the transparency tolerance of various governments, gives the largest holders of capital something of a “God-complex” in today’s global economy. Small banks expand to become mega-banks, regional banks consolidate to become universal banks, and foreign central banks “self-insure” to become sovereign wealth funds. Wealth and capital supercede the common CEO, the everyday purchasing manager, and humble central bankers of today in velocity, mobility and connectivity. Global central bankers in particular need to catch up quickly.
Bear Stearns: Too Connected to Fail
On Monday, March 17, 2008, global financial markets opened to news of a Federal Reserve-enabled rescue of Bear Stearns by JPMorgan Chase. We learned, in the days that followed, of a weekend marathon meeting conducted by Federal Reserve officials to find a buyer for Bear Stearns. Urgency was warranted such that the hyper-connected global financial system might escape the effects of a medium-sized U.S. investment bank filing for bankruptcy and risking reverberations to thousands, nay, millions, of counterparties that were connected to it. Speculation grew of which institutions could be next, and more importantly, of which institutions comprised the Federal Reserve’s “too connected to fail” list. In reality, there was no such list at the ready; however, we can think of several universal banks and investment banks that, by virtue of the network age, play a significantly connected role in global finance such that bankruptcy of one or more would multiply the effects on financial markets globally in a cross-defaulting negative feedback loop.
Bear Stearns fell specifically due to a broadening “run” on its liquidity spurred by increasing skepticism about the value of assets on Bear Stearns’ balance sheet. The Federal Reserve responded with a suite of policy actions that was aimed at shoring up liquidity to the remaining commercial banks and investment banks, but the run on liquidity at Bear Stearns was only a symptom of the real problem incubating beneath it. Unfortunately, the liquidity provisions of the Federal Reserve only succeeded in delaying the process, not in curing it.
Real estate values across the U.S., residential and commercial, continued to deflate post-Bear Stearns. The same went for property prices in the U.K., Spain, Germany, Japan, Italy and Australia. Valuations and the increasing dearth of credit availability were equally to blame for this disease, with the prior a bigger factor in more developed economies, and the latter a bigger factor in more emerging economies. The real rub for policymakers around the world is that no legitimate firebreak was created and held between the cause of the epidemic and its multiplier. The global financial system is “too connected to decouple.” The economics of the oft-cited “hard decoupling” thesis are falling victim to the network effects of the hyper-connected global financial system, and nobody seems to be able to do much about it.
Global Aggregate Demand: Too Connected to Decouple?
BNN interviews Danielle Park, portfolio manager, Venable Park Investment Counsel. I am having a hard time finding anything to disagree with her about!
(I am less bullish about the dollar as anything other than a short term
Danielle has some terrific quotes in this piece:
"Canada sells rocks and trees"
"Secular Bear in stocks started in 2000, Cyclical Bull began 2002 – 07, Cyclical Bear began in 2007."
"Its a fundamentally different climate than ’82-99"
"You cant buy always you cant hold always"
"Ignore day-to-day gyrations, focus on weekly and monthly trends"
Who is this lady? Why don’t we have more strategist like this in the US? She’s terrific!
Danielle Park’s Juggling Dyamite