Month: June 2012

Source: ForexYard

The euro failed to make significant movements in trading yesterday, despite rising Spanish and Italian bond yields which many analysts had predicted would bring the common-currency lower vs. its main rivals. As we close out the week, euro traders will want to pay attention to announcements out of Greece which may give some clues as to what political parties will emerge victorious in elections on Sunday. Any signs that the anti-austerity parties could win may result in fears that Greece will leave the euro-zone, which may result in the common-currency tumbling.

Economic News

USD – Dollar Continues to Fall against JPY

Negative US economic indicators, including a higher than expected weekly Unemployment Claims figure, resulted in the USD tumbling against the yen throughout the day yesterday. The USD/JPY fell as low as 79.15 during the mid-day session, down over 30 pips for the day. Eventually the pair was able to stage a slight recovery to stabilize at the 79.25 level. The dollar also saw some bearish movement against the Swiss franc. The USD/CHF fell close to 50 pips during European trading, eventually reaching as low as 0.9524.

Turning to today, dollar traders will want to pay attention to the Prelim UoM Consumer Sentiment figure, scheduled to be released at 13:55 GMT. Should the figure come in above the forecasted 77.5, the dollar could see a slight recovery against the yen before markets close for the week. That being said, if today’s indicator comes in below the expected level, the dollar may continue to slide against currencies like the yen and CHF.

EUR – Italian Bond Auction may Signal Further Euro-Zone Troubles

Following yesterday’s Italian bond auction, investors remained fearful that the euro-zone debt crisis could be spreading beyond Greece and Spain. Rising Italian bond yields were taken as a sign that the country may have to request a bailout in the near future to avoid defaulting on its debt. While analysts had predicted that bad news out of Italy would have weighed down on the euro, the common-currency managed to trade steadily over the course of the day. Investors remained reluctant to go short on the euro before the results of Greek elections on Sunday are known.

Turning to today, traders will want to continue monitoring new developments out of the euro-zone. In addition to any fresh polls detailing who could win in the Greek elections on Sunday, announcements regarding the current economic situation in Italy have the potential to generate euro volatility. Analysts are warning that even if Greece elects a pro-austerity government, the possibility of the euro-zone debt crisis spreading to Italy could keep the euro bearish for the foreseeable future.

Gold – Global Economic Uncertainty Helps Boost Gold

The price of gold moved up as high as $1627.75 during trading yesterday, as financial troubles in the euro-zone combined with a stalling economic recovery in the US helped boost the precious metal. Investors have been turning to gold as a safe-haven asset recently amid fears of a slow-down in the global economy.

Today, traders will want to pay attention to any news out of the euro-zone and US, as it may help determine what direction gold takes. Any negative data, particularly with regards to the current economic situation in Italy, could cause gold to extend its current bullish trend.

Crude Oil – Crude Oil Sees Little Movement before Greek Elections

The price of crude oil remained steady throughout the day yesterday, as investors anxiously awaited the results of Greek elections on Sunday. In addition, with crude stockpiles in the US at an 18-month high, investors saw no reason to open long oil positions. As a result, crude spent most of the day trading around the $82.60 level.

As we close out the week, crude oil traders will want to pay attention to the US Prelim UoM Consumer Sentiment figure at 13:55 GMT. Should the figure come in below expectations, the price of crude may drop, as it could be taken as a sign that demand in the US will continue to go down. On the other hand, any better than expected news out of the US may help turn the price of oil bullish.

Technical News

EUR/USD

While the Bollinger Bands on the daily chart are narrowing, indicating that a price shift could occur in the near future, most other technical indicators show this pair trading in neutral territory. Taking a wait and see approach may be the best option for traders.

GBP/USD

A bullish cross on the weekly chart’s Slow Stochastic indicates that this pair could see an upward correction in the coming days. In addition, the Williams Percent Range on the same chart is currently close to dropping into oversold territory. Traders will want to pay attention to this indicator. If it falls below -80, it may be a good time to open long positions.

USD/JPY

The daily chart’s Slow Stochastic has formed a bearish cross, indicating that downward movement could occur in the near future. This theory is supported by the Williams Percent Range on the same chart, which has crossed into overbought territory. Opening short positions may be the wise choice for this pair.

USD/CHF

While a bearish cross has formed on the weekly chart’s Slow Stochastic, most other technical indicators show this pair range-trading, meaning that no defined trend can be predicted at this time. Taking a wait and see approach may be the best choice for this pair, as a clearer picture could present itself in the near future.

The Wild Card

GBP/NZD

The Relative Strength Index on the daily chart is approaching the oversold zone, indicating that an upward correction could occur in the near future. Furthermore, a bullish cross has formed on the same chart’s Slow Stochastic. This may be a good time for forex traders to open bullish positions ahead of a possible upward correction.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

Source: ForexYard

The euro saw moderate gains in overnight trading against its main currency rivals, but investors remained cautious about boosting the common-currency too much ahead of elections in Greece on Sunday. Disappointing US news has led to speculation that the Fed may initiate a new round of economic stimulus. As a result, the price of crude oil has gone up over $2 since yesterday afternoon and is currently trading around the $84.55 level. Following the Japanese Monetary Policy Statement last night, the USD/JPY fell over 60 pips and is currently trading around 78.90.

Main News for Today

US Prelim UoM Consumer Sentiment-13:55 GMT

• The indicator is predicted to come in at 77.5, which would be below last month’s figure
• Should the figure come in below expectations, the dollar could extend its bearish momentum vs. the yen

Greek Elections-Sunday

• Major volatility is expected to occur when markets open on Sunday night
• If anti-austerity political parties win in the election, the euro could see heavy downward movement as a result

Read more forex news on our forex blog

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By MoneyMorning.com.au

David Wolman has written a book called The End of Money.

In the book, Wolman asks:

‘Yet how different is Kim Jong Il’s counterfeiting, really, from the decision to spend $700 billion in borrowed money to kick-start economic growth, from creating more than $1 trillion out of thin air to help clean up the housing bubble crisis?’

It’s a fair question, and we’ve asked similar questions during the past four years.

But right now, those who control the printing presses don’t see their actions as counterfeiting. They call it stimulus, support and monetary policy.

They even create fancy names to disguise what they’re really doing. They call it ‘quantitative easing’.

But they can call it what they like. It all means the same thing, devaluation and destruction of wealth…

We haven’t read Wolman’s book in full, so we can’t recommend it. But from the excerpts we’ve read it appears to be a combination of an historical look at the history of money and some thoughts on the next logical step for money.

In an interview with the BBC, Wolman says:

‘We don’t transact using anything of real value – food, electricity, blankets. I give you this worthless slip of paper and you give me dinner or you educate my children or you provide me with healthcare. Or I give you a digital version of this useless thing and it somehow works. The money supply is already driven by the return key so the cat is out of the bag on that one.’

The Cat is Out of the Bag for Central Banks

Central banks now openly practice what they had previously done in secret. They have – if you like – come out of the closet: ‘Yes, we are money-printers and proud of it!’

Let’s call it ‘Bankers Pride’.

They even have their own bankers-only events. Any non-bankers trying to get in are seen as a potential trouble-maker. Guards will turn them away at the door.

For many people it’s easy to spot a central banker just by looking at him or her. It’s like having a built-in ‘Bankdar’ (that’s a contraction of banker and radar, in case you’re wondering).

But comparing central banking to homosexuality isn’t fair to gay people. Any private behaviour between consenting adults is clearly different to the fraud forced on the public by central bankers.

Central bankers have become a private cartel of unelected counterfeiters. They force their decisions on millions of unsuspecting civilians without their consent.

This used to be a well-disguised secret. The kind of secret you keep when you’re afraid that the truth will ruin you.

But now the bankers are out of the closet and proudly proclaiming their fraud in public. Emboldened by the public’s indifference, they’re prepared to ramp the action up further.

The Difference Between Legal and Illegal Counterfeiters

Last night, Bank of England governor Mervyn King gave his annual speech to the Lord Mayor’s Banquet for Bankers and Merchants of the City of London.

In the speech he said:

‘The view that further monetary stimulus is, in present conditions, simply ‘pushing on a string’ is, in my view, too pessimistic. The creation of money by the Bank of England has helped offset what would otherwise have been an extremely damaging contraction of the money supply…

‘There is a widespread misunderstanding that the impact of an expansion of the broad money supply is limited to the first round effects of gilt purchases. But the private sector which sells gilts to us then uses the money thereby created to purchase other assets, including private sector paper.’

You can take two things from this small extract. First, get ready for the Bank of England (BoE) to print more money. As a percentage of GDP, the BoE has now printed more money than the US Federal Reserve, as the following chart shows:

Second, it shows Mr. King doesn’t understand the impact of money-printing on bond traders. Sure, many bond traders have used the proceeds from selling bonds to the BoE to buy private sector debt.

But private sector debt is inherently risky. A private company could go bust. A sovereign country that prints its own money typically won’t go bust.

So rather than buying private debt, bond traders have simply taken their money from the BoE and then bought more UK government bonds…banking on the odds of the BoE printing more money to buy more bonds. Hence UK bond yields near record lows.

But Mr. King made another interesting comment. Opening his speech, he said:

‘Five years ago, at this same dinner and just before the crisis began, I quoted a banker who had said to me, ‘I cannot recall a time when credit was more easily available.’ Today, the sentiment is exactly the opposite.’

To satisfy our curiosity, we checked out Mr. King’s speech from five years ago. And indeed he did quote the banker marvelling at the easiness of credit.

But, that wasn’t all he said in the speech. He said something much more interesting…

Can You Trust Central Bank Money?

And it would be worth Mr. King’s while to reflect on it before he unleashes the printing presses once more.

Here’s what he said on Wednesday, 20 June 2007:

‘Behind the design of our monetary institutions is a simple principle. I described it last October in a lecture at Kirkcaldy. It is that the value of paper money depends on trust. Trust that it will hold its value. Trust that others will accept it as a means of payment.

‘In particular, our banknotes must be trusted by the public – cash still accounts for over 60% of the number of transactions…

‘Imagine my concern, therefore, when, after 3½ years as Governor, I read the following report from the Wolverhampton Crown Court. ‘A judge demanded to know why police failed for three and a half years to arrest a wanted Birmingham man – when all the time he was living at home… Adam Smith, suspected of passing forged £20 notes, had a fixed address in Edgbaston and was picking up benefits.’

Mr. King’s 2007 speech was all about the sanctity of trusting paper money. How the bank had developed new security features for £20 pound notes that would deter counterfeiters and ensure complete faith and trust in paper money.

In last night’s speech – to use Mr. King’s own phrase – ‘the sentiment is exactly the opposite.’

The Bank of England, like all other central bankers no longer feels the need to use words like ‘trust’ when it comes to the money supply.

The cat is out of the bag. The bankers are loud and proud that when the economy starts to falter they can simply print more money.

And if you needed more evidence, what can explain the rally in US stocks overnight? This report from Bloomberg News should explain things:

‘Speculation grew that the Federal Reserve will discuss stimulus efforts at its meeting next week after reports showed jobless claims unexpectedly climbed by 6,000 to 386,000 last week and the cost of living fell by the most in more than three years.’

In other words, the market is priming itself for more money-printing.

All up, David Wolman is right, we are approaching the end of money. The end of paper money, that is. But that’s not to say replacing worthless paper money with worthless electronic money will be any better. Because it won’t be.

The only genuine solution is to end the paper money and central banking experiment and return to real money – gold.

Cheer,
Kris.

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Central Bankers Come Out of the Closet

By MoneyMorning.com.au

First off, last weekend’s 100 billion euro Spanish bailout has staved off the inevitable for now.

What most people don’t realize, though, is that it actually spells disaster for the euro – there simply isn’t enough liquidity in the system and never has been. 100 billion euros is chump change.

A trillion euros is more like it. Probably more, to be quite candid.

Let me lay out the math that European politicians, whose skill set apparently consists of saying “present,” rather than developing real solutions, can’t be bothered to do.

According to the latest data, the European Stability Mechanism (ESM) and the European Financial Stability Fund (EFSF) have a combined lending capacity of 700 billion euros. If Spain requests the full 100 billion euros it approved last Saturday, this leaves 386.7 billion euros in excess capacity. The EFSF has already committed 213.3 billion euros. (700b euros minus 213.3b euros minus 100b euros equals 386.7 billion euros).

If you’re doing this math in your head, you’ll quickly realize that’s 233 billion euros more than the total bailout mechanisms now in existence.

Oops.

How Would a Spanish Bailout Be Any Different?

Call me crazy, but under the circumstances I don’t understand how European leaders can pursue the same course of sorry-assed lending in the Spanish bailout that they did in Greece and expect different results. It’s simply irrational.

Don’t get me wrong, I understand why they are trying to pull the wool over everyone’s eyes. But in reality, who’s kidding who?!

The markets know the politicos can do nothing to stem the tide of money flowing out of Spain’s economy any more than they could stop money from leaving Ireland, Italy and Greece.

The only practical consideration is preventing an all-out bank run through the front door – never mind that it’s already well underway out the back door.

Frankly, I think they’ve failed on both counts. Deposits in German banks are up 4.4% year over year to 2.17 trillion euros as of April 30th, while deposits in Greece, Ireland and Spain fell 6.5% over the same time frame.

Swiss bank sight deposits have reached five-month highs of 252 billion francs as of June 1, according to the Swiss National Bank. CNBC is reporting that up to 800 million euros ($1 billion) a day is being pulled out of Greek banks alone. Data from Spanish banks related to withdrawals is being closely guarded, but I can’t imagine it’s that much different.

No wonder the world’s traders recognize the Spailout for what it is – a colossal mistake.

Why the Bailout in Spain is Insane

I’d tell you what I think, but the legendary Jim Rogers put it so succinctly I don’t believe I can do any better. Speaking in an interview on CNBC recently, Rogers noted that the Spanish bailout is “the most insane thing I’ve ever heard.”

I agree.

Financial systems function because of an incentive to succeed that by its very definition includes the possibility of failure. You can’t have one without the other.

Rogers noted this as well, saying that this is “the way the system is supposed to work – when you fail you fail – competent people come in and take over the assets.”

As he put it to me a few years ago during a conversation we had in Singapore just prior to our bailout here (and I am paraphrasing), “history is littered with the bones of failed financial institutions. Why should this be any different?”

The problem in Spain’s economy is the same as it was in Greece. They’re effectively handing over the reins and 100 billion euros to the same incompetent, incapable people who helped caused this mess in the first place.

The Spanish Bailout – A Euro-Comedy of Errors

Want proof? Look no further than how the 100 billion euros in “aid” is supposed to be disbursed.

The bailout cash is supposed to be put into the Fund for Orderly Bank Restructuring (who comes up with these names??!!) which has been created specifically to fund insolvent banks. Apparently the word insolvent doesn’t bother them one bit.

But that’s not the half of it.

This aid – and it’s a stretch to call it that without turning into a drooling idiot – potentially adds another 10% to Spain’s debt and takes it up to 80% at the end of this year. Factor in Spain’s national and European debt and total debt to GDP exceeds 140%, according to Lance Roberts of Streettalk Live.

In other words, the Spailout just threw that nation into the ditch they’ve dug for themselves.

I can only shake my head and recall the Australian comedic duo of Clark and Dawes who impeccably summed this up, asking, “How can broke economies lend money to other broke economies who haven’t got any money because they can’t pay back the money that the broke economy loaned to the other broke economy and shouldn’t have lent it to them in the first place because the broke economy can’t pay it back?”

I believe that the EU ministers have acted, once again, in knee-jerk fashion and without a complete understanding of the facts. Or worse – in deliberate omission of the facts.

Nobody knows how much money will ultimately be required. We won’t even have an inkling until June 21st. That’s when Roland Berger and Oliver Wyman are scheduled to turn in the results of their Spanish bank stress-test audits.

There is hope for a more complete picture, including audits of 14 of the largest Spanish financial institutions, but that data isn’t going to be ready until the end of July…at the earliest.

In closing, I realize that what I’ve shared with you today may be scary…downright terrifying even. Do yourself a favor and take it with a grain of salt.

Despite that European politicians can’t seem to understand the reality closing in on them like a gigantic anaconda, there are still companies busy building the future.

And those are the ones you want to buy no matter how bad it “gets.”

Keith Fitz-Gerald
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that originally appeared in Money Morning (USA)

From the Archives…

Why You Should Wish For a Falling Market
2012-06-08 – Greg Canavan

Why the U.S. Dollar is Really Rising
2012-06-07 – Keith Fitz-Gerald

How This Bear Market Could Last Another 18 Years… Just Like Japan’s
2012-06-06 – Kris Sayce

The Banking Plan That Could Be A Game-Changer for Gold
2012-06-05 – Dr. Alex Cowie

Best Investment Strategies For the Times Ahead
2012-06-04 – Nick Hubble

The Problem With the Spanish Bailout

USDJPY stays in a narrow range between 79.11 and 79.78. Initial support is located at 79.11, as long as this level holds, the sideways movement is treated as consolidation of the short term uptrend from 77.66, and another rise to test 80.61 key resistance could be expected. On the other side, a breakdown below 79.11 will indicate that a cycle top has been formed at 79.78 on 4-hour chart, then further decline to 78.00-78.50 area could be seen.

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By Central Bank News
    The Central Bank of Chile kept its benchmark interest rate unchanged at 5.0 percent for the fifth month running, despite weaker global growth and growing risk aversion in global financial markets.
   “Internationally, the financial and fiscal problems in the Eurozone continue to intensify, and uncertainty about their resolution has increased,” Banco Central de Chile said following a monthly meeting of its board.
    “Economic indicators in the United States, China and other emerging economies have been weaker than forecast by market consensus,” the bank said, noting that commodity prices, including copper, oil and foodstuffs, have continued falling.

    But domestic output and demand is expanding and the labour market remains tight. Inflation expectations remain close to the bank’s target, it said.

By Central Bank News
    The Central Bank of Egypt has kept its key overnight deposit rate unchanged at 9.25 percent and will introduce a 28-day repurchasing agreement (repo) starting next month.

Beset by rising rhetoric about a possible Israeli attack against its nuclear facilities, Iran is seeking full membership in the Shanghai Cooperation Organization as an additional layer of international diplomatic “life insurance.”  On 12 November 2011 Iranian Supreme National Security Council’s Secretary Assistant Ali Bageri said that Iran is seeking full membership in the SCO, upgrading its current observer status, telling journalists in Moscow, “We have already submitted a relevant application.”

Now, Iran has gotten an endorsement from the SCO about the unacceptability of force – sort of.

The leaders of SCO members China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan said in a joint statement signed at the end of a two-day summit on 7 June that “any attempts to solve the Iranian problem with force are unacceptable and could lead to unpredictable circumstances.”

Pretty impressive accomplishment, given that Iran currently only has “observer” status at the SCO.

The SCO, founded in Shanghai in 2001, currently consists of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan while Iran, India, Mongolia and Pakistan have observer status. Decisions on SCO membership and observer status are made with the consensus of all member countries.

Iran first submitted an official application for SCO observer status on 25 February 2005. In March 2008 Iran then applied for upgrading its status to formally joining the organization.

Three years ago Moscow was much cooler to Tehran’s application. Russian Foreign Ministry Department for Information and Mass Media Deputy Director Andrei Krivtsov commented, “We do not accept any new members of SCO, as no country is seeking to extend the organization for the sake of extension itself. Any talk about an early admittance of Iran to SCO has no grounds.”

Iran now has a powerful ally in Russia, which earlier on 6 November 2011 hosted an SCO meeting in Saint Petersburg. The Russian government pushed for both Iran and India being allowed to join SCO. Then Prime Minister Vladimir Putin said, “Russia would welcome the positive review of applications to join our organization in one form or another from any interested nation.” NATO member Turkey also has “dialogue partner” status and has also requested full membership.

The ultimate purpose of the SCO remains a contentious issue between Russia and China however, as while Russia apparently hopes to build the SCO into a counterbalance against NATO, China views the SCO as primarily an economic union, where Beijing’s booming economy clearly gives it an edge over Russia in dealing with the SCO’s “junior members.”

Iran sees full SCO membership as a most valuable asset in its efforts to prevent encirclement by NATO and other U.S.-led entities, a position that Moscow can well understand.  In July 2011 Iranian Foreign Minister Ali Akbar Salehi during an interview with the Russian media described Iran as the “most significant neighbour” of Russia for standing in the way of the U.S.-led Western encirclement strategy.

Even without SCO membership however, Iran has brought the Russian Federation on board as opposing a military strike on Iran, as on 8 November 2011 Russian Federation Foreign Ministry  Lavrov commented,  “there is no military solution to the Iranian nuclear problem as there is no military solution to any other problem in the modern world.”

China is currently Iran’s largest oil export mark, and has steadfastly rejected sanctions. China continues to invest in an Iran steadily drained of Western investment and Iran is the fourth-largest recipient of Chinese non-bond investment, which a military strike would put at risk. Iranian SCO membership would place the Sino-Iranian relationship in a position to undermine U.S. attempts to isolate Iran.

Iran has another card up its sleeve for seeking military partners, the Collective Security Treaty Organization. The CSTO was established after the collapse of the USSR in December 1991 by a number of former Soviet republics. When Iran began seeking SCO membership it received a warmer welcome from CSTO, as on 18 May 2007 CSTO General Secretary Nikolai Bordyuzha said, “CSTO is an open organization. If Iran applies in accordance with our charter, we will consider the application.”

Iranian CSTO membership would strengthen its military alliances, as Article 4 of CSTO’s charter states, “In case an act of aggression is committed against any of the Member States all the others Member States will provide it with necessary assistance, including military one, as well as provide support with the means at their disposal in exercise of the right to collective defence in accordance with Article 51 of the UN Charter.”

Bolstering Iranian hopes, on 13 April 2011 Bordyuzha, while not mentioning Iran specifically, said that the CSTO is considering expanding the grouping.
Iran’s interest in joining the SCO and CSTO is lacking a crucial element – time. Neither Moscow nor Beijing are known for making snap decisions, with the result that Tehran may soon find itself overtaken by events. That said, having Russia and China in your corner arguing against military action is no small consideration, either in Tel Aviv or Washington.

So, where does the West go from here?

Did the SCO indicate that it would engage in conflict for Iran?

No.

But  Iran’s interest in CSTO and SCO are hardly a minor policy wonk exercise, as between Russia, Kazakhstan (both non-OPEC producers) and Iran, the trio account for nearly 20 percent of the world’s oil output, which could be offlined to the global community should it embark on “reckless adventureism,” to use a piquant Soviet term.

The phrase, “any attempts to solve the Iranian problem with force are unacceptable and could lead to unpredictable circumstances” was signed off by SCO members China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan should therefore factor into the considerations of those beating the drums for a military strike against Iran. Hardly insignificant, as the SCO statement was signed by all members.

Something for both Washington and Tel Aviv hawks to consider.

Source: http://oilprice.com/Geopolitics/International/Beleaguered-Iran-Seeks-Allies-in-Post-Soviet-Space.html

By. John C.K. Daly of Oilprice.com

Article by Investment U

Don’t be taken in when an analyst says, “Buy.” I’m certain they believe it, but there are other factors and conflicts you should be aware of.

In early May, I was intrigued when a few brokerage firms “initiated” coverage of Facebook with “Buy” ratings and price targets in the mid-$40 range – even before the stock was publicly traded. Now, if the stock were to trade near its $38 IPO price, is it still a “Buy” if it’s only going to get to the mid-40s?

Given the disappointing post-IPO performance of the stock and questions about what a particular analyst said or didn’t say to some clients, I thought it would be a good time to look at what makes a sell-side technology equity research analyst tick.

More importantly, how do they generate revenue for their firms?

For the most part, a technology equity analyst (which I have been for the past 14 years) is an honorable, hard-working person trying to make a decent living in a highly competitive environment where trading commissions are declining. But what you need to know is that, in most cases, the analyst isn’t compensated if they make you, John or Jane Q, money on stock picks.  From a purely economic standpoint, they simply don’t care.

Billy Crystal used to have a recurring skit when he was a regular on Saturday Night Live called Fernando’s Hideaway. That’s the one where he coined the phrase “You Look Mahvellous!” In the skit, he would frequently utter the saying, “It is better to look good than to feel good.”

For the typical sell-side analyst, it’s better to look good than to be good. It’s more important to be interesting than it is to be right.

My point is – don’t be taken in when an analyst says, “Buy.” I’m certain they believe it, but there are other factors and conflicts you should be aware of.

“Buy,” “Sell,” or “Hold”

To understand why, let’s review what an analyst does. The analyst works hard to produce a report, sometimes fairly detailed, sometimes with a unique perspective, sometimes merely updating investors on current events, but almost always with a “Buy,” “Hold,” or “Sell” recommendation attached to it.

This report is summarized in “The Morning Meeting,” where the analyst conveys the essence of the message to the sales force. The sales force then may ask questions of the analyst to better understand the message. Ultimately, the salesperson then gets on the phone to their clients to deliver the message – “we say ‘Buy’ XYZ today, and here’s why.”

In many cases, the top clients are the large mutual funds and hedge funds. Why? They’re the ones that pay the most commission dollars. If the portfolio manager at the fund finds the comment interesting, he may place a trade with the brokerage firm issuing the research report. And that is primarily how the cash register rings.

Now, please notice that I said “finds the comment interesting.” I did not say “finds the comment convincing.” Let’s look at why.

When asked what they value in sell-side research, portfolio managers typically point to “idea generation” and “access to management.”

They do not say, “We look for the best stock pickers.” There are two obvious reasons why they don’t say this.

• First, if they admitted that they got their stock picks from listening to a sell-side analyst, they would be failing to justify their own existence.
• Second, the sell-side analyst who truly is a great stock picker ends up on the buy side. That’s where the decisions are made, and that’s where a good stock picker is worth the most money.

So – whether it’s self-serving or not, the buy side will admit to paying little attention to whether an analyst has a “Buy” rating or not. They’re looking for the incremental things – is this analyst looking at something differently, have they spoken to somebody I haven’t that may have a particular insight, have they recently spent time with the management team?

Believe it or not, there’s nothing sinister in this. It’s just a natural result of the environment for an analyst. Just remember as an individual investor not to put too much value the next time you see a report stating an analyst rates a stock a “Buy,” “Hold,” or “Sell.”

In my next article, I’ll dig deeper into the four major reasons why sell-side analysts initiate more “Buy” ratings than “Sell” ratings.

Until then…

Good Investing,

Gary Spivak

Article by Investment U