Internet Trips Up Wall Street (Again)
(Michael Lewis, the author of ''Liar's Poker'' and ''The Money Culture,'' is a columnist for Bloomberg News. His opinions don't necessarily represent those of Bloomberg News.)
New York, July 20 (Bloomberg) -- A few weeks ago Bloomberg News ran a story about Wall Street earnings forecasts that showed just how completely the Internet undermines the power of big securities firms.
The article explained how a pair of Web sites -- streetIQ.com based in Carmel, California, and EarningsWhispers.com in Jackson, Missouri -- routinely provide better estimates of corporate earnings than the biggest Wall Street firms.
A study of 101 high-tech companies showed that estimates by the Web sites were, on average, off by only 21 percent, while the Wall Street estimates were off by 44 percent. The Web site analysts tended to guess high; the Wall Street analysts tended to guess low; but the Web siteserred far less on the upside than the Wall Street firms erred on the downside.
The operator of one of the Web sites as much as confessed that his technique was simply to take the Wall Street estimates - - in turn, more or less dictated to them by the companies under consideration -- and goose them a bit.
The Web site analysts know what everyone knows: Companies systematically poor-mouth their immediate prospects. And Wall Street analysts systematically repeat what they are told by the very companies whose earnings they are meant to be analyzing. These companies want the markets to be pleasantly surprised by their actual earnings. They hope that newspapers will print, after the fact, that they ''exceeded expectations.'' They want the mood in the air after they release their earnings to be one of pleasant surprise. This is much more likely to occur if Wall Street analysts keep expectations low.
Conflicts of Interest
Of course, the behavior of the Wall Street analysts is corrupt. The companies they are meant to be ''analyzing'' are almost always either customers, or potential customers, of their investment banking divisions. To keep their big, corporate investment banking clients happy, the analysts essentially lie to the greater investing public. To mollify the big institutional investors, they offer them, on the sly, higher and more honest estimates.
The small investor gazing in on this situation can be forgiven for thinking that he's on the wrong end of a sting.
Enter, the Internet.
Among other things, the Internet creates something like a free market in information. If the Web site analysts prove to be more reliable than the Wall Street analysts, the Wall Street analysts will be ignored. Indeed, the Bloomberg story describes several cases in which a company's stock price fell after it had exceeded the ''expectations'' of Wall Street analysts because the market had traded off the much higher and more accurate estimates of the Web site analysts.
Changes to Come
Ultimately, the Internet will force analysts at big securities firms to decide between alienating their corporate customers and making themselves ridiculous to the wider public. Actually, the decision will be made for them: They will alienate their corporate customers. If they don't, they will simply be ignored by investors altogether, and thus rendered entirely useless to their corporate customers.
This small change is likely to have several significant consequences. First, it will disrupt the investment banking industry. The main reason corporations are loyal to Wall Street firms, and pay them huge investment banking fees, is that the securities firms help to manage public opinion. Wall Street offers large companies a chance to participate in what amounts to an information protection racket. But the racket is now collapsing; a pillar is being yanked from beneath the power structure. One day soon, big companies will look around Wall Street and say: What are we paying these guys for, anyway?
Fairer Play
Another consequence will be that the Big Corporation will lose a lot of its ability to manipulate public opinion. Big companies will thus lose an important advantage they have over small ones in the competition for capital. Take away that advantage and you make big companies even more vulnerable than they already are, and small ones even more hopeful.
A third consequence is that the big institutional investor, who has grown fat on what amounts to inside information, will cease to be fed. He will no longer reap any advantage from hearing the honest opinions of Wall Street analysts, as the Wall Street analysts will be forced to disclose their honest opinions to the great unwashed.
The institutional investor will respond to losing his privilege in the same way that the big company responded -- badly. When a Wall Street broker calls him he will wonder a bit more than he now does why he should pick up the phone. If he wants to know what the market is thinking, he won't need to talk to an analyst on Wall Street. He'll need to surf the Web. |
