Nice take in Barron's on the Solomon analyst semi downgrad death threats. Includes some quotes from Fleck:
interactive.wsj.com
JULY 17, 2000
Downgrades Provoke
Death Threats for Analyst
By Mark Veverka
Talk about shooting the messenger.
An extremely disturbing development has occurred out here in the Wild, Wild West of Wall Street. If nothing else, it illustrates that too many unseasoned tech investors may be way over their heads in this frothy-yet-increasingly-frustrating market.
After issuing downgrades to four semiconductor stocks on July 5, a sell-side chip analyst, Jonathan Joseph of Salomon Smith Barney, received a series of death threats from, we gather, unhappy, if not unbalanced, campers. At first, the equity researchers and clerks that toil for Solly in San Francisco took the missives rather lightheartedly. But the eerie e-mail and telephone messages persisted, and giggles gave way to bodyguards, says a Salomon employee.
"I originally thought it was a joke, but then I saw some of the e-mails," the employee says. For example, "We know where you work and we have a bullet with [Joseph's] name on it." The threats, "clearly not from institutional clients," says the employee, sent such a chill through Solly's high-rise offices on California Street that San Francisco's Finest were summoned to the scene. Official reports were presumably filed while the men in blue kept tabs on the situation. Shortly after the initial threats, Solly hired bodyguards to protect Joseph and his staff. They remained in place until late last week when the tension finally subsided. Telephone calls by Barron's to Joseph and a colleague, Clark Westmont, were not returned. This certainly wasn't the first time investors have taken exception to an equity analyst's research note. But in a day and age when professional football players allegedly hire hitmen to murder the mothers of their unborn children and self-proclaimed patriots blow up government buildings filled with innocent children, who would dare accuse Solly of overreacting?
Not us. In fact, we can just peer out our window to find a stark and painful reminder of a similar horror. Adjacent to Dow Jones' offices here sits the 101 California Street office tower where 7 years ago a mad gunman opened fire on an office floor filled with attorneys, killing 8 people and wounding 6 others. That same tower today, ironically enough, is home to many of our brokerage and investment-banking friends.
More recently, of course, an enraged day-trader in Georgia opened gunfire on his fellow traders, reminding us that the possibility of a deranged investor "going postal" is a tangible reality. "My reaction initially was that I was totally shocked. My jaw dropped," says William Fleckenstein, manager of a prominent Seattle-based hedge fund known for shorting. "But after further thought, I said to myself: 'I'm not the slightest bit surprised. Things are so out of control.' "
What Fleckenstein means is that valuations and sell-side recommendations are as out of control as some of the human behavior being triggered by the market. Many investors have become so spoiled during this ebullient bull run that they expect stocks to rise on bad news as well as good news, says the shortseller, who also pens a column for the Silicon Investor Website, where he reported word of the death threats.
The short-seller thinks there needs to be more balance restored to markets. Sell-side analysts need to create more distance from management, and the widely accepted practice of managing earnings needs to be scrutinized more closely.
He also suggests that stock analysis needs to take back some independence from investment banking in order to regain credibility and provide objectivity to markets.
"It's not just those dollars from corporate finance" that inspire analysts to publish rosy reports, Fleckenstein notes. "Now if you issue a neutral rating, you get death threats." What kind of report could trigger such a violent response? Solly's Joseph, after conferring with his research colleagues who cover related areas like semiconductor capital equipment, downgraded the semiconductor sector from "outperform" to "neutral" the day after the July 4 holiday weekend.
Joseph cited "slowly reversing industry fundamentals" in his downgrade of the heavily cyclical chip sector. The published research note came on the heels of what one Solomon employee calls, "an informal conference call," held with select clients during the week of June 26. During that call, Joseph pointed to a possible weakness in demand for mobile phones, of which semiconductors are key components.
After being challenged on the call to some degree, the analyst did some more digging and conferring with his cohorts to see if he was indeed on track. In fact, Joseph was even more convinced of a likely glut in these chips, hurting the likes of Texas Instruments, one of the top makers of semiconductors in the world. At that point, Joseph "was sort of forced to take a formal stand" and publish a bearish note, the Solomon employee says. In the report, the analyst hung the equivalent of hold ratings on Texas Instruments, Advanced Micro Devices, National Semiconductor and Silicon Storage Technology. Share prices of this unfortunate gang of four suffered after the verbal warnings to Solly clients. Most recovered a fair amount of ground by Friday. Silicon Storage Technology was an exception, closing on July 3, a sleepy trading day, at 99 and plunging nearly to 84 on July 5 in reaction to the note's being published. SST closed Friday at 86 15/16. (For more on these and other tech stocks, see TechStorm.)
Conspiracy theories abound suggesting that Joseph timed his bearish note after the holiday in cahoots with shorts, who allegedly caught wind of the downgrade early and capitalized on the call.
Of course, as we have been chiding sell-side analysts to be more discerning, we would prefer not to give credence to any of this. Instead, take the note for what it's worth and applaud Joseph for his fortitude and independence, especially in the face of the lunatic fringe. |
