This comes to mind... Who Needs Analysts?
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Schwab Asks Who Needs Analysts After Biggest Flub (Update4)
By Michael Tsang and Eric Martin
April 7 (Bloomberg) -- When Wall Street's almost 1,800 equity analysts figured U.S. earnings growth for the third quarter of 2007, they were 8.2 percentage points too high. Forecasts for the fourth quarter were wrong, too, overestimating profits by 33.5 percentage points, the biggest miss ever.
It's no wonder investors don't trust analysts, says Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees $1.4 trillion for clients. Merrill Lynch & Co., Bank of America Corp. and the rest of the securities industry aren't losing credibility because of anything sinister. The problem is they didn't get their math right after credit markets froze nine months ago.
As Alcoa Inc. kicks off first-quarter earnings season today, analysts say 2008 will be the best year ever for U.S. profits, data compiled by Bloomberg show. Earnings for companies in the Standard & Poor's 500 Index will rise 10.7 percent, even after Federal Reserve Chairman Ben S. Bernanke acknowledged that the economy may fall into a recession and banks reported $232 billion of writedowns and losses, the forecasts show.
The analysts are ``going to lead you off the cliff,' said Richard Weiss, 47, who oversees $60 billion as chief investment officer at City National Bank in Beverly Hills, California. First-quarter earnings will be ``a big wake-up call for some analysts who are sitting on big double-digit numbers,' he said.
The S&P 500 dropped almost 10 percent in the first quarter, the worst start to a year since 2001, as increasing unemployment, record mortgage delinquencies and a retreat in consumer confidence signaled that the economy is falling into a recession.
Buy, Hold
Even with the decline, analysts' recommendations to ``buy' or ``hold' U.S. shares climbed to 94.5 percent, the highest rate in more than five years.
U.S. stocks posted their biggest advance in two months last week on increasing confidence that banks and brokerages will survive losses from the collapse of the subprime mortgage market. The S&P 500 gained 4.2 percent, while Europe's Dow Jones Stoxx 600 rose 4.1 percent, its steepest increase in a year. The MSCI Asia Pacific Index added 2.5 percent.
Today, the S&P 500 advanced 0.2 percent to 1,372.54.
The S&P 500 is valued at 13.9 times estimated earnings, the least compared with reported profits since 1990, according to Bloomberg and S&P data. The ratio is based on analysts' forecasts that show companies in the S&P 500 will earn a total of $99.67 a share in 2008, brokerage data compiled by Bloomberg show. That's more than the $87.72 a share S&P 500 companies earned in 2006 and would be the highest profit on record, data from S&P showed.
Profit Assumptions
Getting there hinges on companies rebounding from projected earnings declines of 11.3 percent and 3.5 percent in 2008's first and second quarters, Bloomberg data show. Income from continuing operations will rise 13.9 percent in the third quarter and jump 54.5 percent in the fourth, according to the forecasts. The per- share earnings are based on profit estimates for the S&P 500, adjusted for each company's weighting.
Alcoa, the world's third-largest aluminum producer, was the first company in the Dow Jones Industrial Average to report earnings for the first quarter. The New York-based company said first-quarter profit, excluding some items, fell to 44 cents a share because of surging energy costs, a weaker dollar and lower metals prices. The company was expected to earn 50 cents, the average analyst estimate compiled by Bloomberg showed.
Analysts are ``way out of line,' said Joseph Quinlan, New York-based chief market strategist for the investment management unit at Bank of America, which oversees $643 billion in client assets. ``There's enough uncertainty about the overall health of the economy to keep investors on edge.'
`Virtual Standstill'
The U.S. economy has slowed to a ``virtual standstill,' the Washington-based International Monetary Fund said last week. The fund reduced its forecast for U.S. economic growth this year to 0.5 percent, the lowest since the recession in 1991.
Home prices fell by the most on record in January, unnerving Americans who said last month their outlook for the economy was the worst since the Watergate scandal in 1973. Economists expect consumer spending, which accounts for two-thirds of the economy, to grow this quarter at the lowest annual rate in 17 years.
Wall Street predictions in the second half of 2007 were too bullish even after analysts cut them. At the start of the third quarter, average estimates called for earnings to increase 5.7 percent. By the end of the quarter, analysts had cut by more than half to 2.7 percent. Companies ended up reporting a 2.5 percent drop in profits.
Widest Misses
The forecasts were even farther from the mark in the fourth quarter. Analysts predicted 10.9 percent growth before flipping the projection to a decline of 7.9 percent. S&P 500 companies reported that profit dropped 22.6 percent.
Earnings estimates for U.S. consumer-related companies, materials producers and financial firms missed by the most. Analysts predicted profit increases of 17.4 percent, 10.4 percent and 1.6 percent, respectively. Consumer companies reported a 10.3 percent decline in fourth-quarter earnings, and materials suppliers a 4.5 percent drop. Financial companies posted losses.
``Even the best analyst of the banking sector has a tough time trying to gauge what the writedowns will be,' said Schwab's Sonders, 43, who is based in New York. ``The consensus is that we'll have a tough first and second quarter and then we'll get some liftoff. That may be too pat an assumption.'
Merrill's Guy Moszkowski, the top-ranked analyst for financial firms in Institutional Investor's 2007 survey, said at the start of the fourth quarter that Citigroup Inc., the largest U.S. bank by assets, would earn $1.08 a share. By Jan. 8, Moszkowski had reversed to an estimated loss of $1.43, the most bearish among 18 analysts tracked by Bloomberg.
Biggest Loss
A week later, Citigroup reported a loss of $1.99 a share, the biggest in its 196-year history. The bank wrote down the value of its subprime-mortgage investments by $18 billion, causing the stock to lose 14 percent of its value that week.
Moszkowski, 50, maintains a ``neutral' rating on Citigroup's stock, which he established on Aug. 28. The rating indicates the analyst anticipates a 12-month total return of between zero percent and 10 percent. Since his call, Citigroup has fallen 45 percent, including dividends.
Moszkowski declined to comment on his recommendations, according to Merrill Lynch spokeswoman Susan McCabe Walley.
Even analysts who reduced their estimates for banks failed to anticipate the extent of the damage.
Meredith Whitney, a New York-based analyst at Oppenheimer & Co., correctly predicted on Oct. 31 that Citigroup would cut its dividend because of credit-market losses, more than two months before the lender slashed its payout. Still, Whitney, 38, forecast a 45-cent fourth-quarter loss. At the start of the period, she had estimated profit of $1.03 a share.
`Hope To God'
Bank of America Corp.'s Robert Ohmes, ranked the No. 1 apparel analyst by Institutional Investor, predicted Liz Claiborne Inc. would report fourth-quarter profit of 70 cents a share. He cut the estimate almost 75 percent to 19 cents on Feb. 22 after the New York-based maker of Kate Spade handbags and Juicy Couture clothing reduced its 2007 profit forecast.
On March 13, the company reported a fourth-quarter loss of $4.55 a share, after writing down the value of the department- store brands it's selling or overhauling.
Ohmes, who dropped coverage of the company on the same day, had maintained a ``neutral' rating since the start of the fourth quarter. The rating indicated that he expected a total return between 14.9 percent and minus 2.9 percent on Liz Claiborne stock. During that span, the company's shares plummeted 50 percent, including reinvested payouts.
The New York-based analyst left Bank of America last month, according to spokesman Brandon Ashcraft.
Dotcom Bubble
The last time analysts lost this much credibility with investors was in 2002. That's when Wall Street agreed to pay $1.4 billion in fines and restitution after investigators found that analysts were distorting research during the dotcom bubble in the late 1990s to gain investment-banking business from companies.
``There's a lot of very, very good sell-side analysts,' said Kevin Caron, a market strategist at Florham Park, New Jersey-based Stifel Nicolaus & Co., which manages $50 billion. ``But if you're on the buy side committing money, I hope to God you're coming up with your own numbers.'
To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net.
Last Updated: April 7, 2008 18:40 EDT |
