Read this Rick
October 27, 1997
Who Really Moves the Market, Part 1
Securities analysts are Wall Street's new stars: They
bring in banking deals, make the calls that move
billions in and out of stocks daily, and earn millions
for themselves. They play a strange game with an odd
set of rules. Here's how it works.
Joseph Nocera
Reporter Associate: Amy Kover
Last Aug. 22 was an important day if you were an owner of Intel
stock. A lazy, late summer Friday, it was the kind of day when half of
Wall Street has already left for the weekend, when news is sparse
and trading is thin. The kind of day, in other word s, when a
securities analyst with a big reputation can knock the stuffing out of a
stock with a ratings change.
Early that morning, several hours before the market opened, Thomas
P. Kurlak, who follows semiconductor stocks for Merrill Lynch, got
on the squawk box at his New York office and stunned the firm's
sales force with an unexpected bit of news: He was do wngrading
Intel from "strong buy" to "neutral." Merrill Lynch's legions of
salesmen immediately began phoning the big institutional
shareholders--mutual funds, hedge funds, pension funds, and the
like--that have made Intel one of the h alf-dozen most important
stocks of this raging bull market. For these institutions, collectively
known as the "buy side," this was big: Kurlak was the dominant voice
on Intel, and his rating changes always move the stock's price. Sure
enough, ev en before the market opened that morning, Intel had
dropped $7, to $91 a share.
Roll your cursor along the graph.
At the same time, on the other side of the country, Mark Edelstone
was beginning his first day on the job in Morgan Stanley Dean
Witter's San Francisco office. In his previous job as a semiconductor
analyst at Prudential Securities, he had gained a fol lowing on
Intel--so much so that Morgan Stanley had recruited him in the belief
that he might one day challenge Kurlak as the "ax" on the stock.
When he left Prudential two months before, he had a "neutral" rating
on Intel.
That morning, Edelstone got on the squawk box too. Addressing
Morgan Stanley's sales force, he unveiled his initial list of stock
recommendations. He had Intel rated as an "outperform." Which
meant, in effect, that he was upgrading the stock.
When word of Edelstone's Intel recommendation reached the Street,
it had an electrifying effect. Though the timing of the calls was
coincidental, the subtext was plain: Wall Street's two most prominent
analysts on Intel were crossing swords, taking opp osing positions on
the short-term prospects for the stock. When both men scheduled 10
A.M. conference calls with buy-side institutions, it was clear to
everyone that Intel stockholders were in for a bruising day.
And what had Intel done to warrant all this attention? Nothing at all.
There had been no new earnings projection, no big personnel
change, no product announcement. These days, such things aren't
necessary to move a stock. The howl of the analysts is su fficient.
The 1990s have
become the Age of
the Analyst on Wall
Street. It is a startling
turn of events: Not
long ago securities
analysts were the
mole-like civil
servants of the
brokerage world.
Their role was to
produce lengthy, bone-dry reports on the strengt hs and weaknesses
of publicly traded companies, which were mailed (mailed!) to clients.
The work had nothing to do with the short-term movement of stock
prices.
But with the cascade of money into the stock market over the past
two decades, the requirements placed on securities analysts have
changed completely. For shareholders large and small, this is no
longer a buy-and-hold world; people want to know what a stock is
going to do tomorrow. Predicting the short-term movement of a
stock has become so central to an analyst's job description that an
old-timer looking in on his colleagues today wouldn't even recognize
the profession.
With this change has come a shift in the balance of power: Analysts
have become the hubs around which much of Wall Street's
profitmaking activities occur. For stockbrokers, analysts'
recommendations are essential tools to persuade clients to buy or sel
l stocks ("Our guy just downgraded Microsoft. You might want to
think about lightening up.") For traders who handle major stock
transactions, analysts generate millions of dollars in commissions.
That's because buy-side institutions, by long-sta nding convention,
reward the analysts they value by placing trades with the analysts'
firms.
Finally, analysts have become vital to the business of investment
banking. When a Wall Street firm wants to take a company public,
for instance, it must have the endorsement of its own analyst on the
stock. (After all, who would invest in a deal done b y an investment
bank whose own in-house expert didn't believe in it?) Many analysts
have taken this role a step further, seeking out potential deals in the
areas they cover as aggressively as the investment bankers
themselves.
As you might expect, analysts are making more money than ever. A
generation ago, top analysts might pull down $250,000 a year;
today, a highly regarded analyst might collect a salary of $2 million or
more. (Weirdly, salaries are determined largely by w here analysts
rate in a magazine survey--Institutional Investor's annual ranking as
determined by a poll of the buy side.) Analysts can earn substantially
more if they get a percentage of any investment banking deals they
help bring in--as is the practice at some firms.
But something odd is going on here. As analysts have become real
players on Wall Street, they no longer seem content to predict the
movements of stocks they cover on the basis of a company's
fundamental strengths and weaknesses. True, stocks ultimately rise
and fall over the long term on the basis of those fundamentals. And
yet there's no getting around it: Power now accrues to analysts who
make stocks move, if only for a brief moment. Companies, for their
part, work assiduously at diluting that power and preventing analysts
from being able to move their shares. This tug of war is played out
every day in the market--and the result is very often short-term stock
fluctuations that have little if anything to do with a company's actual
performance. A forme r Wall Street research director puts it
succinctly: "If you were from Mars and you saw this system, you'd
say it was wacko."
To understand how this psychological game is played, and how it
shifts billions of dollars in and out of stocks every day, I spent most
October 27, 1997
Who Really Moves the Market, Part 1
Securities analysts are Wall Street's new stars: They
bring in banking deals, make the calls that move
billions in and out of stocks daily, and earn millions
for themselves. They play a strange game with an odd
set of rules. Here's how it works.
Joseph Nocera
Reporter Associate: Amy Kover
Last Aug. 22 was an important day if you were an owner of Intel
stock. A lazy, late summer Friday, it was the kind of day when half of
Wall Street has already left for the weekend, when news is sparse
and trading is thin. The kind of day, in other word s, when a
securities analyst with a big reputation can knock the stuffing out of a
stock with a ratings change.
Early that morning, several hours before the market opened, Thomas
P. Kurlak, who follows semiconductor stocks for Merrill Lynch, got
on the squawk box at his New York office and stunned the firm's
sales force with an unexpected bit of news: He was do wngrading
Intel from "strong buy" to "neutral." Merrill Lynch's legions of
salesmen immediately began phoning the big institutional
shareholders--mutual funds, hedge funds, pension funds, and the
like--that have made Intel one of the h alf-dozen most important
stocks of this raging bull market. For these institutions, collectively
known as the "buy side," this was big: Kurlak was the dominant voice
on Intel, and his rating changes always move the stock's price. Sure
enough, ev en before the market opened that morning, Intel had
dropped $7, to $91 a share.
Roll your cursor along the graph.
At the same time, on the other side of the country, Mark Edelstone
was beginning his first day on the job in Morgan Stanley Dean
Witter's San Francisco office. In his previous job as a semiconductor
analyst at Prudential Securities, he had gained a fol lowing on
Intel--so much so that Morgan Stanley had recruited him in the belief
that he might one day challenge Kurlak as the "ax" on the stock.
When he left Prudential two months before, he had a "neutral" rating
on Intel.
That morning, Edelstone got on the squawk box too. Addressing
Morgan Stanley's sales force, he unveiled his initial list of stock
recommendations. He had Intel rated as an "outperform." Which
meant, in effect, that he was upgrading the stock.
When word of Edelstone's Intel recommendation reached the Street,
it had an electrifying effect. Though the timing of the calls was
coincidental, the subtext was plain: Wall Street's two most prominent
analysts on Intel were crossing swords, taking opp osing positions on
the short-term prospects for the stock. When both men scheduled 10
A.M. conference calls with buy-side institutions, it was clear to
everyone that Intel stockholders were in for a bruising day.
And what had Intel done to warrant all this attention? Nothing at all.
There had been no new earnings projection, no big personnel
change, no product announcement. These days, such things aren't
necessary to move a stock. The howl of the analysts is su fficient.
The 1990s have
become the Age of
the Analyst on Wall
Street. It is a startling
turn of events: Not
long ago securities
analysts were the
mole-like civil
servants of the
brokerage world.
Their role was to
produce lengthy, bone-dry reports on the strengt hs and weaknesses
of publicly traded companies, which were mailed (mailed!) to clients.
The work had nothing to do with the short-term movement of stock
prices.
But with the cascade of money into the stock market over the past
two decades, the requirements placed on securities analysts have
changed completely. For shareholders large and small, this is no
longer a buy-and-hold world; people want to know what a stock is
going to do tomorrow. Predicting the short-term movement of a
stock has become so central to an analyst's job description that an
old-timer looking in on his colleagues today wouldn't even recognize
the profession.
With this change has come a shift in the balance of power: Analysts
have become the hubs around which much of Wall Street's
profitmaking activities occur. For stockbrokers, analysts'
recommendations are essential tools to persuade clients to buy or sel
l stocks ("Our guy just downgraded Microsoft. You might want to
think about lightening up.") For traders who handle major stock
transactions, analysts generate millions of dollars in commissions.
That's because buy-side institutions, by long-sta nding convention,
reward the analysts they value by placing trades with the analysts'
firms.
Finally, analysts have become vital to the business of investment
banking. When a Wall Street firm wants to take a company public,
for instance, it must have the endorsement of its own analyst on the
stock. (After all, who would invest in a deal done b y an investment
bank whose own in-house expert didn't believe in it?) Many analysts
have taken this role a step further, seeking out potential deals in the
areas they cover as aggressively as the investment bankers
themselves.
As you might expect, analysts are making more money than ever. A
generation ago, top analysts might pull down $250,000 a year;
today, a highly regarded analyst might collect a salary of $2 million or
more. (Weirdly, salaries are determined largely by w here analysts
rate in a magazine survey--Institutional Investor's annual ranking as
determined by a poll of the buy side.) Analysts can earn substantially
more if they get a percentage of any investment banking deals they
help bring in--as is the practice at some firms.
But something odd is going on here. As analysts have become real
players on Wall Street, they no longer seem content to predict the
movements of stocks they cover on the basis of a company's
fundamental strengths and weaknesses. True, stocks ultimately rise
and fall over the long term on the basis of those fundamentals. And
yet there's no getting around it: Power now accrues to analysts who
make stocks move, if only for a brief moment. Companies, for their
part, work assiduously at diluting that power and preventing analysts
from being able to move their shares. This tug of war is played out
every day in the market--and the result is very often short-term stock
fluctuations that have little if anything to do with a company's actual
performance. A forme r Wall Street research director puts it
succinctly: "If you were from Mars and you saw this system, you'd
say it was wacko."
To understand how this psychological game is played, and how it
shifts billions of dollars in and out of stocks every day, I spent most
of last summer in the company of analysts who follow Intel. Intel may
be the most widely followed company in the wor ld right
now--Nelson's Information counts no fewer than 67 analysts who
cover it. In turn, Intel employs a small army of spin doctors to
pathfinder.com@@5tjoWgUAtyBYktSL/fortune/1997/971027/ana.html
See if you can get this and read all parts of this long
article.
Jerry
of last summer in the company of analysts who follow Intel. Intel may
be the most widely followed company in the wor ld right
now--Nelson's Information counts no fewer than 67 analysts who
cover it. In turn, Intel employs a small army of spin doctors to
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