heinz...An interesting one here >>>
Funny you mention 1929, Enjoy...
To all:
Preaching to choir, of course, but it never hurts to remind oneself what those "analyst" ratings and broker "recommendations" really mean.
_The author of this article has two books about money in print and available at most book stores that are hot sellers. His name is Ric Edelman.
The following article was found in the Fairfax (VA) Journal Newspaper today.
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Reconsider Investments
Let today be one of investment atonement. Think about where you've come from, where you are and where you want to go. Think about what can happen in the future and how that will affect you. Then, think about what these three important people have said about the stock market.
Is the market too high? Many on Wall Street are beginning to ask that question. One of them is Arthur Levitt, chairman of the U.S. Securities and Exchange Commission. As the nation's top cop for the securities industry, his recent comments about Wall Street predictions are worth noting.
Before I relate the chairman's comments, a little background is in order. There are three divisions on Wall Street: underwriters, analysts and stockbrokers.
Underwriters raise money for corporate clients, by issuing stock and bond offerings called IPOs. Stockbrokers tell their clients which stocks to buy and which to sell.
Analysts study companies to see how well they're doing, to determine whether the company's stock is worth buying. If they believe company profits will rise, they recommend buying the stock; conversely, if analysts believe profits will fall, they recommend selling the stock.
Brokers, who constitute the third division, are the workhorses of the three. It's the broker's job to sell the IPO the underwriters created, and to convince investors to buy and sell stocks based on the analysts' recommendations. The more clients act on the broker's advice, the more money the broker (and his firm) earns.
So when the broker calls you on the phone and says, ''I want you to buy X" or ''sell Z," he's likely telling you what the underwriters or analysts told him. They're a team.
As you can imagine, companies don't like it when a brokerage firm's analyst issues a sell signal on their stock. The brokers start calling their clients, who start dumping the stock. That causes the stock's price to drop, which is bad news for the company's management. So, companies have a strong incentive to avoid sell signals. And the best way to avoid one is to make sure your company is doing well, so the analysts will recommend buying instead of selling. That causes the stock's price to rise, and keeps everyone happy.
For this reason, Wall Street has traditionally maintained a Chinese Wall between the underwriting and analyst division. In the 1980s, in fact, analysts issued one sell recommendation for every buy recommendation. In other words, analysts on Wall Street pretty much hated half the stocks and loved the other half.
Today, however, things have changed. Now, for every sell recommendation there are eight buy recommendations. In other words, there are almost no stocks that analysts hate. Virtually every stock seems to be regarded as a buy, according to the analysts. And this has Levitt very concerned.
In a recent speech, he said that rosy stock analyses appear to be shaped by new ties that analysts have with the companies they follow.
Let me explain this concept in laymen's terms:.
Say, company A wants to raise capital. It hires a brokerage firm's underwriting team to do this. But if that brokerage firm's analysts are on record with a sell order on the stock, company A will likely take its business elsewhere. So, to avoid losing the business, the underwriting division tells the analyst division not to say anything bad about company A. This is a clear conflict of interest - which is why that Chinese Wall was built. But it seems this ''wall" is crumbling.
Journalists face the same problem. Do you think the editors ever get pressure from an advertiser to kill a story that makes the advertiser look bad? You bet. But it seems that this problem is now facing Wall Street. As Levitt said, ''The growth in the market has something to do with this 'lopsidedness.' I can't help but wonder what else is driving the number of buy signals to exceed sell signals by 8 to 1."
Part of the explanation could be what studies are beginning to reveal: a direct correlation between the content of an analyst's recommendations and the amount of business his firm does with the issuer. This is a concern because if all of these buy signals are bogus, that's not good news for the stock market or you.
Which leads me to my second piece of information. It has to do with a quote that appeared in the April 19th issue of Forbes Magazine. The publisher of the magazine recalled a conversation he had with a successful New York stockbroker. ''The broker said to me, 'You are mid-Victorian in your ideas on the stock market. Evidently, you don't know that we are living in an entirely new world. That we have outgrown all past conditions and are so rich that it is inevitable. Millions of people will speculate in stocks. Wake up!'"
Forbes responded, ''I, for one, take with more than one grain of salt emphatic assurances that stocks can never, never fall back to anywhere like levels formerly regarded as normal. Is it not just possible that the impossible may happen in the stock market?"
This story was not recited by Steve Forbes, the current publisher of Forbes magazine, but by his grandfather, B.C. Forbes. Indeed, the story appeared, as I said, on April 19 - in the year 1929. The great crash occurred just six months later.
I continue to believe stocks are the best investment for superior long-term returns. My only concern is that investors, especially those new to the stock market, are beginning to believe that this era of spectacular wealth creation has no end. It is the experienced investor who realizes the worst can happen and is prepared to weather any short term events. Therefore, my recommendation remains the same today as it did 10 years ago: focus on a balanced and diversified portfolio based upon your future income needs.
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Ric Edelman, CFS, RFC, CMFC, hosts the personal finance show "Your Money Matters" every Saturday from 10 to 11:45 a.m. on WMAL Radio AM630 and "Money University" on cable's NET. Send questions c/o The Journal, 6408 Edsall Road, Alexandria, VA 22312..
Message 10495336
Regards,
John Madarasz
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