Fair disclosure is getting its chance to sweep The Street
Don Bauder
uniontrib.com
November 19, 2000
Wall Street's red light district is getting cleaned up.
For far too long, securities analysts have not been analysts. They have been "shills, cheerleaders for companies, trying to get business for their own employers," the investment banking firms for which they work, says Dennis Muckermann of Alexander & Muckermann.
As economist A. Gary Shilling notes:
"Despite their claims of independence, many analysts today -- and almost all of the well-paid ones -- really work for corporate finance (within their firms), bringing in deals, helping to sell them and currying favor among investment banking and merger and acquisition clients."
Shilling, of Springfield, N.J., points to a long list of corporate calamities that the friendly analysts didn't foresee, thus hurting their firms' clients.
The analysts and their firms, meanwhile, claim to be doing independent research. "Eyewash," says Kennedy Gammage of the Richland Co. in La Jolla.
There almost is no such thing as a sell recommendation. A doggy stock may "underperform" or get a "neutral" or "hold" or a tepid "long-term buy" recommendation.
Richard Russell of Dow Theory Letters in La Jolla says any analyst who dares suggest that a company has problems will get frozen out by the company, and Shilling says that "analysts who are downbeat are unlikely to say so in print, for fear of losing their jobs."
One firm on Wall Street even sent out a directive, telling analysts not to make negative or controversial comments about clients.
It's little wonder that securities analysts accurately are described in a one-syllable word that connotes a red dress. The analysts play tickle-toe under the table with corporations, and information leaks out selectively, with Wall Street's big boys having a leg up on the small investor.
That's changing.
A year ago, Arthur Levitt, chairman of the Securities and Exchange Commission, said the "web of dysfunctional relationships" between companies and analysts was a threat to fair and efficient markets. Analysts were acting more like promoters and marketers for their corporate finance departments "than unbiased and dispassionate analysts," Levitt said.
Just recently, the SEC issued Regulation FD -- for Fair Disclosure. It requires public companies to release market-sensitive information to everyone simultaneously, and, as Shilling notes, "not just to friendly analysts and big investors."
It will be harder now for mutual funds to outperform the average investor and rake in those high fees, Muckermann says.
Already, fair disclosure is changing things. Companies must invite the public to conference calls that are carried online, for example.
However, Jim Benham of Benham & Green in La Jolla says he's "already seen some companies clamming up."
During some conference calls, says Ellis Smith of Messner & Smith, "You can almost hear the attorneys in the background, handing (top management) a cue card, saying 'We can't respond to that,' "
Wall Street, meanwhile, complains that companies will dish out less information and that everybody will suffer, but Shilling thinks it's "unlikely that corporate leaders will reduce the flow of data."
"After all," he says, "they know full well that stockholders avoid volatile stocks and that volatility rises with surprises."
The overwhelming consensus, however, is that fair disclosure will lead to more -- not less -- volatility.
Previously, Muckermann explains, if a piece of negative information was likely to drive a stock from $50 to $40, the news would be leaked selectively. "The stock would go to $48, $46, $44, $42," he says. "Now it just opens at $40."
Benham says that's "a knee-jerk reaction -- investors trading on headlines without any work."
That's where reform could be a boon. Until now, analysts have been shills, passing along management's slant that was fed under-the-table. Now an analyst will have to do some work, scratching beneath the surface of the headline news and finding phony accounting, for example.
More analysts probably will start visiting Web sites, interviewing customers and vendors and talking with retailers and dealers "instead of burping back what management tells them," Smith says.
Unfortunately, analysts can do superb research and not rely on inside information -- and still get into trouble.
"If you do an excellent job, and say the world is coming to an end, and it does come to an end, the regulators are coming after you," Muckermann says. The SEC might decide the analyst acted on material non-public information. But, Muckermann says, "if you do a mediocre job, you are (going to be) OK."
Gammage is skeptical about fair disclosure.
Companies might be more selective in releasing information, but Wall Street is after the investment banking business, Gammage says, "and they are going to get information any way they can, with a wink and a nod."
He thinks, though, that "the passing of inside information will be less blatant, less open, more subdued."
But, Benham wonders, if an analyst has inside information, how could it be disclosed in a research report "without raising the eyebrows of the SEC?"
Benham and other analysts think the move to fair disclosure will level the playing field -- but escalate the volatility. |
