Martin Spring
City Signals
The bear market is pushing some investors to extremes. In Italy, where I’m writing this, an anonymous investor who says he’s been ruined by falling share prices claims he stole the body of Enrico Cuccia an influential banker said to have been “the puppet master” of the Milan Stock Exchange in his day which has disappeared from a family mausoleum on the shores of Lake Maggiore.
He says he’ll return the remains if the Milan market recovers to its year-ago level. Otherwise “I will start targeting financiers and financial journalists who like Cuccia contributed to my ruin”. Presumably live ones, or those who appear to be alive.
Investors in other countries, especially the United States and Germany, are equally angry, but their reactions are less bizarre they’re suing for compensation.
Their main targets are investment banks that enthusiastically recommended shares of companies whose public offerings they were managing. The banks collected huge fees for placing the shares, yet in many cases the investors who bought them on the basis of their recommendations have lost most of their capital.
The share-pushing bias of banks and brokers is nothing new. What is new is the scale of the losses of those who have followed their advice, and the spread of a cult of litigation by those who have suffered.
Investment banks also fear they are going to be targeted by increasingly powerful and aggressive regulators reacting to pressure from angry investors and politicians representing their interests. They could face having to pay penalties as well as heavy damages, just at a time when their corporate finance business is melting away like snow in the highveld sun.
Their defensive reactions include withdrawal from the business of publicly recommending anything, sticking close to consensus forecasting so they can’t be accused of irresponsibility, not saying anything publicly that hasn’t been carefully vetted and approved by company lawyers, and not talking to the media except in carefully controlled circumstances.
Analysts, the heroes of the boom times, are now the principal targets for criticism.
The economics of investment banking corrupted the independence of analysts, who have been used to preparing detailed positive studies to help float companies, to manipulating market and financial media expectations, and to publicising their employers via broadcast and on-line television.
In other words, they have been used as expert public relations officers to promote actual or potential future corporate clients. JP Morgan Chase forces its European equity analysts to show their research in advance to corporate clients. Elsewhere, analysts have even been fired for being honest in print when they gave the thumbs-down on a company.
As share prices have cascaded down on the river of hope over the past year, investors have been bombarded with analyst recommendations to “buy” or “accumulate”, when it was obvious (at least to some of us) that such advice was nearly always nonsense.
Investors’ disenchantment is turning to bitterness. The normally sobersided Financial Times even published a leader-page comment last week headlined: “Shoot all the analysts.”
Its less bizarre suggestions are that the media shouldn’t give so much weight to what analysts have to say, investors should treat their written work with care (“favoured clients can expect a private phone call that may be more frank”), and the analysts themselves should “learn a little humility”.
The crux of the problem is that good research is expensive. Individual investors can rarely afford to pay a proper price for it, so analysis tends to be bought by rich financial institutions that sometimes use it to promote their business rather than guide buy/sell decisions.
Some financial services companies have realised that the spread of the cult of equity in the “retail” market, with something like a third of the savings of households in advanced countries in shares or equity-based investments, has created the opportunity for the profitable sale of good, independent research directly to investors.
In fairness it must be said that it was not only the investment banks and analysts that were guilty of giving the public extremely bad advice. Financial journalists and company promoters must share the blame.
Jeff Bezos, who created the enormous wealth-destroying machine called Amazon.com, admitted in a BBC interview this month that his stock is not one “you can sleep well with at night” and small investors should not invest in Internet stocks.
As my friend Bill Bonner commented: “This counsel might have been more greatly appreciated if it had been delivered when AMZN” that’s the US ticker for Amazon “was selling for $200, rather than now, when the price is barely above $10”.