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The Pox on Analysts

Another rant...

I think that a fable would be the best way of attacking this problem, it concerns three analysts, each looking at very different segment of the financial market, let us say that the first, we will call him the Bear, is an old school macro economist, nice guy, not too much respect at the farm from the other animals. However, those who listen to him have done reasonably well; his view is similar to many market observers, the U.S. economy is still in trouble and that recovery will only occur once deleveraging has occured -- and it has not started yet.

The second is the Bull, nice micro economist, nice guy not much introspection -- let just say that his prognostication was that by the end of September 2008 the worse was over, and today everything is fine, growth is hear for good, and the stock market is not overvalued. In fact, we are about this is just the beginning. You see labor productivity in the U.S. is growing through the roof, yes sir, its simple the single largest increase in productivity. No mention that productivity has been rising because U.S. companies have been slashing staff at an unprecedented rate (the greatest reduction in the labor force since 1948), no his thesis is that companies will sell more stuff... and generate more profit. The fact that unemployment is around 10.2%, and that consumption represents 72% of the U.S. GDP is not mentioned. 1/10 is unemployed and 1/6 is underemployed or unemployed has no bearing on the profits of U.S. company (where export accounts for less than 10% of GDP...). Clueless

The third is the Lemming, his specialty are unreadable and interminable reports on companies that everybody likes, but he never draws conclusions (specific or general for the mater) ; just long winded reports. Now a few weeks ago he wrote in a long winded report that a specific company's share price should rise to $2, it was trading around $1.5, this despite the poor economy -- let just say that this company is in the transport business...

Anyway, the first two are clearly economist of sort, but with a very different attention span, and very different audiences. The fact that these guys work in the same firm and come to diametrically opposed conclusion is surprising, but then when you work in a bank for a few years you get used to this kind of stuff. The fact that the second guy is always a cheerleader for the market is irritating, but what is really irritating is the third guy, the clueless lemming.

Today the stock of that transport company trades around $1.0, so its down by 1/3, not up by 25%, so its really standing around 50% below his target of 60 days ago, and we all agree that not that much has changed over the past 60 days, and this is the kicker: He has now reduced his target from $2 to $1.15 -- no explanation, he does produce 2/3 pages of "metrics" that justify the valuation, but at the end of the day, a few weeks ago he justfieid the $2 valuation on a different set of metrics.

To add insult to injury, the guy never even mentions that he got it wrong, there is no A to B discussion. How did he go from $2.00 to $1.10 nobody knows!

Added: Turns out that the Hussman Fund did an analysis of the impact of an increase in productivity on the profitability of companies; guess the result -- there is no correlation between improvement in productivity and corproate profits. None


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