The Bridge To Nowhere: Analysts Views On Lehman, Freddie And Fannie

According to a report in the Wall Street Journal, analysts had a pretty dismal record in predicting the downfall of Lehman Brothers.

Wachovia had an "outperform" rating starting on March 14, 2007.

Credit Suisse had an "outperform" rating starting on October 8, 2007.

Merrill Lynch changed its rating to a "sell" on June 1, 2008, but on June 4, 2008 it upgraded the stock. I assume a light bulb went on.

Citigroup had a "buy" rating on Lehman and watched the stock fall by 84%.

Not to be outdone, Deutsche Bank kept its "buy" rating until the stock dropped by 90%.

How about Freddie Mac and Fannie Mae? Surely the analyst gurus gave better guidance to investors in those very public stocks.

Not so.

According to an article in Smart Money nearly half of the analysts covering these stocks had a "buy" rating for them on the date the Treasury announced it would bail them out.

What about small cap stocks? Much is made of the ability of analysts and active managers to outperform the index in this market. We are told that small caps are less efficient than large and mid-cap stocks.

This myth was recently debunked in a study entitled Evaluating Small-Cap Active which was published in the Fall, 2008 issue of The Journal of Investing.

The authors found the chances of an active manager beating the index in these stocks is about the same as a coin toss before costs. When costs are considered, the relative performance of the median active small-cap manager is negative.

The conclusion of the study is unambiguous: "We conclude that indexing is a powerful strategy among small-cap stocks, as it is in any market."

Do you have an account with a brokerage firm? Does your broker discuss with you the importance of analysts reports and the "target price" the analyst has placed on a particular stock?

If so, you are on the bridge to nowhere. Fortunately, there is still time to change your mind and "reverse course."

Just ask Governor Palin!

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

Comments

[cylindar]

Let's have a fire sale!

[glitz]

With the banking crisis comes the usual "the FDIC will protect you"...I understand the FDIC is Federal Insurance and it covers accounts under 100,000. I also understand that it is not like Fort Knox storage of gold buillion, there is no cash sitting in some vault somewhere...so where is all of this "Federal" money coming from? Our Fed does not have any money...all of it is borrowed, the Government can't even make the interest on what is owed now, so where will all these billions come from? I know this is a naive financial question, but, can anyone answer? Just PRINT PRINT PRINT!!

[KillTheMessenger]

There are two main buttons on a printing press. One is big and green and starts it. The other one is big and red and is the emergency stop aka "kill switch".

In the current situation they should paint the green one bright red and call it "Financial Emergency Control" and they can simply remove the kill switch. We don't need it. The presses will be running day and night until somebody turns the lights out.

[Aaror]

While there was a period of time when the FDIC only charged insurance premiums on the riskiest banks, the last few years insurance premiums have been charged to all banks. The account those payments go into is down to 46 billion, and the FDIC is going to raise insurance rates to increase the account. So there IS cash sitting in a vault somewhere, it isn't borrowed. Now if you want to talk about the AIG bailout, that is a different story, but lets stick to facts or we seem like a bunch of conspiricy theorists and we will be ignored until it is too late.

[KillTheMessenger]

D0 you know that publicly traded companies manipulate and buy analyst opinions?

Of course you do.

:-)

[mezz1962a]

Where was Barney Frank? The democrate who was the chairman overseeing Fannie and Freddy for the past 2 years?

Where was his warning that a collapse was coming? Why did he not do his job? Why blame the Republicans and Bush? Did not the Dems controll the congress for the past 2 years?

[WIpatriot]

Yeah, they pretty much didn't.

[SeenItBefore]

For pity's sake, Dan, SOMEBODY is taking the money! Why isn't it the average investor. Oh, I get it. We are supposed to put IN the money that someone else gets

So dare I ask... why should anyone put anything in any investment vehicle more complicated than a coffee can buried in the back yard? And don't obscure me with the, "inflation thing", because some folks just lost 90% of their faith in Lehman Bros in a few days.

I have 5,000 dollars cash hidden for an emergency. Ten years ago a MAC computer cost 3,000.00 plus and I bought a 100 times better IMAC 6 months ago for 1,700.00. What am I missing here? I saved 1,300.00, got a better computer, put ZERO dollars at risk and still have 2,300.00 bucks. Had I invested this money in Enron ten years ago, I would have nothing left of my 5,000.00, ANd no computer to comment on your article!

[worldtraveller]

yes, but that is why you only have 5k

[Aaror]

(Um, 5000-1700 is 3300, not 2300, anyway...)
The reason you should still put your money in an index mutual fund is because the market in general goes up. If a stock (enron) goes to 0 and you own it and 499 other stocks, the other 499 will probably do well enough that you will still have more than if you had not gone into the market. This is true over any long period of time. Granted, risk increases in this strategy the shorter the time period, so when you are close to needing your money, move it to a bond fund.
The other reason to invest instead of hiding it under a matress is that your savings in the investment market (stocks or bonds) will be used to invest in new ideas, better methods of production, etc. This is what drives higher productivity, which should help all Americans. Granted, under Republicans the trickle down effect is replaced by the trickle of urine from the rich peeing on us effect, but once we get a real tax system again that should stop.