Revered Financial Analysts

April 6, 2009

Herd behavior is intrinsic to financial market behavior, and every herd needs trustworthy shepherds.  The top analyst reputations tend to be built from contrarian forecasts that come true.  So while investors find comfort in following the crowd, the savvy analyst looks for opportunities when the crowd seems mistaken.  The analyst must choose the right moment.  It’s harder to hide from unorthodox bad market calls than from poor advice that conformed to the market consensus.  Conventional wisdom is wrong surprisingly often, however, and this creates  a fair number of opportunities to get noticed.

The comments of financial analysts, who identify unexpected market trends before anyone else and do so in a highly publicized way, are worshipped with deep reverence.  Henry Kaufman had such mojo.  So did Abby Cohen, Henry Blodget, Warren Buffett and, more recently, Nouriel Roubini.  Buffett’s is in interesting case.  Here is an incredibly rich man, who laid it all out on the line in an Op-Ed New York Times Article last October 17th, declaring then to be a great time to buy equities.  Five and a half months later, the Dow Jones Industrial Average had dropped another 26%.  Time will tell just how damaging his visibly bad October prediction proves to Buffett’s future reputation as a Pied Piper.

Mike Mayo, who specializes in the financial sector, also clearly enjoys reverential loyalty.  Critical remarks by him about the outlook for major banks stopped their recent recovery dead in their tracks, sending PNC down 7.4%, Wells Fargo off 5.8%, Citigroup tumbling 4.6% and JP Morgan losing 3.2% in very early trading today. Mayo’s case illustrates another characteristic of the top tier of market-changing financial analysts.  Be consistent to a fault.  Mayo began warning a decade ago that bank profits and the appreciation of their stock values were a house of cards headed for a nasty collapse.  He wasn’t just ahead of his time.  He was years ahead of the curve, giving enormous advanced warning and never abandoning his view even as the excesses in the industry kept building.

When financial analysts achieve reverential status, the dynamic transforms between their comments and investor reaction.  These soothsayers no longer are mere messengers and interpreters of good or bad news.  Their remarks are the news, and their forecasts go beyond self-fulfilling prophesies.  Indeed, their remarks not only expedite the timing and direction of market movement, but actually amplify volatility by activating the animal spirits hard-wired into market behavior.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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