Companies that specialize in stock market forecasting and trading—such as Goldman Sachs, Citigroup, Morgan Stanley, and JPMorgan Chase—pay very high salaries to their employee-vendors. New York Attorney General Andrew Cuomo just released data showing that these and other large banks are giving each of their 5000 trader-forecasters bonuses of at least one million dollars.
In return, these fat cats are very frequently wrong in their recommendations and decidedly unprofessional in their fiduciary relationships with the clueless, trusting clients who rely on them. Win or lose, they get their fees.
These firms and brokers are making money largely from other people’s money—pensions, savings and investments. Overall many produce little more than gambling tips. When these moneyboys try to justify their doings as providing liquidity, hedging against risk, assembling capital for productive investment, listeners are permitted to robustly laugh. This is especially so now during Wall Street’s massive, self-inflicted financial collapse. The economy, and taxpayers, are paying for this reckless speculation.
Meanwhile, outside this paper economy, people are producing for the real economy—manufacturing, repairing and maintaining products and structures, offering needed services for consumers. These people are far lower on the income ladder. Unlike their speculating counterparts, if the workers in the real economy stayed home, the economy would stop cold.
I was rummaging recently through some old publications and randomly came across the March 24, 2008 issue of Barron’s, a leading financial weekly. Its contributors and interviewees are supposed to be among the savviest around. Here are some samples of their perspicacity.
The cover story asserts that “the financial sector’s strongest players probably don’t have further to sink, even with the ongoing pressure of negative news. Stocks of the industry’s strongest players could climb by 10% to 20% over the next year as panic recedes, earnings improve and price-to-earnings multiples expand.”
The author, Jacqueline Doherty, got specific. She cited Merrill Lynch, Citigroup, Bank of America, Washington Mutual, among others, for the predicted upswing. At the time (March 24, 2008), Merrill stock was selling for $46.85. Before the year’s end, the stock was worthless and Merrill was swallowed by Bank of America. Washington Mutual, the nation’s largest savings bank, saw its stock, selling at $11.70, go to zero as it was absorbed by JPMorgan Chase in September 2008. Citigroup was selling at $22.50 per share. Now, it has climbed just above $3 per share, and Citigroup narrowly avoided bankruptcy due to a huge federal bailout.
Leafing through Barron’s pages of that week of March 24, 2008, I read a prediction by James Finucane—who is described as a “talented strategist—that the Dow would reach 20,000 within a year. A year later in late March 2009, the Dow was below 8000. Even James Glassman, who loudly predicted in 1999 that the Dow would go to 36,000 by 2005, has been mercifully quiet.
Unlike sloppy plumbers and carpenters who pay a price for their mistakes, Wall Street forecasters seem to be paid very well despite being chronically wrong.
A few Barron’s pages later, columnist Eric J. Savitz was writing that worries about NVIDIA were overblown. The computer chip company stock having peaked in October 2007 at just under $40 a share, was selling for $18.52 when Mr. Savitz was touting its prospects. On August 4, 2009, NVIDIA closed at $13.37 per share.
And so it goes week after week in the financial world of pundits. Do you know of any other profession that can be so wrong so often and be rewarded so well again and again? On their behalf, they say that they cannot guarantee against risk and that they rely on cues from the watchdogs.
The first defense is unrebuttable because it shifts all risk away from the purportedly knowledgeable minds and onto market imponderables. Then why be so cocksure of what you urge investors to buy?
Second, they know that the watchdogs are paid to look the other way and let avarice and deception prevail. These “watchdogs” include the boards of directors, the large law firms, the major accounting firms, and the ratings companies like Moody’s and Standard and Poor’s.
Looking the other way also pays for most state and federal legislators and the regulators. The former solicit campaign contributions and the latter are looking forward to cushy positions in the industries they failed to regulate as government servants.
The forecasters’ excuse is that the watchdogs weren’t barking to alert them. Come on! These forecasters weren’t born yesterday.
Barron’s veteran columnist Alan Abelson is a sharp pen hedger who calls his weekly commentary “Up and Down Wall Street”. Abelson is a wry, irreverent free-thinker on the conservative side, but he sometimes offers useful insights. Maybe he can break his remaining taboo and apply his mordant, satirical style to review a year of Barron’s recommendations and see whether short sellers made more money than investors did who bought on the suspect advice.
It could be that the fog at Barron’s is lifting; it just recently offered a year’s subscription for $52, a sharp discount from its $260 yearly newsstand cost of $5 per copy. Now that’s a realistic price worth paying at least if you like comedic doses of illusion and the fullest stock tables on paper west of the Pecos.