In the February 8th Sunday New York Times, the Business section contained an article entitled “Why Analysts Keep Telling Investors to Buy”. It’s worth a read, even if it covers familiar ground to those experienced in the ways of Wall Street and investment analysts. The long and the short of the article is that even in the mist of a terrible bear market, analysts still only have sell ratings on 5.9% of all stocks. Having missed all of the warning signs for the current economic downturn, most analysts are now of the opinion that stock prices are so low that now is the time to buy. Nobody wants to issue a sell rating just when the markets turn up.
I’ve written about this phenomenon before (see “Stock Ratings from Lake Wobegone”, May 15, 2008). Leaving aside the tendency of the stock market to rise over time, all of the incentives on Wall Street favor the optimistic, bullish view. When an analyst issues a sell rating, companies hate him, investment bankers hate him and commission flow goes elsewhere. The only ones who like sell ratings are short sellers, and they are often viewed as the pariahs of the industry, commonly blamed for all sorts of financial misdeeds and shenanigans. (My own feeling is that short sellers, like jackals and hyenas, form a natural part of the ecosystem, but that doesn’t mean we have to like them.)
None of this would be worthy of a lot of additional comment on my part, except that about the same time as I read The New York Times article, I also ran across a brief piece in the February 7th issue of The Economist magazine that made me think that maybe, as skewed as things are here, they’re a lot better than some other markets. The article, entitled “Bye bye sell” takes a look at research recommendations in the South Korean and Taiwan markets. In both markets it appears that government regulators actively discourage brokerage firms from issuing critical research. In South Korea, the Financial Supervisory Service has been known to investigate brokerage firms that issue critical research, while in Taiwan, if the press quotes critical research, the government requests brokers to provide “explanations” as the press is required to receive a securities firm’s approval before quoting research.
The results are predictable, as the research firms quickly learn that critical research brings more trouble than it’s worth. For example, during 2008, there were 17,335 research reports issued in South Korea, and not a single one was a sell recommendation. This is not what you think of when you start talking about efficient markets. As bad as our distribution of stock recommendations is in the U. S. we are not burdened by a government bureaucracy that views stock markets as an instrument of optimistic government policy. Yet.