Wednesday, August 31, 2011

A Reminder of Why Sell-Side Analysts Add So Little Value

On Monday I caught the second half of Tom Keene's noontime Bloomberg program. Within the space of just 20 minutes, I had two reminders of why sell side analysis provides so little value to investors.

First, I caught Citigroup's Deane Dray's monologue on why he prefers GE instead of UT.My 2008 post on the two conglomerates couldn't be more different. Dray essentially cast doubt on UT's decades of consistent performance, while essentially arguing for a timing play on GE.

The price chart on the left illustrates the point of my 2008 piece, even three years later. Dray, however, thinks UT's decade of impressive share price growth, which has outstripped both the S&P500 Index and Immelt's hapless GE, is just a souffle waiting to deflate. He apparently believes GE will experience a magical mean-reversion, despite the lack of adult leadership at the top.

Along with that, Dray talked about 3M, mixing in discussions of economic expansion phases and relative merits of the various firms. That took me aback, since I've seen work suggesting that the concept of simplistic, always-sequential and reliable economic phase occurrence is largely a myth. Not to mention, as I listened to Dray, that one would need to be correctly forecasting the phases flawlessly for his approach to work- if it does.

Honestly, that sort of 'analysis' seems to me to descend to the levels of voodoo.

Next up was Paul Miller of FBR. Miller spent his time questioning BofA's purchase of Countrywide. Well, I was already there the day after the acquisition. Does that make me a standout bank equity analyst or seer? No, I think it just makes me a sensible business person with some banking experience who saw one ailing firm buying a near-dead one and drew the obvious conclusion that the deal wasn't going to rehabilitate the former.

Moreover, Miller missed the essence of what BofA really is. At its core is, of course, the old BofA retail California franchise. But to that has been glued North Carolina National Bank's, a/k/a Hugh McColl's Nationsbank's dispersed bank acquisitions in the Southeastern US, plus, later, by McColl's lieutenant, Ken Lewis, the dying Countrywide and staggering Merrill Lynch. Which is to say, an unfocused mess of a financial utility which paid too much for its last two mistakes, which were pursued in the same spirit of the banking acquisitions which bulked up the original NCNB. In fact, BofA itself was stumbling when Nationsbank captured it in 1998.

The second chart compares the S&P500 with BofA's share price from 1985. It's not a pretty picture. Lewis' tenure from 2001-2009, was marked by the bank essentially treading water relative to the index. The latter fell after the technology bubble burst in 2000, against which BofA appeared to rise. But a decade later, the bank is back where it was 26 years earlier, while the index only fell slightly.

You needn't have been a genius, or, I guess, Paul Miller to have had doubts about BofA for at least the past three years. Probably a lot more than that.

Why Tom Keene happened to have these two analysts as guests on Monday, I don't know. But it troubles me a bit that he seemed so enamored with both of them, when their comments were so unremarkable, when not specious.

Tuesday, August 30, 2011

Alan Krueger's Appointment as Administration's Chief Economist

I was somewhat stunned to learn that Alan Krueger's appointment as the administration's chief economic advisor makes him the third in.....three years.

Good God! Can the US be so badly off that we literally have changed chief economists an average of once each year in this administration?

I heard various pundits praising Krueger. Douglas Holz-Eakins described him as well-qualified. Bloomberg's Tom Keene said that Krueger 'knows more about the American wage' than anyone else.

Great, Tom. Too bad what our nation needs is capital investment in business which will draw with it more employment. Jobs don't just grow by themselves.

While I'm on the subject, I would observe that the recent anemic US quarterly GDP growth rates hardly constitute the sort of activity which one associates with an expanding effect of Samuelson's accelerator-multiplier effect. A table in a weekend edition of the Wall Street Journal editorial by Alan Reynolds showed private sector quarterly GDP growth to have been worse than the topline numbers, including two recent negative quarters.

I don't care how much Krueger knows about wages, nor how vociferous he is about employment tax credits. Without sufficiently positive and sustained US GDP growth, no amount of temporary tax breaks are going to bring about a sustained private sector recovery.

However, according to recent surveys of business owners, the results of which I've seen and heard on CNBC and/or Bloomberg, an investment climate of less uncertainty regarding government intrusion, less regulation, and lower tax rates on capital gains and profits would all have a more positive effect than minor fiddling with payroll taxes.

Maybe we should find an economist who believes those things and make her/him the nation's new chief economist for this year.

Monday, August 29, 2011

Economic Denial from the OECD

Last Wednesday's Wall Street Journal contained an editorial by Jose Angel Gurria, secretary-general of the OECD. It's a study in either institutional denial or simply complete ignorance of economic reality.

Gurria wrote of the recent pronouncements by Sarkozy and Merkel,

"The new Franco-German proposal to strengthen euro-area governance and to speak with one voice is welcome. That clearly has been lacking. But even more important is the call from German Chancellor Angela Merkel and French President Nicolas Sarkozy that the commitment to balanced budgets over the medium term should become legally binding in euro-area countries. Sounder national regulations and institutions coupled with stronger European Union rules and discipline will reduce the need to use the European Financial Stability Fund, which was established last year to issue guaranteed debt to member countries that can't borrow in the markets."

Can you seriously imagine "legally binding" balanced budgets "in the euro-area countries?" The US is one nation and we can't even manage it. The harsh truth that the Euro has benefited southern European economies, to the detriment of the northern ones, is apparently too bitter a pill for Gurria to swallow.

Then Gurria moves to the ECB. Here, he openly calls for the bank to prop up bad sovereign debt, which will insure that private credit risks gone bad become taxpayer obligations.

"The European Central Bank should for the time being continue to play a key role in crisis containment, not least as a buyer of last resort of sovereign debt. But we need to consider greater involvement by private-sector creditors to tackle the debt problems of some European nations, so that the resources of taxpayers support the growth prospects of the countries in trouble rather than being used to pay their private creditors."

Just guessing here, but I would think that means German and perhaps French taxpayers, those being the largest European economies. Curiously, Gurria seems to be hypocritical within a single paragraph. First he argues for the ECB to rescue troubled Euro banks, then writes that those banks need to clean up their own messes. Which do you suppose he actually means?

The secretary-general then turns to general monetary and fiscal policy, writing,

"Given the weaker outlook, central banks should postpone or even reverse their previous plans for tightening. The U.S. Federal Reserve's signal that it expects rates to stay exceptionally low for another two years is very forceful.

Given that state coffers are empty in most cases, governments need to go structural. Reforms to product and labor markets should be a primary focus of the long-term strategy to restore sustained growth. This will create jobs and help tackle debt."

Pretty funny, eh? Near-zero rates, which distort private investment decisions and suppress investment generally, are lauded. Meanwhile, governments will magically "reform...product and labor markets" because that will "restore sustained growth....(and) create jobs."

I know that in America, low rates have completely screwed up asset pricing since 2008. Meanwhile, lots of government intervention, such as abrogating bankruptcy laws and favoring unions in the GM and Chrysler bailouts, plus obstructing business with lots of new regulations, has slowed business activity and hiring to a near-halt.

But my favorite head-in-the-sand passage by Gurria is this one,

"Governments should also go social, focusing on policies to help those made most vulnerable by the crisis. The urgency of this is evident in the streets of a growing number of cities in countries at different levels of development. Unemployment benefits or targeted job-creating measures should be enhanced, both to reduce hardship and to stimulate demand. Help for overindebted households and those with "underwater" mortgages also needs to be more effective. Giving people hope and a sense of common purpose is not only crucial for their involvement but also for creating the necessary consensus to support the reforms."

Already-lush unemployment benefits are to be further sweetened. Again, we see the wrong-headed notion that paying more for people not to work is really a 'demand stimulus'.

Let's hope Gurria doesn't actually hold an economics degree.
Then he addresses housing by declaring that those who unwisely bought homes in hopes of ever-rising prices, and now cannot afford those homes, should not be expected to comply with standing legal processes of loss, foreclosure and resale, at lower prices, to families who can actually afford the houses. Instead, more financial aid must be given so those who took unwise risks may continue to enjoy the benefits of those risks without any of the pain of their mistakes.

Nevermind the support of those who behaved prudently and now could afford those homes as their foreclosure provides housing markets with their much-needed bottoms.

Well, with economic thinking like this, is it any wonder nobody looks to the OECD to help solve any serious global economic problems?