Bah Humbug: 'Tis The Season to be an Analyst

Posted: Nov 03, 2011 12:01 AM

It’s earnings season, and once again, ‘tis the season to be jolly.  

It never fails to amaze me how every quarter the pundits drool over the corporations beating analysts’ expectations.

In no way do I want to contribute to unemployment, but perhaps the most useless profession is equities analyst. 

However, every bank, brokerage firm, mutual fund, and broker dealer seems to differ with my opinion because they employ dozens of these people. 

Years ago, equities analysts were the mainstay of Wall Street.  They would take the time to personally visit certain corporations in order to perform hands-on research, query the management, and witness production firsthand. 

In essence, they got up close and personal. 

The analysts did the grunt work that produced honest and accurate numbers, and they would report exactly what they believed was going to happen based upon firsthand knowledge. 

Unfortunately, the government, in its infinite wisdom, believed that relationships between corporate management and certain analysts got too cozy. 

Therefore, they decided to make it a level playing field. 

All information that was provided to one group had to be provided to all. 

What was once on-site in-depth research reverted to in-office estimates, so it became very easy for these analysts to sit back and simply throw some numbers against the wall. 

For as many quarters as I can remember, corporations have beaten the analyst’s expectations about 75% of the time. 

So, let me get this straight, quarter after quarter, analysts get their predictions wrong 75% of the time?  

Yet, they’re still listened to, fawned over, and taken for gospel.  

No one could be wrong for so long and still be considered a benchmark.  

That being said, it is possible that these same analysts simply lowball their figures so that corporations seem to be doing better than expected? 

You’ll hear the pundits say “the great earnings season,” “better than expected,” “a terrific surprise,” when in reality all that’s happened is that expectations have been lowered.  

It would seem to me the easiest way to establish earnings performance is to simply compare quarter-to-quarter and year-over-year figures.

This would create a true picture of what the company is doing in the trajectory of growth through sales and earnings.  

The guesswork would be removed, however, so would the need for equities analysts.  

Oh well, since Vegas has its bookies, I guess Wall Street must have its analysts.  

Come to think of it, being wrong (hitless) 75% of the time in baseball would probably get you a multi-million dollar contract. 

Go figure.