Analysts Backtrack On 'Worst Is Over' Claims

Source : The Business Times, June 26, 2008

Some say they were wrong in recommending to buy bank stocks; others cut ratings

(NEW YORK) Wall Street analysts who only weeks ago were telling investors to buy bank stocks because the worst of the credit crisis was over are now flip-flopping.

Goldman Sachs Group Inc reversed a call on financial stocks, saying on June 23 that its May 5 recommendation was 'clearly wrong'. Merrill Lynch & Co on June 17 cut its rating on Lehman Brothers Holdings Inc to 'neutral', just a week after telling clients to buy. Barron's, the weekly financial newspaper, said this week that its February advice to buy American International Group Inc (AIG) was a 'mistake'.

'Analysts probably have less credibility than they did 10 years ago,' said Charles Geisst, the author of 100 Years on Wall Street who teaches finance at Manhattan College in New York. 'This has just eroded it a little bit more.'

The mortgage-market rout that began last year and led to almost US$400 billion in bank writedowns and credit losses has lasted longer and cut deeper than bearish analysts predicted. Citigroup Inc, the biggest US bank by assets, and UBS AG, Switzerland's largest lender, have lost US$43 billion and US$38 billion, respectively.

Citigroup dropped 67 per cent since reaching a record US$56.41 in December 2006, the biggest decline since December 1991, when predecessor Citicorp fell 75 per cent to US$8.63 from the prior peak of US$35.13 in October 1989.

Bank, brokerage and insurance stocks fell 19 per cent from May 5 through June 20, more than any other group. The Standard & Poor's 500 Index slid 6.4 per cent in the period.

'Very few people, not even the people who were bearish, would have anticipated a complete shutdown and freezing of the credit markets that really began in July,' said Thomas Brown, CEO of hedge fund Second Curve Capital in New York and a former bank analyst at Donaldson, Lufkin & Jenrette Inc.

Goldman's team of financial services analysts said on June 17, prior to the reversal, that financial stocks would probably keep languishing. The deterioration of credit won't abate until next year, and raising capital has become more difficult because most completed deals have failed to generate positive returns for investors so far, the group said.

'We boosted our consumer discretionary and financials weights in May on the belief the sectors would benefit from bank recapitalisation and fiscal stimulus,' Goldman analyst David Kostin wrote in the June 23 note. 'Our thesis was clearly wrong in hindsight.'

Goldman spokesman Ed Canaday and Merrill spokeswoman Susan McCabe Walley declined to comment.

Merrill's Guy Moszkowski, the top-ranked brokerage analyst in Institutional Investor's annual survey, on June 11 changed his rating on Lehman to 'neutral' from 'buy' and cut his target price to US$28 from US$36. It was Mr Moszkowski's fourth call on Lehman this month. He shifted to 'underperform' from 'neutral' on June 2 and recommended investors buy the stock twice, on June 4 and then on June 10, the day before he moved back to 'neutral'.

Lehman, whose shares have dropped 63 per cent this year, has been hit by speculation mortgage- market losses will continue to drag down earnings. The fourth-largest US securities firm posted a US$2.8 billion second-quarter loss on June 9.

Shrinking fees from brokerage commissions mean fewer dollars for research and more pressure on analysts to hang on to paying customers such as hedge funds. Clients covet information gleaned from meetings with company executives - audiences that favoured analysts can deliver. 'There are many different ways to win' accolades as an analyst, Mr Brown said. 'The most common way is to provide a high level of contact to the largest buy-side clients.'

Barron's this week reversed its view on AIG, the world's biggest insurer, telling readers to sell the shares after recommending buying them in February. The stock has tumbled 40 per cent since the end of that month. Barron's made a 'mistake', the newspaper said. 'We'd bail right here.'

Judging by the latest batch of US economic statistics, any turnaround is still months away. On Tuesday, an index showed that confidence among Americans slid to the lowest in 16 years as housing prices fell by the most on record. -- Bloomberg