Wall Street Stock Analysts - Behind the Curve Again?

An interesting article published about a week ago by James Montier of Societe Generale in London made its way to my inbox via the weekly John Mauldin’s “Outside the Box” e-Letter.  I thought I’d share it with you and provide a few thoughts of my own.

Before we get started though, John Mauldin’s free pieces – “Outside the Box” (published Monday) and “Thoughts from the Frontline” (on Friday) are really worthwhile readings for those wishing to stay up on non-traditional thinking and analysis as it applies to the financial markets.  Very focused, opinionated, and to the point. You may not agree with everything written, but I assure you it will make you think.  I encourage you to sign up if you have an interest.

In Mr. Montier’s commentary, he makes a strong case that Wall Street stock analysts are behind the curve with regards to earnings revisions for corporate America in this downturn.  It’s not the first time – in fact Wall Street analysts have routinely lagged reality.

“They only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly.”

Mr. Montier goes on to make two additional points.   Most fundamental stock analysts base their assessments, at least in part, on corporate guidance.  Unfortunately companies themselves have a hard time recognizing reality. Instead they’re consistently more optimistic about their own companies than the overall economy.

Finally, in all likelihood the market hasn’t gotten anywhere close to pricing in the severity of this unfolding recession – we’ve likely a good deal further to go, and a good deal more pain to endure, for that to happen.

Our opinion precisely.  It’s simply astonishing to hear analyst after analyst present their views that the worst case has already been priced into the market.   Hello – earth to McFly! 

To think we slide right through without significantly lower earnings is simply laughable.  Facts to consider:

·        For all the talk of delinquencies and foreclosures over the past few months, we’re just now entering the high-season of increased resets among adjustable-rate mortgages.

·        The consumer has little in the way of savings, having become reliant on the “Home as ATM” phenomenon to maintain an extended lifestyle over the past few years.  Simply removing this increased spending without additional savings will drop GDP noticeably.

·        Financial services companies have a long way to go before their balance sheets are back in order.   Think many, many quarters.   While there is growing concern over Sovereign Wealth funds buying stakes in many of these concerns, they’ll likely look less like geniuses and more akin to the Japanese Real Estate investors of the 1980s in a few years.

·        Non-financial companies are just beginning to feel the pinch of higher input prices and reduced demand.  If one hasn’t noticed layoffs, and good sized ones at that, are a daily occurrence in the financial press.

So, the stock market is already pricing this in, huh?  We’ll continue to take the other side of that bet.