Tuesday, November 17, 2009

REALLY Grumpy Analyst Syndrome


In “Grumpy Analyst Syndrome, or, ‘Optimistic, How Dare He!’” from August 31, we noted the uncanny tendency of Wall Street’s Finest—of which we were one, once—to throw in the towel on their favorite stocks at precisely the end of whatever bear market has caused those stocks to collapse.

This makes WSF look doubly-dumb: first for stubbornly keeping “Buy” ratings on stocks that collapse, and then for stubbornly keeping “Sell” ratings on those same stocks as they begin to recover.

As we pointed out, Grumpy Analysts often take out their ensuing frustrations on earnings conference calls—sometimes in the manner of radio call-in conspiracy theorists who seek to dump As Much Vital Important Information As Possible on their hosts Before Government Agents Pull The Plug.

By way of example, we quoted from the Toll Brothers earnings call that triggered our initial musings on Grumpy Analyst Syndrome, when one such GA actually warned CEO Bob Toll of “ominous statistics” that he would be wise to keep an eye on:

Well, just to keep in mind, Bob, keep in mind before you go there, these are foreclosures in process so they're not yet hitting the real estate for sale side market, so they are ominous statistics and I think that we have seen false recoveries before…

When the CEO attempted to point out that his company had seen a recovery in housing demand despite the rise in foreclosures, the GA, rather than being mollified, continued to wag a finger with this warning about Toll’s fourth quarter results:

I guess what I'm just trying to point out and make sure that Toll Brothers is thinking about as well is the headwind that might be fourth quarter 2009…

That was in August, and apparently the world has not taken heed of such “headwinds,” for when Toll Brothers reported its fiscal fourth quarter 2009 results last week, orders were up 42% in units and 62% in dollars from the year before.

This good news was, apparently, too much for our Grumpy Analyst, who did not bother to ask questions on the ensuing conference call.

Instead, the GA spoke truth to power by appealing directly to the New York Times, in a Sunday column by the redoubtable Gretchen Morgenson, called “Home Builders (You Heard That Right) Get a Gift.”

Morgenson's column concerned the latest Tax Break for Businesses that Don’t Need Tax Breaks: a $33 billion gift to, among others, homebuilders.

And in it, Morgenson makes the plain point that providing more government assistance to companies that contributed to the housing bubble at the center of the crisis in the first place makes no great amount of sense—especially since it merely encourages the same mindless growth-for-growth’s sake that caused the problem we’re now coming out of.

Besides, as she rightly points out, having come through the down-cycle relatively intact, homebuilders don’t exactly need more dough.

Still, you might wonder why one of Wall Street’s Finest would bother commenting in that article, since government policy isn’t exactly what Wall Street’s Finest are paid to evaluate.

Investors live in a world as it is—not as they wish it to be. If the government decides to throw more money at one particular interest group, well, so be it.

But not to our Grumpy Analyst, who sniffed to Morgenson as follows:

“I AM surprised that home builders are getting hundreds of millions of dollars given that many have very strong balance sheets,” said Ivy Zelman, chief executive at Zelman & Associates, a research firm. “We question the public policy decision to gift home builders with capital that many will not use to create jobs, since they admit that job growth will be dependent not on capital, but on improving demand.”

Hence do Grumpy Analysts become Really Grumpy Analysts.

And stocks do what they will.




Jeff Matthews
I Am Not Making This Up


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2 comments:

Anonymous said...

Wasn't Ivy Zelman one of the first of WSF to downgrade the homebuilding sector and note the problems with pricing and the mortgage market? This is just my recollection, and I've kept no evidence on file, but if my memory is correct, I don't think its accurate to imply that she stubbornly kept a "buy" on the stocks as they collapsed. (In this particular case.)

She may be grumpy as homebuilder stocks are no longer collapsing, but they aren't really zooming upward either unless you really cherry pick the chart. There are other industries that have done far better since March. It seems to me that the jury is still out on the success or failure of any call on homebuilders.

Thanks.

Jeff Matthews said...

Yes, absolutely right, and we gave Ivy credit for that correct early downgrade in "Grumpy Analyst Syndrome."

As for other stocks doing better than homebuilders--well, sure. But most analysts overstay on the upside and the downside, it's the nature of the beast.

As most did on homebuilders, whatever your near-term view is.

JM