Sell Side Research Uncovering Stocks

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New York – Citigroup is reducing its global research staff and diminishing the number of covered companies, Reuters reported yesterday. The independent research industry is likely to feel the impact of this move due to a reduction in the number of stocks covered by the sell side and to the increase of experienced analysts available for hire.

The banking giant had announced upcoming personnel cuts since last April when it reported losses. The measures to reduce costs have materialized with the dismissal of 11 US research analysts (listed at the end of this article), and the closing of the Wellington Research Division in New Zealand. The Wellington division will consolidate operations in Auckland with an expected job loss of half a dozen in that country, according to The New Zealand Herald.

Before these cuts, Citi had about 350 analysts globally. The announced cuts in the US and in New Zealand represent around 4 percent of Citi’s global research staff, which covered over 3000 stocks. After reassigning coverage to other analysts, the cut in the number of companies covered is expected to be of 7 percent, according to Reuters. This information leads us to calculate that around 200 companies will lose coverage by the bank. Sirius XM might be among the dropped companies, according to Satwaves, a news blog covering satellite radio.

The implications for the independent research industry?

As we analyzed in previous articles, the shrinking or closing of research departments (i.e. Bear Stearns and Lehman) is very likely to leave its mark on the independent research industry. Positive consequences for the industry are thinkable in this environment of economic distress, if we analyze Citi’s measures in relative terms. An increased number of companies in need for coverage, a larger number of experienced analysts available for hire, and less competition from sell side research departments are all certainly welcomed facts.

If we look at Citi’s move not as an isolated event but as part of a generalized trend, the picture is scary, even for the independent research industry. An article by Hedgeworld estimates that the maladies of Wall Street will extend to the buy side as soon as next year. With the hedge fund industry undergoing its worst-ever performance, Hedgeworld predicts that the number of hedge fund can halve in 2009. It is possible that some funds will give up fees in order to retain capital and survive. But this can translate into a reduction of the demand for research in general.

Unfortunately, Citi’s cut in its research division is surrounded by a shady environment. The sum of events, unlike the individual happenings within Cit, is likely to negatively affect the independent research industry and prevent it from enjoying the availability of experienced analysts with reduced competition from the sell side.
 

List of the 11 US analysts that left Citi (from Bloomberg Press):

1.  George Shapiro: Aerospace and Defense
2.  John Hill: Metals
3.  David RAso: Machinery
4.  Shannon Cowherd: Canadian Banks
5.  Chip Dillon: Forest Products
6.  Bradley Ball: Asset Management and Credit Cards
7.  Paul Mansky: Computer networking Devices
8.  Tony Wible: Radio and Media
9.  Leone Young: environmental Services
10. Joshua Attie: Casinos and Hotels
11. Paul Heldman: Health Care policy

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