What Recession?

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 New York – ‘What me worry?’ is the motto of US analysts if the portion of sell recommendations is any indication. Only 6.7% of stocks followed in the US have sell recommendations based on an analysis by Thomson Reuters StarMine. Conversely, nearly 50% of total U.S. stock recommendations are ‘buys’. One illustration of this phenomenon has been analysts’ responses to the 65% decline in Google’s share price.

According to a recent article in the Financial Times, European analysts are the most bearish with 18% of their recommendations being sell recommendations. UK analysts have put sells on 14% of the stocks they follow. Globally, the average is 12%.

The meager 6.7% of sells placed on US stocks is at ‘historic levels’, according to StarMine, having increased 1.4 percentage points since the beginning of the year. As we have reported before, firms like Merrill Lynch have attempted to increase the percentage of sell recommendations by establishing a quota that no less than 20% of an analyst’s recommendations must be sells. 

One example of how sell-challenged analysts are is the case of Google, which has declined 65% from its high in November 2007. Henry Blodget recently reviewed the current recommendations of top analysts in his blog, Silicon Alley Insider.  Not surprisingly, Blodget is circumspect in criticizing his erstwhile colleagues’ bullishness, but is wryly sympathetic: “When you’re banging the drum on a stock and all it does is hit you on the head with a two-by-four day after day you eventually get discouraged. (Don’t we know it.)” Discouragement doesn’t extend to sell recommendations, however.

The five Google bulls Blodget reviews, Mary Meeker (Morgan Stanley), Mark Mahaney (Citi), Doug Anmuth (Barclays), Youssef Squali (Jefferies), and Sandeep Aggarwal (Collins Stewart), all maintain buy recommendations. Their ‘bearishness’ is confined to their outlooks and commentary. In her latest note, Mary Meeker labels her summary outlook “NO CLUE” and laments that “Forecasting is more of a moving target than we have ever experienced.”

Mark Mahoney listed his outlook as “DEAD MONEY FOR A WHILE” and removed Google from his top picks rather than change his buy rating. Youssef Squali’s summary outlook “FUNDAMENTALS HORRIBLE BUT MAYBE SOME HOPE LONG TERM” was accompanied by lowered estimates but no change in his rating. Sandeep Aggarwal summarized his view as “LOUSY BUT WILL SOMEHOW SOAR EVENTUALLY” based on his view that net advertising will have secular growth despite overall decline in advertising spending.

What Henry Blodget didn’t say, at least in so many words, is how reminiscent this is of the pre-Spitzer era when analysts’ views were conveyed by signals other than their recommendations. This time around, you can’t blame investment banking for persistent bullishness. It is also hard to believe that analysts of the stature of a Mary Meeker would fear retribution from the companies they follow. No, blame human nature: it is hard to admit when you are wrong. This is compounded by the natural tendency to fall in love with some of the companies you follow. Google was an easy stock to love when it soared from $100 to $700.

The Spitzer settlement ends next August, and the persistent bullishness of analysts is one more example of how little it ultimately accomplished. This should be a warning as we go into another round of proactive regulation of the financial markets…

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