In the 1970's and early 1980's Henry Kaufman was a managing Director at Salomon Brothers. His interest rate and money supply forecasts moved markets. There were few other market moving indicators at the time and even fewer market gurus.
This is no longer the case. As more and more predictions were made, the frequency of error increased until we were left with economic predictions almost consistently wrong. Talking heads proliferated. The economic forecasts took on the air of Ladbrokes Betting Parlor.
Some of the guiding lights of investment vision have been the government's announcements of Indicators; GDP, PPI, CPI and employment numbers to name a few. The markets react to these numbers, at times with huge price swings. But the following month the government comes out with a new set of corrected numbers they call the revised numbers. They are often dramatically different than the original numbers and the market again reacts strongly to these revisions. One would have to ask why not omit the first set of numbers and just wait for the revised and more reliable set.
The ADP Corp. has been entertaining Wall Street with it's monthly predictions of what the national employment report will be when announced by the government. Since they have begun their predictions they have become infamous for being so far off the mark, however they are still able to move the markets with their gems of prescience. Wonders never cease!
With the proliferation of computers, the advent of the Internet and eventually the arrival of all day business shows like the Financial News Network, later to become CNBC, the amount of information available increased exponentially.
Program trading greatly increased the movement of prices and the amount of trading volume. The Golden Age of the wirehouses began. Banks, Brokerage and Insurance companies combined. New products to sell to the public appeared daily. Vast departments were established to devise new and enticing financial products. There were product wholesalers touting their wares to anyone who would listen to them. The one thing all these things had in common were the best interests of the brokerage house first and foremost.
There were industry analysts, technical analysts, equity strategists and chief investment officers. Frequently with differing opinions at any given time, but a win-win for the brokerage firm. They would eventually march out whichever adviser was right and proudly display his incredible acumen for all the world to see, conveniently ignoring the other highly paid individual who happened to be as wrong as an ice storm in July.
Analysts making $20M annually now appeared on the scene. Investment bankers that brought companies public were now making hundreds of millions of dollars annually. The problem, as we all know from recent history, is that their methods were not above board. The walls separating investment banking and equity analysis became virtually non-existent. The Investment Houses broke so many laws that at least one of them should have been charged under the RICO Act.
There is little need for wirehouse research. Poor research and the easy abundant access to information, have greatly diminished the role of the sell side analyst. This research really only serves the brokerage house as a value added feature. Eventually the public and the industry have come to rely more and more on the forecasts the individual companies would make regarding their prospects and performance.
The Attorney General of Massachusetts announced today that he had subpoenaed two of the largest brokerage houses for information regarding their dealings with New Century Financial Corp., a sub prime mortgage lender. A potential case of slanted research and conflict of interest. Familiar territory…
