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The Conspiracy Letters
Join the fray! Email us at letters@poorandstupid.com. We reserve the right to publish all letters with authors' names, unless specified as not for publication or for publication anonymously. Letters may be edited for clarity and brevity.
Friday, November 22, 2002
TAINTED, REDUX In reference to your interchange with Mr. Buxbaum, I believe his distinction was not made clear.In most consumer advertising, the product is known by all to be consumable. Once purchased, the product is used, or used up, and no other expectation is made of it (e.g. you buy the potato chips, you eat the potato chips; you don't go back to the bag the next day expecting more). Stocks, like all collectibles, are not consumed, and are (obviously) expected to retain their value tomorrow or the next day. We expect their appraisal (i.e. the research) to be honest, and to reflect the demand/desirability of the market.
In the idealized world, to equate "research" with "advertising" is to equate the Getty Museum with the Franklin Mint. It is a sad state of affairs that "Wall Street Research" as become the equivalent of an advertisement in the Sunday Paper Magazine insert.
Incidently, the "collectible" analogy to stocks has been extremely apt the past few years. The sobering example I give is a friend of mine, a philatelist, who has a stamp which is one of four in the world, over a hundred years old. In the late 60's, it was "worth" over $50,000. It is now "worth" less than $200. Its "fundamentals" have not changed, it's just that collectors are no longer excited by the particular genre (a civil war "wages" stamp, I think). Similarly, if a particular "sector" was no longer exciting, then the "value" of the "stocks" dropped...
Tracy R. Hall
Posted by Donald L. Luskin at 5:18 PM |
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TOO FAR In your blog today "Responding to treatment" you say, "Next thing you know, the 'regulators' will start going after real criminals."
OK, Don. Now you have gone to far. If they go after real criminals they are no longer regulating. ;)
Mark da Cunha
CapitalismMagazine.com
Posted by Donald L. Luskin at 5:16 PM |
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CONCEITED, DISHONEST... WHERE DO I BEGIN? New York Times columnist Paul Krugman is still way off the deep end -- see today's. I work in the trust world and see the stultifying effects of taxes on the availability of estate capital firsthand. His citation of Krueger's findings as support for estate taxation as a means of expanding social mobility is ludicrous. And his romantic defense of Camelot is incredible. His utter inability to critically assess his own beliefs is quite amazing. He's clearly indifferent to the fact that every op-ed he writes ends with some sort of lighthearted qualification of the strong, albeit cynically or sarcastically stated beliefs with which he opens. Sorry to vent. A lot of people love this conceited, dishonest charlatan.
Anonymous
Posted by Donald L. Luskin at 10:11 AM |
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Thursday, November 21, 2002
STRUCTURALLY DISHONEST I read your column today (Tainted Research? Tainted Journalists, National Review Online 11/20/2002) about media accountability. I don't think your argument is terribly persuasive, even to someone like me who comes at all of this from a Forbes-magazine capitalism-is-king perspective. Admittedly, you've chose a difficult task: defending sell-side analysts. But I'm not sure the comparison to business columnists holds up.You're absolutely right to say that Gretchen Morgenson functions as an independent analyst and that she made a bad call on AT&T. However, unlike Grubman, she is not tainted. The New York Times does not tell her which stocks to recommend. No cash changes hands. There are no alterior motives. Her reputation depends on her ability to get the story right. Her readers will ultimately decide whether her advice is worthwhile. But in the meantime, she is not tainted, and not hiding anything.
Grubman, however, presented himself to thousands of Salomon Smith Barney brokerage clients as an unbiased source. His reports were delivered directly to individual investors by their brokers, and many took his advice. But despite his imprimatur of objectivity and independence, he made calls based on the whims of the investment banking business, his kids' preschool choices, Citigroup boardroom alliances, and we'll see what else -- but unlike Morgenson, whose allegiance is to her readers, his was not to SSB investors. That's the problem here. And while it's a mistake to completely scapegoat Jack Grubman -- he was just doing his job, even it was structurally dishonest, something needs to change. Now that all these revelations are out of the bag, investors will know not to trust any buy-side advice. But during the 1990s, the brokerages bear at least some responsibility for misleading investors by not disclosing the conflicts of interest that compromised their formally objective stock picks.
David Whelan
Posted by Donald L. Luskin at 6:50 PM |
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LIE DOWN WITH WEASELS... Bravo on your Morgenson piece (Tainted Research? Tainted Journalists, National Review Online 11/20/2002) . I am just a small investor (who also happens to be a journalist, but not one covering business). I firmly disagree with your point that small investors simply should know that all research is tainted. Still, I am glad that someone, somewhere had the guts to take Morgenson on. She writes so smugly, it is sickening. I, too, remember her AT&T piece. The fact that she doesn't have the guts to deliver a clear, straightforward mea culpa speaks volumes. It makes her no better than the weasels she's always writing about.
By the way, if I am not mistaken, I believe she was the spokeswoman for the Forbes 1996 presidential campaign.
Anonymous
Posted by Donald L. Luskin at 12:52 PM |
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MISTAKE VERSUS LIE Your column in the National Review (Tainted Research? Tainted Journalists, National Review Online 11/20/2002) on Gretchen Morgenson misses the entire point of the Grubman affair. Gretchen Morgenson may have recommended AT&T as an investment, but she did so because she sincerely thought that the stock was a good investment. Jack Grubman apparently recommended AT&T in order to suck up to his boss, keep his pay high and get his kids into an elite preschool.
The evidence suggests he did not think the stock was really worth buying. The difference is between a mistake and a lie. Intent is what distinguishes an error from fraud. No one is claiming to be perfect, and I don't think we want to pillory people for having an opinion and expressing it. But that does not mean we should give a pass to people who cynically mislead investors for personal gain. That is, has been and should continue to be a
crime.
Mark Stein
Posted by Donald L. Luskin at 12:36 PM |
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DIALOG ON RESEARCH, MEDIA AND ADVERTISING Michael Buxbaum [11/20/2002]: What does research tell the researcher? Does it tell the researcher that one company is better to invest in than another? If so, don't other researchers find out the same thing and, next thing you know, everyone is being advised to invest in the same companies? Is there really some competitive advantage to be had by some researchers over others? If so, why do the successful ones sell research instead of simply investing for their own account? I'd love to get some real answers. No one seems to be able to answer these questions.
Luskin [11/20/2002]: Research analysts are the advertising department of Wall Street. Please read my SmartMoney.com article on this: click here.
Buxbaum [11/21/2002]: Thanks. Your column is scary stuff.
1. One can say about potato chips: "They didn't make me thin, as WalMart advertised, but at least I enjoyed them." One cannot rationally say that about investments.
2. One does not lose a large chunk of pension cash eating potato chips. (Not even a lot of potato chips.)
On the basis of your proposition that "research analysts are the advertising department of Wall Street," there is tremendous deception being perpetrated on the little guy. The little guy is too dumb or unsophisticated to discern that "research" is nothing more than unsubstantiated puffery cloaked in the guise of hard work ("we make money the old fashioned way; we earn it") or expertise (from Merrill Lynch's website: "Merrill Lynch's research expertise is at the core of the value proposition we offer our clients"). If what you say is true, brokerage houses are perpetrating something close to pure deception.
On the basis of your column, all stock research is inherently fraudulent, because it is promoted as something of inherent value when in fact it has no value. Kinda like "buy our car; our car is better because our advertising says it is." Do you really think mom and pop evaluate a Smith Barney commercial that way? Aren't mom and pop in fact encouraged to rely on their investment advisors?
I see Spitzer's point. I don't see yours. Keep in mind that basically the only reason people invest is because they believe the value of their investments will go up over time. Therefore, the only value in "research" is gaining some sort of competitive advantage in determining which investments will go up more and sooner. Any advertising claims regarding investment research must therefore be analyzed in this common-sense context. Are mom and pop supposed to hear various forms of the advertising claim "we have better research, so our 'Buy' recommendations are better" and take that to mean "we're just bullshitting you, there's no such thing as research that makes any difference"?
Man, you are a cynic!
Luskin [10/21/2002]: You are putting your finger on the point. Is investing somehow a "different" kind of product in some way, whose advertising must be especially objective?
I agree that it "feels" as though it should. But if you are rigorous about it, is there really any reason why it is different than potato chips, cars, perfumes, beers or all the other products that are advertised essentially based on the same kind of image deception? I can't come up with a principled answer for why it is.
At the heart of it, products of all kinds survive because they please people. Advertising helps them get to people, and helps people be pleased with them. But awful products don't survive -- advertising kills them quick. Stocks are basically good products. In all sincerity, I can say that all stocks have what academics would call a "positive expected return" at all times. So while the rationales may be bullshit, the essence is correct: it's the correct thing to do to tell customers that stocks are good. Over the long term they are.
Buxbaum [11/21/2002]: Yeah, there really is a principled answer. People don't lose their shirts buying consumer products. Stocks don't please people. Only the run-up in stocks pleases people.
Even assuming that "all stocks are good" (dunno about that one! Perhaps most stocks on the NYSE), why is that not the message? Why is the message "our recommended stocks are better" not false advertising for stocks the way it is for, say, car warranties or household cleaners, if it's really not true?
But I blame financial journalists, too. They make money by writing bullshit and yapping bullshit. And that's worse than movie reviewers, who yap bullshit that all of us know is nothing more, nothing less, than personal opinion. A financial journalist from the New York Times might lead mom & pop to conclude that the substance of the financial journalist's article must be true because of the paper it's written in. I think the National Review, on whose website your column on research and the media (Tainted Research? Tainted Journalists, National Review Online 11/20/2002) was published, constantly has that axe to grind, and rightly so, and that's what your column's about and that's why they printed your column in the first place!
National Review is acutely sensitive to the importance of the medium through which any message is transmitted. That's why National Review views "traditional media" with such disdain. Yeah, traditional media has a liberal bias, but why should that make any difference? National Review has a conservative bias, after all, and everyone has an equal right (and maybe even an equal opportunity) to get a message across, biased or not. Would you say to National Review: "Hey, lighten up, don't worry that something you don't like is in the Times, readers ought to be able to evaluate a Times financial reporter's message just as easily as a Merrill Lynch website claim or a TV ad for motor oil"? You'd be depriving National Review of one of its core messages -- that stuff had better be true if it's going to be in the Times. In fact, conservative hypocrites such as National Review would have nothing to snipe at if they took the attitude that "it's all bullshit anyway, so caveat emptor."
Luskin [10/21/2002]: I would point out that the National Review proudly labels itself the journal of the conservative movement. The NY Times, on the other hand, holds itself out as the "newspaper of record." Quite a difference in disclosure. I would also note that National Review is a free-markets response to the bias of the traditional media. They did it themselves, without Eliot Spitzer.
Posted by Donald L. Luskin at 10:39 AM |
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Wednesday, November 20, 2002
THE TWO FACES OF THE WSJ In your NRO article (Tainted Research? Tainted Journalists, National Review Online 11/20/2002) you write that "even the politically conservative Wall Street Journal is joining this media onslaught. Last week it took the lead by pillorying former Salomon Smith Barney teleco analyst Jack Grubman . . ."Politically conservative WSJ? To which part of the WSJ are you talking about? I have read the WSJ, either online or the paper version, for about 10-12 years. One thing that I have learned is that there are "two" WSJ's. The editorial page and the rest of the paper, with most of that being the front page (and section). The editorial page is conservative, while the front page/section is not.
Jeff Ford
Posted by Donald L. Luskin at 9:21 PM |
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UNINTENDED CONSEQUENCES Don, one of your best pieces, ever (Tainted Research? Tainted Journalists, National Review Online 11/20/2002). Just look at the unintended consequence of attempting to separate research from banking -- pink slips all over wall street research, every single day. You should look into this, mind-blowing how good analysts are getting the hook.
Ken
Posted by Donald L. Luskin at 9:12 PM |
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WHEW! Glad I ignored Grubman *and* Gretchen. Posting tomorrow.
James Romenesko
Romenesko's MediaNews
Posted by Donald L. Luskin at 9:09 PM |
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OPINION AS FACT I read your piece (Tainted Research? Tainted Journalists, National Review Online 11/20/2002) and agree fully with it! It's one thing for these talking heads to go on financial news to spout their opinions but at least (almost always) they inform you that they're expressing their own opinion. However, if we listen to the regular news, print and broadcast, they very frequently and intentionally pass off their opinion as fact without any such qualification.
Michael Lee
Posted by Donald L. Luskin at 1:56 PM |
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OBSOLETE ACCOUNTING STRUCTURES AT FAULT Financial journalists have been just as culpable as the Wall Street touts themselves. Just go back and read the cover stories of everything from Forbes to Fortune from 1990 to 2001. Of course an even larger problem is caused by the aftermath of deregulation in the 1970's which destroyed any leverage the analysts once had in Wall Street in having an independent point of view from the retail side.
And a coincidental problem no one talks about: once Wall Street "analysis" became PR for all practical purposes, the economy slowly morphed into a world in which computerization went from something easily quantifiable under the old economy as "office equipment and systems" into a new economy of its own. Today's FASB accounting rules are as useless as Yap Island stone deposits. For example, in a digital world, current deprecation allowances originally set up for machine tool investments in an industrial economy and intellectual property asset calculations outrageously underestimate the real asset value of companies that dominate in what is now more than 1/2 of the the US GDP.
It is easy to make PE ratios look astronomical in this environment. When is someone going to demand new accounting structures that will make it easier to do proper analysis of the prospects and achievements of these companies? Until they are established and generally accepted, there will still be reasonable excuses for the lousy work we suffer with today.
Tom Lipscomb
Posted by Donald L. Luskin at 1:19 PM |
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MORGENSON'S DELL SELL Great piece (Tainted Research? Tainted Journalists, National Review Online 11/20/2002)...try and get this published as an op-ed piece in the New York Times, but I doubt they'd have the courage to print it.
Those of us in the investments business know journalists have their biases. What surprises me is how someone like Gretchen Morgenson can pass herself off as an "analyst" and make stock recommendations to the masses. Want an even stronger example of her "analytical" work? Look at her article bashing Dell Computer on September 22, 2002, when the stock was around $24-25. This was such a strongly negative article that it made me wonder if she was short the stock prior to publication. Of course, the stock subsequently rose 20+%. Worse, Morgenson has no fundamental understanding of Dell's business model. She claims that the company's working capital has declined in recent years and that this is a big negative. To the contrary, this is the beauty of the Dell model and what the company strives for using its lean and efficient manufacturing and distribution system.
Anonymous
Posted by Donald L. Luskin at 12:47 PM |
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DAMAGE CONTROL AT ITS FINEST My take on the New York Times article you discuss (Tainted Research? Tainted Journalists, National Review Online 11/20/2002) when I read it on Sunday was that Gretchen Morgenson was taking direct responsibility for her bad call but she definitely didn't want to spend a lot of time on it -- that is, she was getting it out in the air in case an astute observer (like you) found the column but it was damage control at its finest. In this case, you are right, though. I hasten to add that we all made decisions in the bubble era that we have come to regret. Still, I am glad you make the point, it's quite valid.
Anonymous
Posted by Donald L. Luskin at 10:05 AM |
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MEDIA SHOULD BE HELD ACCOUNTABLE Congrats on your column today (Tainted Research? Tainted Journalists, National Review Online 11/20/2002). The media should be held accountable for puffing up Wall Street in the bull market. I mentioned your column on my blog site, The Capital Spectator, and linked to the article. Keep up the good work!
James Picerno
Posted by Donald L. Luskin at 10:03 AM |
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THE MEDIA ENEMY Thank you for the fine article (Tainted Research? Tainted Journalists, National Review Online 11/20/2002). I have been trying to make a similar point via comments to the Wall Street Journal and CNBC for some time. The "Crisis in Investor Confidence", and overblown stories like the Harvey Pitt controversy, (which, I can assure you, nobody outside the NY-DC corridor cared about in the least), attempts to camoflage the fact that investors have actually lost confidence in the business and financial reporting provided by the infotainment industry. The media has met the enemy, and it is them.
SB
Posted by Donald L. Luskin at 9:57 AM |
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Tuesday, November 19, 2002
GRUBMAN THE INDEFENSIBLE I don't know how to compare Ms. Morgenstern to Mr. Grubman, and I'm not going to try.However, having been a professional investment analyst and portfolio manager for almost 20 years now, and having first met Mr. Grubman way back in 1990, I do know something of his background. He's not the devil he's being made out to be, but . . . . . . .
1. Before coming to Wall Street as a telcom analyst, Grubman worked at AT&T. He left on bad terms and to the best of my knowledge Grubman had never had a positive recommendation on AT&T or a good word to say about the company, until he conveniently changed his rating after discussing the company with Sandy Weill. And Grubman was definitely, absolutely the kind of analyst who would hold a big-time grudge against a company, forever.
2. When an analyst who's hated a company FOREVER turns positive, it registers on Wall Street. Whatever Grubman's powers of persuasion were at the time, the dramatic change of opinion on the company he'd loved to hate made an impact on Wall Street.
3. Most professional investors I know and respect recognize that analysts at brokerage firms are highly conflicted. As a result, any changes in recommendation by a Wall Street analyst are always looked at skeptically. ALWAYS.
4. Most importantly, professional investors regularly evaluate and judge analysts based on the rationality of their analysis, the timeliness of changes made in earnings estimates, and yes, even the degree of an analyst's biases are subjectively rated. In this regard, my professional acquaintances have always considered Grubman to be one of the worst offenders in favoring investment banking clients in research calls.
He's not a bad person, necessarily, but he does have a temper and a huge ego, and compensation packages in the $20 million dollar range can certainly rot the brain of the undisciplined.
GH
Posted by Donald L. Luskin at 2:31 AM |
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