One day last week a high-tech company whose stock had collapsed from more than $170 to $3 and change in little more than a year, revealed that conditions were even worse than he had anticipated.
The company, Exodus Communications Inc., already had reported a first-quarter loss of $650 million, which was bad enough. But now it was running low on cash and its business was not recovering as expected.
If company officials, equipped with computers and software able to sop up every nuance in the marketplace, were caught unaware, their shock was matched by that of investors who had relied on information from “experts.”
The experts were brokerage house stock analysts, calculating types who earn six-figure annual incomes for dissecting the finances of companies they cover, issuing recommendations and, often, publicizing their firms. Many if not most of them had advised investors to buy Exodus. In fact, some had been so advising investors since Exodus was trading in triple digits. They indicated they had not anticipated Exodus’ dismal news. Within a couple of days or sooner, they rushed to cleanse the record. Salomon Smith Barney downgraded Exodus stock to “neutral” from “buy.” UBS Warburg cut its price target to $3 from $15. Lehman dropped its advice from “buy” to “market perform.” All after the fact.
Too often during the long decline in stock prices investors had observed the same thing: Buy recommendations on declining stocks from advisers who claim to see ahead. At one point when the Nasdaq composite index was down 60 percent, almost all recommendations were to buy.
For a marketplace that depends on investor trust and confidence the consequences could be deadly. Investors, portfolios depleted, now wonder if they were duped. Conflict of interest accusations have been made. Are analysts hucksters or advisers?Recognizing the dangers, the Securities Industry Association, a major trade group, has endorsed a “best principles” set of guidelines that it believes might quiet suspicions and restore confidence levels.
Among other things, the principles encourage a wall being erected between analysts and other, profit-seeking activities of their firms. And it would prohibit analysts from trading against their own recommendations.
But the principles are voluntary, and so might be insufficient to the task. Already feeling deceived, investors might be excused if they question soft discipline.
Whatever the resolution, the stock market’s confidence problem depends on assurance of a free flow of quality information as certainly as the welfare of society in general depends on a flow of good water. In the view of many, some of the information seems tainted if not plain polluted.
It begins not with Wall Street but with corporations and industries, where officials, though equipped with computers and software that sop up every nuance of the marketplace, still can’t forecast their own markets. In evidence, one chief executive officer after another — at Nortel, Lucent, JDS Uniphase, Xerox, to name a few — has conceded in recent weeks a failure to anticipate major changes occurring just weeks ahead. Analysts, then, might be forgiven for not having had insight superior to that of the company’s chief. But even if such insight were possible, the suspicions may remain.
The questions have been raised and the fears expressed that in one way or another the information that flows through Wall Street might emerge tainted. So tainted it isn’t to be believed.
John Cunniff is a business analyst for The Associated Press