Thursday, June 26, 2008

Difficulty in calling for a major reversal

Global analysts do not seem to learn quickly enough. When bulls stampede, it is alright to recommend a sell, since clients do not mind taking profits and would still thank the particular analyst who recommended the stock or trade, even if the stock price momentarily went higher because of buying momentum after the sale. However clients’ reactions would change if the stock instead of retracing lower, unexpectedly storms up much higher.

It is difficult to call for a major reversal of fortune while a major bull market is still heading higher. Think of the various renowned investment strategists and analysts of global investment banks who kept calling for a major reversal and failed miserably over the past decade.

Therefore in a bull run, one seldom recommends anyone to sell, unless one is really certain that the market will plunge.

However if global analysts think that it would be easier to call for a major reversal during bear markets like in the prevailing situation, perhaps they have much to learn, as some have recently found out to their chagrin. (Refer Bloomberg reports dated June 25, 2008) Rich and angry clients, who lost a lot by following your stock recommendations, are not easy to pacify even with repeated apologies, and most happen to know your bosses!

Therefore, if analysts value their jobs, they cannot simply call a buy without understanding the strong bearish undercurrent in a market or a sector where stale bulls dominate waiting to cut losses at best and where jittery banks start to pull the carpets right off margin players without any leeway given.

In their haste to call buys in the current bear market(s), perhaps they have forgotten the gloom and doom of subprime mortgages, the resultant credit crunch, the sudden but foreseeable withdrawal of credit by banks which literally lost tons of money, rising food and oil prices, the consequent plunge in consumers’ confidence and the similar fall in appetite of equity investors.

What had happened in Australia is happening elsewhere. Some top analysts have lobbed off the target price of the previous recommended stocks by fifty percent in less than a few months, since the particular stocks have plunged by more than that percentage. And if these same analysts ever think their global firm’s rich clients are going to stay happy and quiet over such huge losses, they must have gone bonkers. With global investment banks retrenching staff, analysts who made devastating wrong calls could be among the first to go.

If you happen to be a stock analyst and want to be a hero during a bear market, by calling for a major reversal, prepare to lose your well paid job. Even if you have not heard about Laozi and Confucius teaching those who listen not to be brash, you must have heard of the proverbial saying that ‘heroes die young’?

If you really want to learn how to correctly call a major reversal of fortune, try studying the Book of Changes (Zhouyi) and understand change. Perhaps then, analysts can put their analytical and research skills to better use.

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