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December 05, 2004
Why we don't need Analysts
The world is a very complex place and as chaos theory suggests, a minor event in one part of the world can trigger a chain of events causing huge events in another part of the world. Still, I try and boil things down to simple a term, which usually causes trouble or at least gets Deb very frustrated with me.
Take the stock market, for example. The Market reacts less to a company’s actual announcements than what the analysts think the company will say or do. For example, if LexCorp’s analysts think they will post double-digit sales increases for the fourth quarter, but Lex Luthor announces he’s only managed eight percent sales increases, he has failed the expectations and the stock drops.
What people aren’t focusing on, in my opinion, is that LexCorp increased sales eight percent. That’s positive news and news that, without the analyst’s guesses, would have sent the stock up.
Given the economy over the last few years, any sales increases should be applauded, guesstimates be damned. Those companies, like Google, that have chosen to avoid forecasting the future, are to be commended and encouraged. Why project what the next year will bring when so many market forces are out of their control? Dock workers struck last year creating huge gridlock for imports just around the holidays. In January 2003, could J.C. Penny or Circuit City have any clue that would slow up deliveries and ultimately sales, forcing them to possibly miss their forecasts?
Analysts are little different than the touts at the race track and like Chico in A Day at the Races they can make a fortune selling the decoding books.
With that said, one of the chief headaches is always the guessing about the holiday sales season. Recently, in the days leading up to Black Friday, the theoretical busiest shopping day of the year, the analysts were assuming the season would show a 3-5% increase in sales. People had money to burn, were working, had their tax cut dollars at the ready and confident the government was stable.
By Monday it was clear the ballyhooed sales were lackluster. Friday looked good, because of the early bird sales, discounts and coupons. But the behemoth Wal-Mart staggered with sales increases of under 1% and others were little better. The papers were filled with stories about the stores were hoping to avoid price reductions this early but were forced to do something to get people back in the stores. Wal-Mart has picked 24 items to heavily push and came under criticism for previously discounting the wrong items, failing to understand their customer base.
The papers got so much mileage out of this because everyone listened to the analysts. Well, if I were employing these marketing geniuses, and saw they missed the mark that badly, I would question their effectiveness and worth.
I do not presume to understand all of America. The nation’s collective psyche is something I can’t fathom in a variety of areas. All I know is my household. We’ve shopped, we bought stuff on sale, and started in November to avoid the rush and have a nice selection. We’re one gift short of effectively being done and tomorrow I will ship all that needs shipping. Our household will be spending about what it spent last year (and the year before), mostly because we stretch our buying power with smart shopping. I didn’t need an analyst to tell me when and where to shop and I would think we’d be all better off if they just shut up and went away.
Posted by Bob Greenberger at December 5, 2004 03:06 PM
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Comments
I don't think that the shutting-up's going to happen anytime soon, for various reasons I'm not sure need going into at this point.
Not sure if this is related or not: If people in high corporate places are getting nervous because more of the rest of us are shopping more carefully than we were, then I suspect that we're going to have to be careful that they don't make their perceived problems reality to prove themselves to be Always Right.
Not sure if I'm right about this...
Dwight
Posted by: Dwight Williams at December 5, 2004 06:06 PM
Why do stock prices go down if they don't meet analyst's predictions, even if they're generally positive? Because the price of the stock already reflected the expectation that the analyst prediction would be correct. Thus, Lexcorp's stock was already mostly, if not completely, priced assuming their profits would be up by 12%. So when it turns out that they're only 8%, the price readjusts to reflect the actual reality as opposed to the predicted reality.
On the other hand, given the manipulation, inaccuracies and laziness shown during the period from when Google announced its IPO to the actual IPO, my opinion of financial journalists dropped down to close to zero. Look at the actual numbers (and how they're obscured) as opposed to what people are writing about them, taking into account the public image only so much as it's affecting the price one way or the other.
Posted by: Tom Galloway at December 5, 2004 10:14 PM