Why Analysts May Stop Covering Individual Stocks
Published: Monday, 2 Jul 2012 | 1:51 PM ET
By: John Melloy Executive Producer, Fast Money & Halftime
With markets continuing to move in lockstep to every headline out of Europe, China or the Fed, the days of individual stock analysts may finally be numbered.
“There is an old saying about analysts among the gray hairs of Wall Street: ‘In a bull market, you don’t need them, in a bear market, they’ll kill you,’” said Nick Colas, chief market strategist at ConvergEx Group. “And in a flat market, it seems, both apply.”
After a 12 percent surge in the first quarter, the S&P 500 then gave up all those gains in the second quarter as another seemed to be in jeopardy.
While the market is back up on the year after a rebound in June, fears of a China Slowdown, an ornery German leadership and an uncertain November Election continue to overhang the market.
With most stocks moving on these big picture headlines, rather than their individual merits, it’s made the job of a single-stock number cruncher that much more difficult.
“In this type of situation, it doesn’t make sense to spend time analyzing details of specific companies when most movements are lockstep with the prevailing risk appetite,” said James Iuorio, managing director at TJM Institutional Services. “This type of trade should continue as global markets work their way through unusually large event risk.”
Analysts have had seismic headwinds against them for more than a decade now: from the stock-research scandal in the early 2000s, to the boom-bust nature of the market turning off baby boomers, to the explosion in hedge funds , to the ETF-ization of the marketplace.
“The nail went through the industry’s heart years ago as Wall Street research morphed away from variant and hard hitting analysis to maintenance research,” said Doug Kass of Seabreeze Partners. “(Former New York Governor Elliot) Spitzer’s legislation was the catalyst for the exodus of many of the better sell-siders into the hedge fund industry and then the Great Recession of 2008-09 uncovered their worthlessness.”
To be sure, many investors said that markets can’t move forever on the whims of central banks. At some point in the future, individual stock picking and research is bound to matter again.
The question is, how long will that take? Investment banks and boutique firms can’t keep low-margin research businesses going forever, especially with the proliferation of free content on the Internet.
“The impact of the internet is not given its fair due in this issue,” said Enis Taner, global macro editor for RiskReversal.com. “Universal access to stock-specific content and research has made the brokerage shop’s analyst research much more commoditized. In my personal investing, I much prefer reading the direct sec.gov 10Q or 10K release of the company than the filtered research of the stock analyst.”
Sounds like a CSInvesting reader, doesn’t it?