James A Shepherd of The Shepherd Investment Strategist describes the intersection of Madison Avenue and Wall Street as being the world’s most dangerous intersection. The evidence to back this up, at least as far as investors are concerned, is overwhelming. As long as stock investing remains the "in" thing to do, and advertisers are spending billions to reinforce that idea, stocks will be in serious trouble. As you read this, many of those who have lost the lion’s share of their portfolio, are still being convinced that their stocks will magically bounce back.
Two of the most heavily recommended stocks by Wall Street analysts, and two of the stocks most heavily owned by mutual and pension funds, were Enron and Tyco. If you had listened to the stories their analysts told, and watched commentators discuss these companies and believed the slick advertisements and press releases, you might have concluded these were great companies to put your money in. There is no need to dwell on the fate of investors who bought Enron stock based on Wall Street’s learned advice.
The financial analysts were excitedly proclaiming the breakup of Tyco into four separate entities as a brilliant move that would release the full "value" of Tyco for the benefit of shareholders. The same financial media is now bemoaning the fact the stock has fallen 50% since the original announcement was breathlessly released. This is the way things have always worked at the intersection of Madison and Wall Street.
During the final 5 years of the greatest bull market in history, the stock market exploded in value in spite of ever increasing and historically high price/earnings ratios. That run-up came as the result of stocks being purchased for the sole reason that in the future someone else would buy them for an even higher price. Wall Street came up with new and innovative ways to convince investors that the nonsensical highs reached with respect to P/E ratios, were no longer relevant. Their new reasoning was that sales or revenues were now more important in the new economy, and earnings were not, probably because many companies had no profits. Investors later learned to their sorrow that sales and revenue figures used to justify ever increasing values of many new economy companies didn’t exist either.
There is no doubt that many of the investigations now going on and ones that
are yet to be started will result in indictments, convictions, fines and for
some, jail sentences. This is not to imply that all who make their livings on
Wall Street are dishonest because they are not. But there are very powerful
motivators forcing Wall Street to act the way it does. Those motivators come in
the form of $ billions received in the form of salaries, commissions, fees and
bonuses. In the never-ending quest forever increasing sales at any cost, Wall
Street analysts and brokers, who are often supported by commentators from the
financial media, must, by necessity, produce new reasons to buy, or lose their
jobs. This has lead to a very creative set of almost subliminal messages that
constantly urge investors to "buy now before the market leaves you
behind". Among some of the more creative messages commonly heard are these;
"There is money on the sidelines, ready to go to work".
"Those problems are company specific".
"Being underweight in techs could be very costly for investors".
"All the bad news is now fully discounted".
"Stocks are fairly valued’.
"Valuations are the most appealing they have been all year’.
"Don’t be surprised to see the Nasdaq at 6000 by year’s end".
"We recommend being overweight in stocks".
"Underlying strength of the US economy will underpin corporate earnings".
"We remain heavily weighted in equities".
And last but not least, "they beat the street", meaning the company exceeded lowered earnings expectations for the quarter, usually by a penny, in spite of the fact the earnings were only a fraction of what the company earned a year ago.
Unfortunately a phrase that you will seldom hear coming from Wall Street is anything that remotely resembles their recommendation to SELL, at least until after it’s too late!
Wall Street’s ability to influence the media and to spend the vast sums required to promote their often misplaced advice and expertise has become a very powerful and often overwhelming influence on investors’ decisions. However it should be noted that a substantial amount of their advertising message goes into explaining why their current recommendations are going to be correct even if their previous ones were not as in the Enron and Tyco examples. Unfortunately Wall Street’s powerful ability to influence the vast majority of investors leaves their clients in a situation where they miss important and major changes in the market's direction and hold losing investments far too long, for no other reason than they hope that someday they’ll get their money back.
This is the way things work at the corner of Wall and Madison and this is the way they have always worked. This is the reason there are wild swings in the market during which the public is either an expert at picking winners during a bull market or left with a feeling they never want to hear about stocks again after following Wall Street’s one-way signs and missing the turn. This situation has been exacerbated by portions of the media, which in the last 20 years have been purchased by companies, that have a vested interest in what their on-air personalities or their guests are saying.
Jim Shepherd has four strategies to profit in the current market. His first strategy has resulted in a 54% profit since the start of this bear market. His subscribers are awaiting his advice on implementing the next three. To see those strategies go to this link: