Sunday, February 10, 2013

Deep Thoughts (Weird, Weird, Weird’s Sunday Metaphysical Musings) Why Do Analysts Herd?

From the NY Times: Last September, Apple shares hit a record $705. And to the overwhelming majority of Wall Street analysts, that meant one thing: buy.

By November, with Apple stock in the midst of a precipitous decline, they were still bullish. Fifty of 57 analysts rated it a buy or strong buy; only two rated it a sell. Apple shares continued their plunge, and this week were trading at just over $450, down 36 percent from their peak.

So how could professional analysts have gotten it so wrong?  It wasn’t supposed to be this way. A decade ago, Congressional hearings and an investigation by Eliot Spitzer, then the New York attorney general, exposed a maze of conflicts of interest afflicting Wall Street research. There were some notorious examples of analysts who curried favor with investment banking clients and potential clients by producing favorable research, and then were paid huge bonuses out of investment banking fees. Many investors and regulators blamed analysts’ overly bullish forecasts for helping to inflate the dot-com bubble that burst in 2000…..

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