Wall Street Analysts

25Apr10
These are quotes from “THE WATCHDOGS DIDN’T BARK: ENRON AND THE WALL STREET ANALYSTS“. It is extremely interesting read, though 174 pages long. Some parts which I have highlighted are amusing to say the least. These are quotes from the report.
By mid-October, the picture had deteriorated somewhat, but still not to the point where we believed that a downgrade was justified. On October 16, Enron did report a third quarter loss of $618 million and took a $1.2 billion charge to shareholder equity I should say. However, at the same time they reported a 35 percent increase in its core business, and even though this release was made in the morning, the stock closed the day up 2 percent. Nevertheless, during the next week, we saw a developing crisis of confidence. It was fueled by negative press coverage, Enron’s disclosure that the SEC had launched an informal inquiry, and Enron’s failure to address the resulting investor concerns head-on.
On October 24, I downgraded Enron’s rating from a ‘‘buy’’ to a ‘‘long-term buy’’ and removed it from our company’s focus list. Let me just clarify this point. A ‘‘long-term buy’’ does not mean that the stock would be a good investment in the near term. Instead, the rating tells my institutional clients that the company is facing near-term challenges that, once resolved, should allow the stock to outperform its peers. (What a definition for “long term buy” !!)
– ANATOL FEYGIN, SENIOR ANALYST, JP Morgan Securities


Beginning in October, Enron began to make public disclosure of the transactions and financial restatements and writeoffs that eventually led to its bankruptcy. I made timely reports as the significant facts were announced. On October 16, I noted Enron’s decision to take $2.2 billion in charges, but reported that the charges, as described by Enron, did not relate to its core merchant energy business. Accordingly, I continued to rate the company a ‘‘buy’’ with a ‘‘high risk’’ rating. On October 19, when the stock was still trading at over $32 per share, I issued a report which noted that the company’s ‘‘complex off-balance-sheet vehicles have raised concern,’’ and that there could be further writeoffs, and I was also concerned that Moody’s had put the debt on review for a possible downgrade, but that we were still evaluating these issues at that time. Later that day I issued another report, again raising concern about their off-balance- sheet financing, and again about the uncertainty and magnitude of potential writeoffs of the company. I downgraded my rating to 1S, or ‘‘buy, speculative,’’ on October 25, and lowered it again to ‘neutral, speculative,’’ a 3S rating, the next day. In my report that day, I noted that management had to address issues related to credit and liquidity, particularly the use of off-balance-sheet vehicles.

I fail to understand what does “buy, with high risk”, “buy, speculative”, “neutral, speculative” mean? Why should one buy a product when there is a high risk of failure? Do we read product reviews where reviewers tell us to buy a mobile phone, but there is a high risk it wont work? Why can’t that money be put to use to buy a safer stock? Why can’t an analyst recommend “Sell” or “Don’t buy”?
-RAYMOND C. NILES, SENIOR ANALYST, CITIGROUP SALOMON SMITH BARNEY
But let me cite the Bethany McLean article in Fortune Magazine in March 2001, very direct, strong questions about Enron’s viability. At least one analyst, Mark Roberts, of Off Wall Street Consulting Group, May 2001, which is an independent research firm, diagnosed the problems with Enron in a research report that was printed on the Web and talked about shrinking profit margins, raised questions about Enron’s related party transactions, even identified one dark fiber transaction as being used to exceed earnings expectations for two quarters in 2000. In additional reports in July and August of last year, he raised concerns that Enron was relying even more heavily on related-party transactions and that Enron’s cash flow from recurring operations and return on capital was poor as compared to its competitors. Finally, he noted that insiders at Enron were selling like crazy, then put together the growing media concern during last fall about Enron with some specific allegations being made in articles and places like the Wall Street, and the beginning of the SEC investigation. And yet the four of you—and, in fact, by  our calculation, about two-thirds of the analystson Wall Street who were really focused on Enron continued to recommend a ‘‘buy,’’ to say the other obvious fact which I haven’t mentioned, the stock price was dropping significantly over the period of time. So the obvious question is: Why? And why shouldn’t we or average investors feel that you were not really doing independent analysis but that you were affected by the fact that—by either of the factors I mentioned: One, that you got too close to Enron; or, two, that your firms were benefiting from ongoing business relationships with Enron?
-Judge to the 4 wall street analysts present
Senator THOMPSON. Well, I understand that. But let me give you a cross-check on the other side of the ledger. Mr. Feygin, I was looking here at a clip from the London Times, March 21, 2001, where it says J.P. Morgan reins in analysts. It says that the independence of J.P. Morgan’s stock research is being questioned after analysts at the U.S. investment bank were instructed to seek approval from corporate clients before publishing recommendations on those stocks. In a memorandum circulated to J.P. Morgan analysts last week, Peter Houghton, head of Equity Research, said that he must personally sign off on all changes in stock recommendations. In addition, the memo further sets out rules described as mandatory, requiring analysts to seek out comments from both the companies concerned and the relevant investment banker, J.P. Morgan, prior to publishing the research. He says, ‘‘If the company requests changes to the research note, the analyst has a responsibility to incorporate the changes requested or communicate clearly why the changes cannot be made.’’ So it looks to me like J.P. Morgan is telling their analysts that they have got to get a sign-off from the company they are analyzing and the mortgage banking side of the operation before they can make any changes.
There cannot be a more pointed opinion than this!
– Judge to JP Morgan Analyst

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