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« Getting beyond the Rhetoric | Main | This looks good, too Good »

February 27, 2008

Comments

Bill aka NO DooDahs!

If you read Cramer's first book, a large portion of his hedge fund's activities were based on the fact that up(down)grades are positive(negative) in the short term. They called it "dialing for dollars," calling the analysts and providing them information and analysis about the stocks that Jim's fund was long(short).

It's essentially a "pump and dump" scheme, but since it wasn't directly aimed at buyers(sellers) through paid advertisements, but done third-hand through analysts who up(down)grade the stocks (which are then bought(sold) by others), it appears to have been perfectly legal. I'd have to check my copy of "Confessions of a Street Addict" to see if Eliot "Clean up Wall Street" Spitzer was still associated with the fund at that point of the book.

The fact that analysts' strength of opinions is long-run contrarian is basically another measurement of the "value anomaly."

SBG

Jeff love the blog and the concise way you sum up your points. You last paragraph

"It is a matter of time frames. The immediate effect of downgrades is negative. The longer-term effect may well represent an opportunity. The short-term trader might act one way. The investor might see a good risk/reward situation."

Raises a good point and perhaps is a topic you could consider writing about in the future (if you haven't already). The individual investor has a hard time discerning between the interpretation of information in regards to time frame. The short term trader's market analysis can differ vastly than the long term investor's.

Christopher Tinker

Jeff, I think your points about the CNBC influence are spot on. However, one of the unintended consequences of this has been that CNBC et al. now take it upon themselves to presume that ALL price action is news driven, all the more so when the news is market created in the form of Recommendations. One of the funds I talk to here in the UK has done a lot of work in this area and uses a "half life" concept for broker recommendations; Broker X's recommendation has a half life of 3 days, broker Y has a rec. half life of a few hours during which it has a realtime price impact. From my own standpoint, I operate a market timing and valuation system that takes broker forecasts for earnings, sales cash flow etc. and uses them to model market knowledge in relation to value and risk. It explicitly ignores the rec. which is normally of no value added over any meaningful investment horizon. In other words I take what the analysts do well in terms of their spreadsheets and leave behind what they do badly as regards target prices and recommendations. The advantage is that hoardes of B grade students can run (at someone else's expense) consistent spreadsheet models of company info and standard sector/ market level growth models from which one can "model" what the market knows about a stock and hence what the share price currently reflects in terms of fundamentals and the risks associated with them. Target prices and expected return alpha can then be calculated daily and used in conjunction with one's own Macro views etc without the need for recourse to the sentiment views of individuals whose recommendation agenda has very little to do with making an investor money.

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