Analyst target prices

Useless, according to Anthony Klan.

That is because the analysts who set them are highly compromised by the companies they cover, according a leading fund manager.

Challenger Financial Services Group equities head Peter Greentree said analysts were reluctant to report sell share recommendations for fear of access to briefings and internal company documents being revoked.

That's somewhat anecdotal evidence - so what about the more rigorous analysis?

Brav and Lehavy have a paper in the Journal of Finance that finds a significant market reaction to the information contained in analysts' target prices, both unconditionally and conditional on contemporaneously issued stock recommendation and earnings forecast revisions. Using a cointegration approach, we analyze the long-term behavior of market and target prices. We find that, on average, the one-year-ahead target price is 28 percent higher than the current market price.

Taking a different approach, Mark Bradshaw finds that target prices tend to be used to justify analysts' stock recommendations.

Regulating the ratings agencies

Well, that's the proposal, anyway. John Durie isn't convinced. Here's what he sees as the nub of the issue:

The real problem is the inherent conflict of interest in the rating agency model, because the person who wants the rating pays for it.

In the midst of the inquiries into ratings industry, according to The Economist, emails were discovered where one analyst, when asked why he was rating a bit of toilet paper, replied: "We rate everything, even if it is structured by cows we rate it."

If someone will pay you to rate their paper and that's your business, then you rate it.