The Dot Com crash case study

Next week in class we're looking at the Dot Com crash. One of the things to think about: is there any parallel between that and the sub-prime 'meltdown' that led to the "Global Financial Crisis"? While you're thinking about that, here's a video of Emeritus Professor Sidney Winter, the Michael Crouch Visiting Professor in Innovation and Entrepreneurship at the Australian School of Business, in conversation with renowned US economist Dr Alice Rivlin.



If you can't see the video, click through here.

Analyst coverage and small cap firms - Australian evidence

Yep, happening here as well. The Australian reports.

It all suggests that the firms themselves see analyst coverage as important, notwithstanding the recent (& ongoing) criticism that securities analysts have come under. Assuming that research on small caps is informative, or that the visibility from coverage is beneficial, there's some scope for the market to fill the demand for small cap research.

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.

This one's got the lot

General Electic has announced its first quarter profits, and disappointed the market. The Wall Street Journal (as featured in The Australian) has the story. Some business analysis:

GE's results also shake another common Wall Street belief, that large multinational conglomerates have become safe stock market havens.
GE, which recorded more than half of its $US173 billion in 2007 sales outside the US, did post strong international results, but not enough to fully counter its problems at home.
"It's evidence that you can't offset declining US earnings by having operations in the rest of the world," said Sherry Cooper, global economic strategist at BMO Financial Group.

Some accounting analysis:

On the consumer-lending side, Mr Sherin said GE would likely increase loss provisions beyond the planned $US600 million for the year because of increased delinquencies.

Some discussion of the role of analysts:

One reason for Wall Street's surprise: GE usually works closely with analysts in giving guidance on where its earnings are likely to land. The company generally meets the consensus estimates of Wall Street analysts.
This time, the analysts were way off. Their consensus suggested GE would record earnings per share from continuing operations of US51c. Instead, the number was US44c, down 8 per cent from a year ago. Overall, GE earned $US4.3 billion ($4.6 billion), or US43c per share, in the first quarter, down from $US4.57 billion, or US44c per share, in the same quarter a year earlier.

And another example of the impact of missing analysts' forecasts:

The disappointing results put new pressure on Mr Immelt to shake up the company he took over six years ago. GE's closing share price of $US32.05 on Friday is 19 per cent below its level when Mr Immelt became chairman and CEO just before the September 11, 2001 terror attacks, although the share price is well above its 2002-03 lows.

Meeting analyst forecasts

Is still considered important. Here's a report about QBE who missed analyst forecast in their recent half yearly profit announcements. Share price dropped, as is usually the case.