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Full of Bull: Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio Excerpt from Full of Bull: Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio

by Stephen T. McClellan

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Wall Street Is Blinded by Optimism

Wall Street is even less help to you as an individual investor in a bear market than during bullish times. Investment banks are sales organizations, not investment advisory firms. Besides, as we saw in 2007 -- 2008, their record of managing their own risk has proven to be pathetic. Brokerage-firm investment advice rings hollow and lacks credibility in light of its own risk-management record. Wall Street fortunes and the stock market are interlinked. The market never does well when investment firms are reporting red ink, mergers, extensive layoffs, and plummeting bonuses.

The poor Street performance in forecasting earnings in normal times is even less reliable during economic downturns. Analyst earnings estimates lag behind reality, and trail downward only after companies report their quarterly earnings and lower their guidance. Even amid a deep recession, estimates almost always reflect pie-eyed optimism and anticipated improvement in the next year.

Stock recommendations are similarly worse during a bear market. Sell opinions are scant, late, and of little help. Timely advice to Sell, move into cash, and preserve capital never emanates from Wall Street. Only after it was glaringly evident that Lehman Brothers was about to capitulate in September 2008, and the stock had cratered to around $7 from over $80 the prior year, did the three biggest firms on the Street finally get around to downgrading their ratings. Likewise, a couple of brokerages did not downgrade recommendations on General Motors to Sell until late 2008 when the GM stock price had already eroded from over $40 in the prior year to well down into single figures. One of these firms had a Buy rating on GM until it had withered to $24, when it shifted its rating to Hold. Citigroup moved its opinion on GM to Hold in May 2008 after the shares had fallen to under $18. It finally threw in the towel and moved to a Sell when the stock fell below $8. It was as if these firms forecast that the Titanic would sink only after observing its bow end jutting straight up into the air. Thank you very little. It did not take rocket science to see that the auto industry would tank after oil prices skyrocketed, consumer spending on discretionary items stopped, and the economy started collapsing.

During bear markets Wall Street optimists concentrate on bottom-fishing, recommending stocks that have fallen far enough to appear as good values. This is tantamount to encouraging investors to catch a falling safe, as described in the preceding chapter. A full-page ad by a leading brokerage firm, nine months into the 2008 bear market, hailed: "Our analysts are bullish on companies in . . . healthcare, consumer staples, and on companies creating innovative technologies in energy and agriculture." Its Chief Economist was featured in the ad saying, "The U.S. manufacturing sector is on its best competitive footing internationally in 30 years." In February 2009, 16 months into the bear market, its ad flashed: "Defensive investing does not mean staying out of the markets. Look for conservative opportunities." And it teased investors with, "The markets will see less volatility in 2009. When volatility goes down, the markets do tend to rally." Even in one of the worst bear markets since the 1930s, the Street wants investors to purchase stocks, rather than protect capital.

The above is an excerpt from the book Full of Bull (Updated Edition): Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio by Stephen T. McClellan. The above excerpt is a digitally scanned reproduction of text from print. Although this excerpt has been proofread, occasional errors may appear due to the scanning process. Please refer to the finished book for accuracy.

Copyright © 2010 Stephen T. McClellan, author of Full of Bull (Updated Edition): Unscramble Wall Street Doubletalk to Protect and Build Your Portfolio