A Most Helpful "Call" Today

Jon and I come from different sides of the Street.  No, I didn't grow up with Paris Hilton style amenities while Jon lived in a shack, nor vice versa.  Rather we come from different sides of Wall Street.  You see, Wall Street has a "buy side" and a "sell side".  These aren't north, south, east or west, but rather a metaphor for two functions that a Wall Streeter may find him or herself primarily engaged in. 

A "buy sider" works for a "money manager" which may be a mutual fund, hedge fund, or other portfolio manager.  A "sell sider" works for a firm which services the buy side by providing trading, clearing, research or other such information that helps the money managers make or execute their investment decisions.  In other words, the buy side tends to buy services from the sell side.

There has always been a friendly rivalry between the two sides.  Buy siders like to chastise the sell side for peddling lots of worthless information that they sell to everyone including your competitors.  Sell siders like to lament the ivory tower attitude and egos of the buy side, often enduring tirades from angry fund managers too full of themselves to accept blame for their own bad decisions.

What does this have to do with a helpful call?  Relax, I'm getting there.  You see I read lots of research from both sides of the Street (a lot of it is free on the web if know where to look).  A change caught my eye regarding a big financial services company I will call "Finco".  Finco like many financial companies has been severely impacted by the credit crisis.  A sell-side analyst lowered their "target price" which is the price they think the stock is worth by over one fourth today.  The problem is that Finco trades at about 14% below this new target price, down over 70% from when the crisis began.  Many sell-side analysts (and I am not singling anyone out here) keep publishing lowered target prices to keep pace with the plummeting value of Finco.  Thank you, Captain Obvious(es)!  (In fairness, there are quite a few highly respected buy-side firms owning this stock too).

Now if analysts who do nothing but follow financial company fortunes failed to recognize Finco's troubles last summer, or last fall, or during the winter, or this spring, why on earth would I think they understand it now?  As far as I know, Finco could go to $0 as easily as it goes to back to where it was.  And that's the point, we don't know.  Yet both sides of Wall Street create an air of certainty out of predicting the immediate future and sell that to investors of all levels.

Now, it is no secret Finco's true worth is controversial.  Surprisingly, Finco is falling considerably today as I write.  Why?  Apparently, the deteriorating fortunes of Finco are in fact news to many investors even after a 70% fall.   This means, of course, that the "smart money" may not be so smart after all.  Didn't I say this was a helpful call?  The crisis probably hasn't hit the bottom yet if many investors still think the upside in financials is just around the corner while unexpected bad news continues to suprise them.  In my opinion, this is a classic case of over-optimism and inattentional blindness, the latter being where people fail to notice stimuli appearing right in front of their eyes.  Ironically, that's why I consider this a helpful call today.(*This is NOT investment advice; Past performance is no guarantee of future results.)