[Vision2020] Not All Investors Are Equal

[Art Deco]

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July 17, 2012
Not All Investors Are Equal

In the Facebook
fiasco<http://dealbook.nytimes.com/2012/05/22/facebook-i-p-o-raises-regulatory-concerns/>in
May, brokerage firms that sold Facebook’s initial shares apparently
warned large investors about doubts from analysts regarding the company’s
prospects. Many ordinary investors who were not warned sustained
considerable losses. The Securities and Exchange Commission is
investigating the disclosures.

But what if it turns out that the selective release of views of analysts is
more the rule on Wall Street than the exception?

Gretchen Morgenson reported in The Times this
week<http://www.nytimes.com/2012/07/16/business/in-surveys-hedge-funds-see-early-views-of-stock-analysts.html>that
a handful of top hedge funds appear to be taking an early peek at
views from research analysts, allowing them to trade on the information
while other investors are still in the dark. The tips come from surveys
that the hedge funds send to research analysts, either monthly or
quarterly, asking about possible earnings surprises or the competitive
position, management or innovations of companies.

Among hedge funds using the surveys are those run by BlackRock, the money
manager; Marshall Wace, a large British hedge fund operator; and Two Sigma
Investments, an American hedge fund company. Among analysts that have
participated in the surveys are those from Citigroup, Goldman Sachs,
JPMorgan Chase, Merrill Lynch and several large European banks.

The funds say they ask only for information that analysts have already
expressed publicly, and some participating banks say their analysts follow
strict policies to keep their comments in line with their public views. If
the information is public, why do a survey? A BlackRock spokesman said the
surveys allow troves of data from analysts to be crunched with other data
for use in computerized investment models. But documents obtained by The
Times from Barclays Global Investors, now a unit of BlackRock, tell a
different story. Regarding information about analysts’ expectations for
earnings, a confidential memo from 2008 stated the firm expected “to be
able to capture the information not released to the market.” A 2009
document about the surveys said, “We are trying to front-run recs,” meaning
to trade ahead of recommendations from analysts. BlackRock says the wording
in the memos is sloppy, inaccurate and inconsistent with the purpose of the
surveys and the firm’s ethical standards.

Still, what if big investors systematically receive early word of important
company developments?

The answer, in brief, is that there are already more than enough reasons
that individuals shun the stock market. Serial booms and busts of the last
15 years have cast justifiable doubt on the conventional
wisdom<http://money.cnn.com/2012/03/02/pf/efficient_market.moneymag/index.htm>of
buy-and-hold investing. Serial scandals — insider trading, Ponzi
schemes, the flash crash of 2010 — have also eroded trust. At the same
time, the S.E.C. and other investor protection agencies must fight for
every penny<http://www.nytimes.com/2012/06/10/opinion/sunday/lost-the-vote-deny-the-money.html>from
Congressional Republicans who are hostile to the very notion of
regulation. Politicians of both parties, in thrall to financial-industry
campaign contributors, have supported
legislation<http://www.nytimes.com/2012/04/02/opinion/their-contributors-bidding.html>to
erode investor safeguards.

Trading by big investors ahead of recommendations from analysts would be
another example of the uneven playing field that markets have become — and
another reason for ordinary investors to shun equities.

The result will be a less robust market, a less robust economy and a less
wealthy society, as individuals are unable to mass the sums needed for
retirement. But until the stock markets are restored to health — with rules
and protections that are clearly understood and enforced — individual
investors have reason to be wary.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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