An ode to “anal”ysts – the hindsight players of the Financial World!

By Filipe R. Costa & R Jennings, Titan Investment Partners

It is interesting to note how fast some analysts from major banks and investment houses change their opinions regarding the assets they supposedly research. Of course, others, usually the brokerage house of a particular stock, commonly known as “the shop” stick doggedly to their view, even in the face of changing dynamics. Witness many of the names that have gone to the wall in recent years and where the house broker remains with a buy or hold stance. So much for their impartiality…

Many analysts in fact just add noise and volatility to investors’ range of possibilities and add absolutely nothing, nada, at the margin. This publication has opined at length on previous blogs and in a special magazine piece in the March edition of our magazine (see here page 26- http://issuu.com/spreadbetmagazine/docs/spreadbet_magazine_v14_generic) on just how useless they are in the conventional sense and how you can actually profit from this by doing precisely the opposite at extremes of group think.

In other words, in their traditional role, they just make it harder for investors to decide on the best trades to incept instead of adding valuable information. They’re a bunch of “after timers” and hindsight players. Worse than that, some even make make recommendations in the opposite direction of their employers actual actions (see here – http://www.zerohedge.com/news/2013-08-30/guess-which-bearish-bank-bought-record-amount-gld-q2).

It took but a matter of days for our old friends “the Squid” at Goldman Sachs to change their view on gold. From a recommendation that was supposed to be in the direction of an epic shorting opportunity in the gold market (their words), within mere hours gold moon shot by $70 on the FED decision to not taper. I thought an epic opportunity was something that could bring in a hefty profit, probably achieved with a 30% or 40% decline in gold prices, nothing like a $70 price change to the upside?!

But Goldman is not alone in this game. The guys from Bank of America also changed their recommendation on metals very quickly. They decided to close a short recommendation they had on silver, justifying their actions with the following words:

“The Wednesday Bullish Candlestick formations (Bullish Engulfing Candles) in gold and silver say that our bearish view on precious metals now incorrect. Indeed, this is supported by the US $ breakdown and the increasingly constructive environment for risk assets generally. As such, we are cutting our Silver Short and moving to the sidelines. Silver should see a test of long term resistance at 24.24/26.23, in the sessions and weeks ahead while gold should re-test its 1433, August highs. In both cases, watch trendlines at 23.20 & 1375. A close above confirms the bullish candles and upside trajectories.”

The above recommendation seems fine and indeed justified, were it not for the fact the short trade was put on September 4 with the following justification: 

“We have turned bearish silver following the series of intra-day impulsive declines from the confluence of long-term resistance between 24.78/24.97. It is now time to act. Initial downside targets should be seen to 22.44/31 (382% of the Jun/Aug advance and Aug-20 low), before making a push back toward 18.22. Sell Spot silver at 23.60, target 20.00, risking 24.55.”

This is the kind of disinformation investors don’t really need to buy. Particularly as very few people would have been able to profit on this “advice”.

Investment advice only works when it is forward looking. Analysts need to compile all available information for a market or asset in order to make a rational recommendation to their clients. It doesn’t mean they will be right all the time; just that they need to go through a thorough analysis aimed at identifying a mispricing which, in the end, is expected to result in a valuable recommendations to clients as this mispricing is corrected. Even when the analyst correctly identifies mispricing, sometimes the trade goes wrong, but in the long run the system is expected to give positive results. Basically, the analysts knowledge and efforts will bring some abnormal returns, thus justifying his hard work otherwise investors would be no better than simply throwing darts at a newspaper of stock prices.

Unfortunately, analysts as we know them today, don’t add any value with their analysis. Their recommendations aren’t forward looking and they usuall go in the direction of crowd trading, meaning they come too late to add any value whatsoever. They observe and react. They are the true value detractors of the financial world!

To be part of a fund that attempts to look through the smoke and deliver value through well researched trading and appropriate application of leverage, click the image below for more details on our Macro Fund. Our first quarter results will be released in a little over a week.