Wall Street Analysts--Nobody Knows What the Hell They’re Doing, But the Pay is Great

Just a week ago, Intel (the chip-maker) posted quarterly earnings that shattered all company records for profitability and growth. Intel’s reward was to lose 12.5% of its stock value.

Just a week ago, Intel (the chip-maker) posted quarterly earnings that shattered all company records for profitability and growth. Intel’s reward was to lose 12.5% of its stock value.

Recently I wrote a piece about three other quarterly reports; two of them in the dumper and one doing OK. Guess what? The Dow rose 171 points on the basis of nothing more substantial than investors desperation for something to cling to in the rising waters of national economic disaster.

SAN FRANCISCO (AP Jan 16, 02) -- Intel Stock Hammered on Economy Fears--Shares of Intel Corp. fell more than 12 percent Wednesday, a day after the world's largest chip maker reported disappointing fourth-quarter results that investors saw as a sign the company is more vulnerable to U.S. economic pressures than many investors had believed.

My God, a quick look at that headline would send most investors to their broker to dump Intel before it tanks. What on earth could have so spooked the pundits that they got all twitchy and disappointed?

• True, Intel had $10.71 billion in sales during the latest quarter, which was an 11 percent increase from the period a year earlier—a sure sign of weakness
• There’s no denying they posted a profit of $2.27 billion for the three months ended Dec. 29 and management apologizes that, compared with $1.5 billion during the same period a year earlier, profits are up only 50%--pretty shaky
• Embarrassingly, gross profit margin (gauged by how well a company manages pricing and manufacturing costs) came in at 58.1 percent of revenues—apologies are due for the increase.

So, if I have this straight, in a market where things are going to hell everywhere you look, Intel lost about an eighth of its value because the best numbers in company history were not good enough for the experts from this or that investment firm.

The same guys who were out to lunch or on a yacht with their girlfriend, while their own employers swindled their way to the worst economic disaster of this young century, devalued a worthy firm because it missed their Ouija-board projections by two cents. These geniuses had Intel marked down for a forty cent dividend and got thirty-eight instead.

The increase was driven by higher sales and lower costs of producing chips.

Intel is ahead of its rival Advanced Micro Devices Inc. in moving to the latest generation of chip technology, which helped Intel drive down the cost of producing its chips while making them more powerful.

Certainly no one can be actually paying these analyst guys for that kind of advice. Punishing a company 12.5% for missing the dividend by 4% seems a little harsh, when they cost their employers tens of billions for missing a sub-prime fraud crash that everyone with eyes could see coming. Certainly these bozos can’t be making more than minimum wage. Read on . . .

(TheStreet.com—Don Colarusso) Being a Wall Street analyst these days is a lot like being in the NBA: Even the guys at the end of the bench are living large.

The bull market, the unprecedented interest in initial public offerings and CNBC celebrity status have driven the market for sell-side analysts who help the top firms hold institutional clients and bring in new underwriting deals. Over the past two years, fresh-faced newcomers to Wall Street became overnight sensations, covering the explosion of New Economy issues and pulling down seven-figure paychecks. Established analysts could land multiyear contracts with huge guaranteed bonuses.

The tales abound. In 1999, Credit Suisse First Boston telecom analyst Frank Governali got a two-year, $14 million package to join Goldman Sachs. Pricey? Sure, but it was a lot less than the Shaq-like $24 million deal it took Salomon Smith Barney to keep famous telecom analyst Jack Grubman from jumping to Goldman.

No. Tell me it isn’t so.

Citigroup wrote off $24 billion and plans to let 24,000 employees go. That’s a million bucks a throw for back-office folks. Does anyone explain how a company functions after letting 24,000 employees take a hike? What the hell were these people doing on a Monday that will not be required of them on a Friday?

In the Back-to-the-Future department, here’s a little tidbit from Business Wire;

SHERMAN OAKS, Calif. -- Lewis S. Alexander, chief economist and head of Citi's Economic and Market Analysis (EMA) department, will discuss national economic trends at the 2007 San Fernando Valley Economic Summit, co-presented by the Economic Alliance of the San Fernando Valley and California State University Northridge. The Summit will be held on Thursday, May 17, 2007 from 7:30 a.m. to 1:30 p.m. at the Sheraton Universal Hotel in Universal City.

It will also feature video game pioneer Nolan Bushnell, CEO and founder of uWink, Inc., who will address entertainment technology and creativity in the 21st century and its significant presence and impact on the Valley region.

You can make the case that the SFV Economic Summit had the wrong guy heading the billing. Entertainment technology and creativity in the 21st century was far more the name of the game than mortgage-lending in the run-up to the Wall Street boys getting caught with their pants around their ankles. Send Nolan up with his fastball.

Onstage, killer-hair and all, Lew Alexander suggested in his outlook summary for the country (parentheticals mine);

• Looking forward, we expect the drag from the housing sector to dissipate allowing the economy to move back toward trend growth. (Dissipate? Trend growth? Do those terms come with definitions?)
• The correction in the U.S. housing sector is ongoing, however, and it continues to be the most significant source of uncertainty in the U.S. outlook.
• The economic and financial context should help limit its broader impact (read that 'six months to impact'):
• The rest of the global economy continues to do well. (Snake oil)
• Financial conditions are supportive for the U.S. economy overall. (Missed kinda big on that one)
• The economic backdrop is actually reasonably supportive for housing. (Trying to stave off a Citigroup meltdown)
• Consumers’ financial position is strong. (Wrong—only rhymes with strong)
• The financial system is well positioned to handle the strains from losses in the mortgage market. (Like Dunkirk was well positioned for evacuation)
• Inflation should moderate giving the Fed flexibility. (Flexible, as in drop rates and print money)
• Until the housing market clears, material downside risks will persist. (You got that one Lew)

How much do they pay you for this, Lew? That much and a golden parachute and a stock-options deal and deferred retirement? All while your company goes down the tube?

Amazing.

Meanwhile, back in the real world, the place where they actually make something of value instead of skinning an imaginary rabbit;

For the full fiscal year, Intel reported net income of $6.98 billion, or $1.18 per share, up 38 percent from 2006. Annual revenue rose 8 percent to $38.33 billion. In the first quarter, Intel expects revenue between $9.4 billion and $10 billion, in the lower end of the range analysts were expecting. Gross profit margin is expected to be 56 percent of revenues, plus or minus a couple percentage points.

A scenario Citigroup can only dream of. There has been no $24 billion loss at Intel, no co-conspiracy in fraud, no enormous loss of jobs, no impending scandal that would bring the American and world economy to its knees.

Just a great year, with a great year to come unless the over-paid and under-trustworthy analysts get in the way.

Oh, and California Pizza Kitchen Inc. fell $2.08, or 17 percent, to $10.19 after the gourmet pizza chain reduced its fourth quarter and fiscal 2008 forecasts, citing lower spending by diners.

Go figure.
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Media comment;

• Reuters-Merrill, Citi job cut restraint will be tested
• Bloomberg-Sovereign Funds Beat Buffett With Stakes in Citigroup, Merrill
• The Moscow Times-The Cost of Believing in America
• BloggingStocks.com-Real estate slump didn't hit ex-Citigroup CEO Chuck Prince
• Guardian-UK-Western banks sell China stakes at own risk

Comments

[Larry Kubin]

Loved this article. Explains my thoughts exactly. I think Intel is doing great. It's strange that their stock price is below what it was when AMD was actually a threat. I imagine with Apple getting hammered today, Intel will drop a little lower. I plan on starting to accumulate. I just read that they only have 15 billion in cash. Wow, what a disappointment. They are really hurting.

[Bag an analyst get a prize]

It has always been easier to tear something down than to actually go out there and produce it. If Intel does not like the stock price as is, the company should use the extra cash and buy back shares. Reduce the shares out floating around and the stock will come back sound.

[Jim Freeman]

The question, of course, is what you people on Wall Street have 'produced.'

Seems mostly like chaos and fraud, juiced by the HBS model of 'anything for the quarterly' profit, to which you have now conveniently added;

"Congratulations on the record earnings and profits, but if you disappoint our 'analysts expectations' we'll kick your ass."

Analyst projections are important for those who have no ability to judge corporate worth without a guide.

And you call all that claptrap 'building something.'