Crystal balls

Why do we deride crystal ball gazing, palm reading, and even (some of us), astrology, and yet base our investment decisions on the predictions of financial analysts? How accurate are forecasts? Why should we believe that one specific area of futurology is a science? And how much forecasting is really being done?

 Quoted companies are under an obligation not to knowingly allow a false market to develop in their shares. In practise this means that they issue frequent statements about current trading and outlook, and sometimes even issue a specific statement if they need to correct an over optimistic or pessimistic consensual view of their trading performance.

This means that if you are a financial analyst making a bad guess, you will have your work corrected in time to stop you looking foolish.  Here are a couple of examples out of many:

Which illustrious broker said of Barratt Developments in May last year when the share price was 177p “hold, price target 302p” and in May this year “sell, target 75p” when the price was 105p, and in September “hold, target 172p when the price was 172p?

Or which major international financial institution said of Land Securities in June 2007 whent he share price was 1557p “Buy, target 2250p”, and in November of the same  year when the share price was 1400p “Buy, target 1735p”?  The same institution that said in July 2009 when the price was 500p “Hold, target 500p” and last month when the price was 530p “Neutral, target 645p.

Land Securities share price closed at 725p yesterday- 13th November !

If analysts can continuously adjust their estimates of earnings to reflect changed actual conditions as they become apparent, what forecasting is being done? What is the difference between continuously updated forecasting and a continuously changing share price?

Ordinary mortals can’t place bets on a race once it has begun. The analysis game is different. Analysts can keep switching their bets to the horse most likely to win, right up until the last few furlongs, and then claim credit for prescience.

 Clever stuff?

Lex – the way to better buttock care?

There have been many rights issues during the past few months. Most of them would have been repulsive to individually franchised rational investors because they are really fee-fertile rescue issues in disguise (BDEV, SHI, NTG, YELL, etc, etc, etc).

Some financial columnists writing in 2009 about rights issues hint at the reality, speculating about the prospects of ‘getting them away’ (i.e. ‘getting away with them’) or focus on the fat underwriting fees and issue expenses .  I can’t recall once having seen an objective piece of analysis of a rights issue from an investment perspective. Probably because no case can be made in most instances.

Issues are subscribed by institutions on behalf of (in theory),  the myriad individual investors they collectively represent. However the  individual constituent investors  are never consulted, reminiscent of the once notorious block vote wielded at labour party conferences by the trades unions, where constituent members were not consulted before their votes were assigned to whatever barmy cause the leaders supported.

Why would real investors, by real I mean individually franchised rational investors with their own money at stake, subscribe to new shares in banks?  World markets are already awash with bank shares. Even in the UK there are billions of them already available.

Lex tries to say something about the possible Lloyds rights issue. As usual the sum of the comment is zero. On the one of Lex’s hands:

“A successful cash call would enable a beefed-up Lloyds to avoid the government’s asset protection scheme, so saving a £15.6bn insurance premium. It would still have to pay a break fee for APS cover over the past six months, rumored to be £2.5bn. On top of that, Lloyds must pay advisory and underwriting fees, perhaps another £300m. The net saving, therefore, may be about £13bn. Not bad.

 Subscribers, meanwhile, would increase their bet on the UK’s largest domestic retail banking franchise. If they share chief executive Eric Daniels’ optimism that bad loans have peaked, the mega-bank may finally start to deliver earnings too. There are cost savings from the HBOS merger, and reduced competition could spell meatier margins. One day, Lloyds’ dividend might reappear.”

And on the other of Lex’s hands:

“But loan losses could still rise, not least in HBOS’s private equity and property lending areas. The European Commission is likely to force disposals. Removing, say, the branch networks of Cheltenham & Gloucester and Lloyds in Scotland would lop some £300m off earnings. Eventually, the government will also sell its 43 per cent stake, a huge overhang. Finally, the UK economy, to which Lloyds is fully exposed, remains flat on its back.”

Lex, would you buy Lloyds shares?  We should be told.  

Bun rating: 200% bun. A bun filled with another bun, placed under Lex’s bottie for cushioning the effects of all that fence-sitting.