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Investment bank research dead? Hardly.

August 24, 2009 – 6:48 am

It’s a little to early to auger the demise of the investment bank research department.  Yes, they’ve lost their prestige and their ability to move stocks like butter.  Yes, independent, whisperbuy-side research firm Gerson Lehrman is rockin’.  Yes, we’re even beginning to see the early stages of free, collaborative research take hold here and here.

But to anyone who doubts the influence i-banks still retain, I invite you to read an article in today’s WSJ, “Goldman’s Trading Tips Reward its Top Clients“.

While we can debate the merits of providing tiered service to different types of Goldman clients until we get blue in the face, the message is clear: when a firm like Goldman gets incrementally more positive on a stock, they still have a way to make it go up.

According to the article, Goldman holds a weekly powow to determine both how to pitch certain ideas to clients and how to position proprietary firm accounts accordingly.  For Goldman Sachs, as the house, they win.  For clients, Goldman’s influence still means profits.

Every week, Goldman analysts offer stock tips at a gathering the firm calls a “trading huddle.” But few of the thousands of clients who receive Goldman’s written research reports ever hear about the recommendations.

At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman’s widely circulated research reports. Some Goldman traders who make bets with the firm’s own money attend the meetings.

Does it matter whether Goldman’s research is good? Not really.  It’s the firm’s backing and propagating ideas to clients that provide the real value.  It’s also what’s partially responsible for Goldman’s $3 billion + in net income it reported last quarter.  It’s also just interesting to note that in the article quoted from above, it didn’t appear that anyone made any real money on the Janus idea.  Point here, point there.

In addition to influencing trading, Goldman’s also raising the service levels and closeness brokers and analysts are providing to their hedge fund clients.  The WSJ article quotes a hedge fund analyst at Frontpoint who says that he appreciates the banter and finds it useful to hear both sides of a trade as part of a larger conversation.

Don’t count banks out.  Their influence comes in how well they can integrate their brokerage units with their prop trading desks to give a full, 360 degree view to the investing process.


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Why Yahoo Finance continues to give Google Finance a noogie

August 24, 2009 – 5:40 am

In spite of being one of the lone voices online who actually likes and uses Google Finance (check out my Yahoo Finance vs. Google Finance post), it’s becoming clearer and clearer that I’m really in the minority.saddam_noogie

The NYT ran an article this weekend that looked at both Yahoo Finance and Google Finance.  A good read, the article presented a couple of salient points on why Yahoo seems to be running away with the race in terms of traffic growth.

  • Psychology: Online investors appear to get psyched-out when there is too much information presented to them all at once.  James Pitaro, vice president of Yahoo’s audience group is quoted as saying, “He said Yahoo deliberately adopted what he calls “the Apple model — simplicity in design; a clean, simple look, not overburdening our users with too much information on the page.”
  • Designed for speed: The layout of Yahoo Finance, with its short video embed on the right hand side, was designed for speed and multitasking.  Google’s appears jumbled.

But here’s the thing.  The article itself belies its real premise.  Scroll down a bit and see what Pitaro himself credits as a big traffic driver: Yahoo’s homepage.

“We have a great relationship with the front-page team to identify topics we should cover,” he said. An example of a “featured” story found last week on Yahoo’s front page: “Where Rich Singles Live,” accompanied by a picture of an attractive young woman smiling at the camera while pulling papers out of a briefcase. A click whisked the interested reader to Yahoo Finance.

Up until rather recently, Google didn’t even favor Google Finance links in its search results.  Yahoo uses its firehose of traffic to continuously drive traffic to Yahoo Finance.  It’s hard to compare traffic trends as a stand-alone finance property under these dynamics when Yahoo Finance received almost 2x amount of traffic from Yahoo properties than does Google Finance.

All of this boils down to a simple fact though:

Yahoo understands that a free finance site prospers by drawing less from the world of mathematics and more from the world of entertainment, informing just enough to satisfy users without setting off an anxiety attack.

Check out Barry Ritholtz’s take on the article and most interestingly, scroll down to the comments.  Most readers cite Yahoo’s API that allows them to easily pull data from Yahoo Finance as the deciding factor for favoring Yahoo.


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Interested in Distressed Debt Investing club? Let ‘em know

August 23, 2009 – 8:30 am

For investors willing to put in the time to get accepted, there are a couple of great resources for serious investors to share their work in a closed community of experts.  I reviewed SumZero here and of course, there is the Value Investors Club.

I’ve mentioned a couple of times that there is an expert community in the works for distressed debt investors, run by the guys at the Distressed Debt Blog.

Read more about it here.  They’re interested in hearing from you in terms of interest or functionality requests or whatever.  Be in touch with them if you have any ideas.

You can reach Hunter at hunter [at] distressed-debt-investing [dot] com.


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Walt Mossberg eats Cake (and sorta likes it)

August 20, 2009 – 8:43 am

Walt Mossberg is out today with a review of a new service being launched by Cake Financial, called Cake Premium.

I’ve written about Cake previously here and am generally impressed with all they are doing.  As opposed to expert communities like Covestor or kaching which try to make you a better investor by aping others, Cake provides an overlay on top of your existing portfolio at your online broker.  This overlay is intended to make you smarter about your own portfolio by providing nice analytics and a gentle interface.cake-financial-logo

With over a million transactions tracked through their platform, Cake has evolved by providing suggestions and recommendation based on individual and community activity.  And recently, Cake made a move into financial planning by providing investment-grade automated tools to help investors easily assess their portfolios and make guided changes if necessary.  This move mirror some of the similar activity we’ve seen at E*Trade with their Online Advisor product.

As more investors defect from full-service brokers to the online brokerages, more and more tools are being developed that blur the line between DIY investing and full service financial planning.  Technology is being automated that can deliver investment grade services to online investors — effectively marrying the ease and autonomy associated with online investing with the professional advice that many investors desire to manage their portfolios.

Anyway, back to Cake and Walt.  Walt reviewed Cake’s new retirement service (premium $model, by the way) that according to Mossberg:

attempts to tailor a mutual-fund portfolio that will get you to retirement according to your goals. It’s designed to be simple, clear and relatively quick, using plain English, easy-to-understand graphics, and a step-by-step approach that walks you through the process. In essence, it’s a robotic, low-cost investment adviser.

It does this by conducting a mini-financial plan via a wizard and aggregates 401(k) data from a provider.  I haven’t tested it, so I can’t speak to how well it works or posit my opinion on the product/service but here’s Mossberg’s take:

I can say that I found the service clear and easy to use, and can see how it could be helpful to average people with limited time and knowledge.

A typical, somewhat tepid Mossberg review.  He cites a couple of limitations as well:

  • only mutual funds: The system doesn’t suggest changes to investors’ securities other than a change in mutual funds.  Mossberg wanted to see something about CDs or money market funds.  I hear that objection but also think that the system is trying to help make sense of more opaque securities like actively managed mutual funds.  Anyone can quickly check on CD and money market rates.  Those are simple apples-to-apples comparisons.
  • limited planning: Cake is focused on retirement planning.  Walt was disappointed that other goals-based planning isn’t offered like saving for college.  I’m not sure I find this objectionable — this is a retirement product and I’m sure Cake will role out something similar for other goals if it thinks there is demand for such things.
  • limited view: Because the system is simplified to make it easy, it can’t possible take an entire financial picture of a client into account.  That would take hours but Mossberg felt it should have a more 360 view.
  • 401(k) restrictions: Mossberg is maddened at the fact that Cake Premium isn’t “smart enough” to understand which mutual funds are offered under a specific plan when it makes its suggestions, so it recommends things you can’t possibly own in that account.

I plan on digging in some more.  Mossberg is very influential but he’s not typically active in the investing space, so take this with a grain of salt.  But if he’s at all representative of large numbers of people out there, we are going to want to see Cake Premium account for the 401(k) administrator’s parameters in terms of which funds can be held in such an account and therefore, further tailor the advice Cake provides.


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Is Buffett really as good as everyone thinks?

August 19, 2009 – 6:30 am

Interesting meme going around launched by an article in the Atlantic, entitled “What Would Warren Do?“.  Megan McArdle raises some good points and the article and it’s worth a read.

Specifically, McArdle raises a couple salient issues:

  • Inability to distill Buffett investing into systematic approach: As opposed to a more purely arithmetic approach that Graham espoused, Buffett seems to embody some special sauce.  She says, “Buffett is the one who has, more than anyone else, refined and redefined value investing for a new era. He is the one who stopped hunting for superbargains and started buying exceptional companies, even if they weren’t available at fire-sale prices. But what makes a company “exceptional” is idiosyncratic. Warren Buffett is exceptionally good at asking the right questions”.
  • More information erodes value investor advantage: “Value investors love to deride academics and the efficient-market hypothesis, but they can’t deny that stock-screening tools and other analytics have taken away many of the best bargains. At least some managers have lost the will to wait patiently for superdeals and have taken on more risk to get more return”
  • Historical changing of rules: McArdle professes that she’s not sure that Buffett, if he were to start investing today would achieve the same level of success as he did.  Here she is:  “In many ways, it’s not even clear that Buffett could replicate his own success if he started out today. He built his reputation as an investor in an era when there were more opportunities for easy money, and these days, the news that Buffett has bought a stock is often enough to help support, or even boost, its price.”

Overall, it’s a good thought piece and requires some thought.  McArdle approaches her subject with respect and asks good questions.  I have some thoughts on the matter (which I’ll probably share in a later post) but want to point out a good piece on Greenbackd that answers The Atlantic’s hard questions and attempts to show why value investing is very far from dead.

Divergence from Graham methodology: Greenbackd takes offense at the assumption that Buffett has diverged from his mentor. In fact, Buffett himself denies this claim.  According to the post, “Buffett’s divergence from Graham’s methods was not, however, a rejection of Graham’s philosophy. Buffett has said on occasions too numerous to quote that he still works within Graham’s framework and has said that his change was a function of the increasingly large sums of capital he had to invest, and not a problem with Graham’s approach.”

More information weakens value approach: Here, the blog focuses on the various flavors of value investing — from liquidation value investor to the intrinsic value investor.  All are valid forms of the value approach “because the interpretation of that information is the key step.”

Absence of good opportunities: This statement seems to whet the value investors appetite.  Greenbackd, and other value investors, salivate over statements like this.  They typically respond with a “Great! That leaves more good eatings for us!”.  He follows in kind.  One important point made here is timing of the markets.

From Greenbackd:

There are plenty there. When those opportunities do disappear – and they will eventually – it won’t be because of all those supercomputers chasing them, it’ll be a function of valuation. Prices go up, and prices come down. When they’re up, it’s hard to find investable opportunities, and when they come down, it’s easier to do so. It has always been thus, and it will always be so. When there aren’t many opportunities around, that’s a signal from the market. It’s telling you to wait. As a friend of Greenbackd says, ‘Patience can be a bitter plant, but it has sweet fruit.’


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Don’t change the channel — getting serious about primary research

August 16, 2009 – 7:24 am

remote-controlAs the success of Gerson Lerman Group mirrors the buy side’s demand for primary research, Dana Telsey and Co. announced earlier this month a formal launch of its national retail channel checking effort.

Interesting move, though not surprising, and puts them right in direct competition with firms like the Retail Intelligence Group, Cleveland Research, Verbatim Advisory Group and Farmhouse Equity Research (always think of Phish when I see this one).

According to the press release put out by Telsey Advisory Group:

The TAG channel checking team has been working on this effort since last year to establish year-over-year comparisons in order to measure each retailer.  The team is led by Tom Chin, managing director of consulting and analytics, and visits 14 malls and more than 300 stores every month in Atlanta, Chicago, Dallas, Los Angeles, New York, Philadelphia and San Francisco. The TAG team grades retailers based on customer
traffic, merchandising trends, promotional activity and inventory levels.

I like to see what TAG is doing for a variety of reasons:

  1. I covered retail at a hedge fund and always enjoyed Telsey’s work at Bear Stearns.  She’s doing great work in retail and it’s great to see what she’s doing post-BS.
  2. Telsey is a great case study in the Wall-Street-analyst-leaves-bank-and-starts-independent-research-firm.  She’s ramping up staffing and rounding out product/service offerings.  Her success augers a lot in terms of what the next generation of vertical equity research firm looks like.


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The profitable other side of financial social media

July 23, 2009 – 12:19 pm

Because it has broader appeal, we spend a lot of time thinking and talking about the demand side of financial social media.  Investors can use tools like following their favorite investors portfolio moves on Covestor or crowdsource ideas on Piqqem or use AlphaClone to create the same portfolio Warren Buffett has.

There are other great tools, communities and sites as well that help investors with stock discovery — idea generation for new investments.  Other businesses focus less on broad idea generation and rather assist deep research on specific investments.  So, we’ve got great new ideas being developed to help investors with vertical and horizontal coverage for stocks.

What’s creating this demand for stock ideas is a vibrant supply side of financial advisors, investment advisors, newsletter editors and analyst-bloggers posting fresh and creative ideas 24/7.

Ever ask yourself why they are doing this if blogging keeps you poor?

TOTAL SELF INTEREST.  That’s why.

Financial analyst-bloggers get noticed.  They get hired as analysts for hedge funds.  They get hired as financial journalists and many of them, who run money, attract more money. 

SeekingAlpha was early in this space, providing a podium for finance professionals and all aspirants to market themselves. The idea here was that financial professionals would contribute content to SeekingAlpha in return for the voice that SeekingAlpha gave them.

What SeekingAlpha lacks in terms of providing a direct connect from blogging to landing clients, companies like Covestor have provided.  With the launch of an investment advisory this week at CV.IM,  Covestor has provided the business model behind blogging for financial professionals.

We’ve now got a liquid market of demand for investment ideas and a supply of analyst-bloggers providing them.  Everyone wins.

Additional Resources:


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All-star team of analysts join forces for research boutique

July 20, 2009 – 5:30 am

According to a recent article in the FT, some of Europe’s best banking and insurance sell-side analysts are banding together to launch an independent research boutique this fall.

Autonomous Research will work to combine both equity and credit research under one roof independent of an investment bank entity.  It’s hard to find good independent research on both stocks and bonds.

From the FT article:

Autonomous Research, headed by Stuart Graham, a former Merrill Lynch banks analyst, will focus on both equity and credit research on Europe’s top banks and insurers. It has already secured authorisation from the US Securities and Exchange Commission and is awaiting clearance from the UK Financial Services Authority.

Instead of going on retainer, it appears that Autonomous will work on soft dollars — using actionable ideas to sell clients and capturing trading commissions.

The UK market for independent research hasn’t seen the likes of established sell-side analysts transitioning out of investment banks to set up their own shops — something of a trend underway in the U.S.

According to Integrity Research:

Since the insertion of Arete in 2000 by ex-Goldman Sachs technology analyst Richard Kramer, the UK independent research space has not seen new entrants established by former top-ranked analysts. This trend differs from the US independent research industry where former sell-side analysts have tapped into the industry’s maturity to set up shops. Starting in 2006 with Dana Telsey (ex-Bear Stearns), this trend in the US continued in 2007 with Ivy Zelman (ex-Credit Suisse), followed in 2008 by Ed Wolfe (ex-Bear Stearns), and most recently with Meredith Whitney (ex-Oppenheimer).


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Google Finance refresh is, well, refreshing

July 13, 2009 – 5:00 am

Kudos to the Google Finance team.  While Google Finance’s first lead, Katie Stanton is off galavanting somewhere within the Obama administration (go Katie!), Google Finance hasn’t missed a step.  While I may be criticized as a G Finance pump monkey, I’ve always enjoyed their simple platform.  For looking up quotes, monitoring the portfolio and simple charting, it’s always been my first stop online.  For more in-depth research, like poring over balance sheet info or looking at industry information, I still use Yahoo Finance and a slew of others (I really like what Wikinvest is doing with their data — check it out).

For a simple overview, check out my article comparing both Google Finance and Yahoo Finance.

While Yahoo has always been the 800 lb gorilla in online finance sites, Google has not seen a lot of success here.  I think a lot of this had to do with the sheer amount of information Yahoo has on its platform.  From press releases to news to blogs, Yahoo’s effort was about creating a good user experiences across numerous different content and data sources.  Google Finance, as per its search background, was always about figuring out what users were looking for in the research process and just pointing them there.  Less time on the site the better.  Outside of some basic charting and portfolio tracking, Google Finance was classic portal.

googlefinance_homepageSo, without much fanfare, Google Finance rolled out a slew of new functionality and a nicer interface last week.  While there is nothing groundbreaking here, I do think that the new changes represent a change of thinking on the Google Finance team.  Instead of merely pointing users out of Google and sending them on their way, this new iteration of Google Finance understands that online finance users are looking for an environment that has a unified feel to it and doesn’t require hunting down information on numerous other sites.

I just wanted to call out a couple of interesting things here in the new version of Google Finance:

Some Changes

Homepage

  • Improved layout and customization elements: I’ve always liked that you could get everything that you needed on a stock in one page on Google Finance.  That overarching usability is improved upon and Google has added more to a single page and still retained its usefulness.  Users can add, subtract or move different modules on the homepage (I want to see top news first and then, portfolio-related news or vice-versa).
  • Recent activities module: Both Google and Yahoo allow you to see instant stock quotes on recently viewed stocks.  Google Finance takes this a step further and allows you to retrace any of your previous activities.  This is really useful for those of us with ADD stock research tendencies.  In seriousness, stock research is frequently interspersed with other activities and more often, when we see one data point, it requires us to jump to another.  These research bread crumbs allow us to retrace our activities to recalibrate.  It’s useful.  By the way, you can also create a quick watchlist portfolio populated by recent stock quotes.  I see how this can be useful if you are in heavy research mode.
  • World markets module: It’s nice to see currency movements AND how other markets performed on the homepage.
  • Bond yields: Also important and useful to have here.
  • Sector comparisons: It’s nice that Google allows you to do this.  It aids stock discovery, but it’s pretty bare-bones.  I’d like to see some more output here.

Stock pages

  • Cleaned up quote box: Google has cleaned up its quote box (see below) and has placed alongside it how well the stock is performing against the overall market and its sector.  Google has also added some relative data into the quote box, including today’s volume and how it relates to average volume.  Also helpful.

pricebar_stockpages

  • Expanded comparative companies module: This module gives you a quick view for sizing up a particular stock against its sector or competitors, including some customization that allows users to display which information is most useful to them.  Not sure how useful this is, though, in relation to how much real estate it gets.
  • Key stats and ratios: There appears to be more meat here on the individual page as it relates to financial metrics which a link to more info at Thomson Reuters.  I’d like to see some more Google smarts put to use here and add real ratios according to industry metrics (like Wikinvest is doing).  If Google doesn’t want to, port in some of Wikinvest’s data because it’s really useful for stock-specific research.
  • Technical charting: Google has introduced technical chart overlays on top of their basic chart, which I thought was one of the easiest to use and most useful in the industry.  Now, investors who use the MACD or RSI technical can do so.  Some smarts in the system here: I played around and empowered the SMA technical and wanted to add not only the 20-day but the 50 and 100-day and Google allows you to add more technicals like this and even pre-populates the check boxes accordingly.  Makes things easier to use.  I founds some of the charting a little buggy.

Anyone else have any feedback?  Let me know in the comments below.

Google Finance has been gunning for Yahoo Finance for years.  This new interface takes them part of the way.  I’m looking to Google to mix it up a bit if the company is really serious about competing in this space.

Additional Resources:


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All the news that’s fit to trade

July 9, 2009 – 5:32 am

As a buyer of PR services at different times in my career, I probably wasn’t a great client to work with.  Having cut my teeth on Internet marketing, where everything is measurable, everything is quantifiable (if you believe the numbers), I wanted to know what I would receive in return for my dollars earmarked for such services.  There was never an answer that addressed the metrics.

IR services are similar.  Outside of the pump and dump schemes which are clearly jimmied just to inflate stock prices, I would assume that IROs and IR professionals have a similarly hard time quantifying their value proposition.

Dick Johnson at IR Cafe has an interesting post today in which he reviews two recent studies examining the relationship between press coverage and stock price movement for individual stocks.  In his post, PR Does Matter, Johnson explains:

Trouble is, influencing the market is not all about the numbers. It’s all about the numbers – plus getting the right people to pay attention.

Together, the two posts conclue that a greater dissemination of company news and financial results influences lower bid-ask spreads, increase trading volume, and lower idiosyncratic volatility.

Johnson’s take-away from reviewing the two studies:

Bottom line: Issuing news has a measurable benefit for public companies in the capital markets – increasing volume, reducing trading costs and reducing volatility. More frequent news is better. Getting more reporters or news outlets to write about the company amplifies the benefit. That’s what the quantitative evidence says.

Additional Resources:


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