Even when analysts get all the facts right, their own prejudices and personal incentives get in the way of accurate forecasts. But enormous opportunity exists for those analysts who manage to read the tea leaves right, despite the constraints
Information is the raw material of the financial industry. Certainly there seems to be enough of it. But what does it all mean? All worshippers need high priests to interpret the entrails, read the runes, or decode the cards. For understanding the financial health of a company, this means reading the numbers.
But numbers by themselves are often meaningless. It is necessary to compare them to something else. Often these are expressed as ratios. We have ratios that are current. We have ratios that are quick. We have ratios of cash flow. But it does not end there.
Besides ratios, we have returns, returns on equity, assets and employed capital. We all like to forget returns on unemployed capital. Then things move in cycles, cash conversion cycles, operating cycles and the great business cycle.
The high priests of these numbers for investors are financial analysts. Financial analysts do the necessary research. They interpret the raw data churned out by company accountants and try to make sense of it. If they have good records they can be extremely well paid and a few have risen to be demigods of Wall Street. But are they right?
This has to be looked at from two different perspectives. The first question is whether their analysis is correct. The second is the value of their predictions. Finally we have to ask whether anyone cares.
As the legendary speculator Bernard Baruch said, "If you get all the facts, your judgment can be right; if you don't get all the facts, it can't be right." Analysts' job is to get the facts, but management has a very large economic incentive to convince them otherwise. To do so they use all sorts of schemes.
For example, the hallmark of good corporate governance and hopefully good management is supposed to be an independent board. By most corporate laws, the board is supposed to ensure that management works for the shareholders and not themselves. To be truly independent the board is not supposed to have economic incentives or relationships with the company on whose board they sit.
Independent directors get good marks from analysts. If a company makes an effort to recruit independent directors, analysts are happy. The likelihood that the company receives a subsequent stock upgrade rises by 36% and the chance of a downgrade falls by 45%. But what is independent? Even if there is no economic relationship, there is often a social relationship. It should not come as any surprise that 45% of the members of nominating committees on the boards of large American firms have "friendship" ties to the CEO. In emerging markets where family and State-owned firms predominate, the other board members are likely to be family members or ruling party members.
Then analysts can always be bribed, perhaps not with money, but there are other methods. The more a company's profits missed forecasts the higher the probability that management will bestow favours on analysts including recommending them for jobs and or helping them join exclusive clubs. Of course in countries with less diligent watchdogs, the bribes are simply money.
Even if analysts do get the facts, often their own prejudices and other incentives get in the way. According to a McKinsey study, over the past 25 years, analysts' forecasts on average have been 100% too high. They are also loath to predict a long-term profits decline. Analysts forecast that less than 0.2% of companies will suffer a long-term decline. In reality about a third do. A Harvard study found that sell-side forecasts were more accurate than buy-side estimates.
Finally like all market players analysts tend to rely too much on history. Research found that the correlation between analyst's earnings forecasts and actual growth for the coming year to be a mere 0.28. In contrast the correlation between the forecasts and the past year was 0.75.
With all their faults we still need someone to do the number crunching, don't we? Yes and no. Recently all stocks and all markets have this unsettling habit of correlating. So it doesn't matter if you invested in Europe, Japan or the US since 2007 - they have basically moved in lock step. Emerging markets are more volatile, but they also have consistently moved in the same direction as the developed world. There is also no difference between value stocks or growth stocks.
One reason for the correlation has to do with the popularity of exchange-traded funds (ETFs). Many investors just choose a sector or a market with an ETF, not an individual stock. So a good company within the ETF can get dragged down if there are problems within the sector or the market. In other words, the micro-numbers are irrelevant. You don't need to pick a stock; you need to pick a sector, an individual market or even the global market to make money.
Of course, the paradox is that the analyst can be more important than ever. The correlation misprices and good companies eventually will outperform their sector. So for those analysts good enough, enormous opportunity awaits.
The madness in this commercial gets reduced to self-indulgence on the part of the advertiser
Some amount of madness is expected from candy advertising, for sure. After all, you can't be expected to rationalise and argue with the consumers in this product category. However, ad ideas are going totally bizarre and outlandish of late. With no story to tell about the product, the creatives are going berserk with gimmicky tactics. Cadbury Éclairs has been running a new series of commercials where the consumer's head is seen exploding into a chocolate bomb after gobbling down the thing. Chocolate blast, they call it. Not a very savoury sight, let me quickly add. In fact, it borders on the grotesque. But the advertiser will probably claim this is their way of demonstrating 'chocolate experience'. Yeah right!
And in their latest bomb blast version, the protagonist not only loses his head, he also slips into a psychedelic trance! The commercial features a young lad, bored and sleepy at an uncle and aunty party. The grannies torment him by pulling at his chubby cheeks, and worse, he gets glad-eyed by a totally square girl. Frustrated and pissed off, he downs a Cadbury Éclair, his head blasts like a chocolate volcano, and then the choc psychedelics take over. Of course, the special effects last only a few seconds (makers of Cadbury Éclairs would want the dosage increased, else how do they sell volumes?), and the dude returns to the humdrum world of geriatrics.
Shockingly dull advertising. A crime, if you ask me. To deliver such rubbish creative, given that the client would have given the ad agency a huge creative license to experiment. After all, there are no scientific features to a candy, so the product is always a great opportunity to push the creative envelope. The chocolate bomb idea is so silly, self-absorbed and uninteresting, I would actually much rather enjoy the aunty party… the oldies look like much more fun in comparison! And that's a telling statement on the commercial. Net-net: a complete waste of an opportunity to do some great work. Madness is all very well, but the key to it is viewer entertainment, else the madness gets reduced to self-indulgence on the part of the advertiser.
By the way, the psychedelic lights trick would be a super idea for pushing ecstasy or coke. Hopefully the ad agency creatives were munching Cadbury Éclairs when they came up with this bomb of an idea.
UBI is considering takeout financing for some of its infrastructure loans
Union Bank of India (UBI) plans to go for takeout financing for some of its loans in the infrastructure segment. The public sector bank is considering going for the takeout financing scheme offered by India Infrastructure Finance Company Limited (IIFCL).
Moneylife had earlier reported on how takeout financing (under the ECB route) is expected to benefit foreign lenders more. (See: http://www.moneylife.in/article/8/7867.html).
According to well-placed sources from the bank, the public sector undertaking is seriously considering the takeout financing model.
"The bank plans to opt for the takeout financing model. We will opt for this model to remove those infrastructure loans from our books, for those projects which have been operational for the past three years," said an official from UBI.
The official refused to share further details on what the total amount of loan under the takeout financing route would be.
In April 2010, IIFCL had been allowed to lend to infrastructure projects under the takeout financing norms.
Under the new process, a tripartite agreement is required to be signed between IIFCL, the lender (in this case UBI) and the borrower (the infrastructure development company developing the project).
This financing model could be extended to projects which have achieved financial closure and have a residual debt tenor of at least six years.
Thus, UBI would opt for this model for some of its loans which it has granted to infrastructure projects - which have been operational for around three years now.
A number of banks and banking experts believe the takeout scheme will benefit late entrants. The common line of thought is that the risk and delays involved in the initial years of the infrastructure funding will be borne by the first lender or the bank.
However, this UBI official differs and says that that takeout financing will benefit the bank too.
"As per the guidelines this model will be allowed only for those projects which have been operational for at least three years. Thus, the domestic bank would have been associated with the project for six years (assuming three years is the average construction period for any infrastructure project). It is a good time period for the domestic bank to benefit from the funding," said the official. He further added, "Most importantly, it will help reduce the bank's asset-liability mismatch."
Under the guidelines issued for IIFCL's takeout financing scheme, this kind of lending could be extended to projects involving development of road and bridges, railways, seaports, airports, inland waterways and other transportation projects. This scheme will also benefit projects involving power, urban transport, water supply, sewage, solid-waste management and other physical infrastructure in urban areas like gas pipelines, infrastructure projects in Special Economic Zones (SEZs) and international convention centers along with tourism infrastructure projects.