The Sacred Analyst Oath…Revealed!

Another day, another earnings blow-up. However, today’s disaster
du jour had an interesting twist. The world’s largest athletic-shoe manufacturer, Nike, blamed its horrific earnings miss this quarter on its supply chain
management software provider ITWO technologies. This finger-pointing sent the Internet business-to-business software sector reeling and prompted the analyst community to once again come to the rescue by defending ITWO. The market however, didn’t respond positively to the urgings of the analyst community to stick by ITWO and continue buying it on this weakness. How unselfish for them to urge us to continue buying a stock with a -4.80 EPS and a market cap of around $12 Billion. Amazing.

As such, I noticed the market telling us two very important things today. These things are: the market will no longer respond in lock-step to the urgings of the analyst community to continue buying a stock when there is a blow-up. 

Second, and much more importantly, the market told us today that an intra-meeting rate cut rally had already taken place the past two sessions and no further upside should be expected should the rate cut prior to the March 20 FOMC meeting. With the durable goods,
consumer confidence, and new home sales numbers coming in today far weaker than expected (actually in recession territory) the market proved correct in assuming the economy was in far more trouble than expected. As the old saying goes.. “be careful what you wish for because you just might get it.” Well, the market got what it wished for today in the troubling economic reports. What good did it do and how will and intra-meeting rate cut change the fact that new homes sales continue to slow at an alarming rate, consumer confidence is eroding at the quickest pace in decades, and durable goods orders have plummeted into recessionary figures? It won’t. It is all just a diversion.

Federated Department Stores……a hero?

With still more hoopla being generated on a daily basis about the retailing and apparel sector, Federated Department Stores definitely slipped one past the goalie this morning. Although Federated Dept. Stores (FD) reported headline Q4 numbers that beat forecasts, when you include inventory adjustments, restructuring, and asset impairment the net drops far below the First Call estimate. The CEO also made cautionary comments about the challenges the business faces in the uncertain economic environment in the year ahead. This twisted earnings report and cautionary statement by the CEO was enough to vault FD to a new 52 week high. Job well done.

To top it off, yesterday Deutsche Banc Alex Brown analyst Marcia Aaron issued cautionary comments on the specialty apparel retailing sector. Aaron said the second-half outlook for the sector “may not be as bright as investors envision given rapid square-footage growth over the last several years and anticipated growth this year.” 

She went on to write that “the last time square footage growth grew at a rapid pace, from 1992 to 1995, operating margins were under pressure and profits were weak” adding that “a turnaround didn’t occur until the square footage contracted in 1996.”

However, Aaron went on to add that Deutsche Banc’s favorite company in the sector was American Eagle Outfitters (AEOS), which she rates a
“strong buy.”

Interestingly, Deutsche Banc has been handling the sales of millions of shares of stock the past few months for insiders of AEOS. Hmmm… I believe Ms. Aaron’s
“strong buy” rating in light of this was totally coincidental, however. When a stock only has an 11 million share float and you have 6 million shares to sell, you need to generate some bids and quickly. Another job well done. Kudos to the team at Deutsch Banc.

Reminds me of all the people who were praising an old fiber optic fave, Corning (NYSE: GLW) or “glow-worm” when it was near its highs but forgot to tell us when it was going to crash and lose 80% of its value. Wouldn’t you think that a warning would have been in order?

Which brings me to my next point.

I hereby propose that any analysts and fund managers who dare open their traps by recommending anything must be hooked up to a polygraph machine first. The analyst community has completely lost all credibility and the situation is getting worse.

In fact a friend of mine was able to secure a key document that brokerage firms use to sign on their new
analysts. I thought you would be interested in reading it:

As a candidate for employment as an analyst for (state firm’s name here), I, (state your name here), do hereby
affirm, declare and promise, and swear that:

I will expunge the word “sell” from my vocabulary, replacing it with the word “hold.”

I will torture the English language to within an inch of its life, so that I can say “Nobody expected Procter and Gamble (NYSE: PG) to meet expectations,” without acknowledging either the paradox, or the fact, that everyone was wrong when P&G actually did meet expectations.

I will pretend to feel entitled to all the money coming my way.

I will retain a rating of “strong buy” on a company like Internet Capital Group (Nasdaq: ICGE) as it slips from $212 to $3 per share, and only then will I decrease it to a “buy.”

I will not explain how I expect someone to “accumulate” a stock without actually buying it.

I will pretend to ignore that my analysis is designed to attract investment banking business to my company.

I will cover all companies that my employer has taken through a public offering with a “strong buy” immediately after those stupid SEC limits expire.

Rather than reduce the rating on those companies for which I have a “strong buy,” I will reduce the target price.

If I can’t say anything nice about a company, I won’t say anything at all.

I will only say “You can’t time the market” when I have been dead wrong about a company, for example, when I have my highest rating on a company that recently filed Chapter 11.

I will vigorously defend my employer’s best clients from any outside force that threatens them, including but not limited to: other analysts, God, The Motley Fool, the truth, reality, cash flow problems, newts, global warfare, competition, economic reality, Alan Greenspan, Alan Alda, Albania, taxes, earnings, deficits, or the Dow Chemical Corp. (NYSE: DOW)

I will not call the SEC “the Great Satan,” except in the most discreet of situations.

Whenever a company does surpass my price target, I will respond by releasing a new, higher target.

I will not let archaic concepts like “negative cash flow” get in the way of a good opportunity to pump up the stock of a client’s company.

I promise to practice my “deer in the headlights” gaze for those situations in which a skeptic infidel like CNBC’s Mark Haines asks me why my coverage list and my company’s client list bear remarkable similarities Where this fails, I should learn to say “I really like the Retailers prospects in this environment” with a straight face and a clear conscience.

I will remove any quaint notion of “accountability to shareholders and individual investors” from my value system. A man cannot serve two masters, and neither can I.

Whenever I am on a conference call with a company, I must open my question with “Congratulations on a great quarter,” even if it wasn’t.

I will never, ever pass up a media opportunity, and I will n ever let one pass without mentioning a stock my company is trying to sell out of its inventory.

When news comes out about a company that is too bad to ignore, I will respond by lowering my rating down to “buy,” only after the news comes out, and only if other analysts drop their ratings as well. I will call this “value added research.”

Most importantly, I will never, ever reveal the existence of this oath, so long as I live, on pain of having to work for a living.

To this I pledge my sacred honor, and the title to my beach house in Bridgehampton.



(your name here)


So, there we have it. The cat has been let out of the bag. Draw your own conclusions.


Rate-cut fever will no doubt continue with rumors of an impending cut causing wild swings in the futures pits. The trade is quite treacherous here with technology growing increasingly weaker. The inability of the technology sector to bounce should cause grave concern at this juncture. As the program traders continue to attempt to make the Dow look healthy by selectively buying stocks to drive the index higher, the moment of truth is certainly approaching. 

We will go over some charts tomorrow to identify exactly what is going on from a technical perspective. At this time, however, I sincerely recommend limiting your trading or trading with smaller size until the current rate cut hysteria passes and the emotions driving the current market subside.

Have a great night.