The Bears' Revenge
The long, devastating bear market has changed attitudes on Wall Street considerably—but not completely.Throughout the post-World War II era, rising stocks were the rule. Declines were few and far between. The last time stocks declined three years in a row, as they did in 200-2002, was in 1939-1941. Combine this with the long-term growth in the economy, the natural optimism of Americans, the vast majority of investors who are long stocks and never sell short, and the zeal of investment bankers to please corporate clients with optimistic reports from their stock analysts. The results are obvious. Economists and investment strategists who are positive on the economy and stocks are welcomed with open arms by Wall Street, the media and company managements. But those who are negative are shoved into the outer darkness, often without jobs.
I know from first-hand experience. As Merrill Lynch's first chief economist, I correctly forecast the 1969-70 recession, but that wasn't being bullish on America, in the Merrill Lynch parlance. So, Donald T. Regan, CEO of the firm at the time, and I disagreed, and he obviously won. I left with my entire staff and ended up at White, Weld, another Wall Street firm. Even there I came close to being dismissed for forecasting a real GNP decline in 1974, the only negative forecast of 32 in Business Week's 1973 year-end survey. But it happened and the mid-1970s recession turned out to be the worst of the postwar era. In 1978, Merrill Lynch bought White, Weld, and the story that then circulated on Wall Street was absolutely true: Shilling was the only guy fired twice by Don Regan. Well, at least I got one thing right. We promptly set up our own firm and, by golly, I haven't been fired by Regan a third time.
I may have been the first on Wall Street to be fired for a negative forecast, but hardly the last. Charles Peabody, a bank analyst with Kidder, Peabody made repeated "sell" recommendations on NationsBank, which then discontinued all stock and bond trading with Kidder. He subsequently left the firm. Janney Montgomery Scott axed analyst Marvin Roffman after he correctly foresaw financial trouble for Donald Trump's Taj Mahal casino and Trump demanded his ouster. Charles Clough, Merrill Lynch's top stock strategist, didn't believe in the late 1990s stock bubble and recommended asset allocation of 55% bonds, 5% cash and 40% stocks—far too few stocks in the midst of soaring equities to maintain the good graces of Merrill's vast and powerful sales force. He left the firm in 1999, just before the bear emerged from hibernation.
What a difference a long bear market makes! Now we're seeing some of Wall Street's biggest bulls shown the door. First and foremost, of course, is telecom analyst Jack Grubman, Citigroup's fallen angel. He was paid handsomely, $25 million in 1998, for touting investment banking clients' stocks such as WorldCom. He upgraded AT&T to help his firm win lucrative underwriting business from the telecom giant and then downgraded it after the business was done. As a result of myriad missteps, Grubman was fired from Citigroup, paid a $15 million fine to regulators and is barred for life from the securities business.
Henry Blodget, the star tech analyst that Merrill Lynch paid $12 million in 2001, was wildly optimistic on tech stocks long after they crashed and burned. And, to add insult to investors' injuries, he was privately negative on many of the stocks he was recommending, often in graphic terms, as revealed un his e-mails. He, too, pushed investment banking clients' stocks. Blodget was paid by Merrill Lynch to leave the firm in late 2001, and is under investigation by the New York State Attorney General. So, too, is Mary Meeker, Morgan Stanley's erstwhile Queen of the Internet who was also sued by investors who lost bundles with her enthusiastic recommendations on Amazon.com and e-Bay.
Lehman Brothers fired its well-known stock market strategist, Jeffrey Applegate, late last year. He had remained bullish through most of the big bear raid. Then there's economist Bruce Steinberg, late of Merrill Lynch as of November 2002. He was a big proponent of the "New Economy" concept, a brave new world with unlimited economic and stock market growth. In March 2000, while stocks were reaching their tippy top, he authored the Merrill economic report, "It's Not Tulip Mania." In it he said, "Much of what is happening in the [2000] equity market is a rational response to a huge ongoing shift in economic reality." (see "What the Long Bull Market Taught Us: 20 Follies," page 1 for our completely opposite belief at that time).
Before you conclude that Wall Street is now equally critical of bulls and bears, note the key difference. Not all, but most of us who were fired for being downbeat were right in our forecasts. The bulls that are being dismissed were wrong. Wall Street is a very long way from being neutral. Even after three years of stock declines, the embarrassment of Grubman, Blodget & Co., pressure from regulators to issue honest recommendations, $1.4 billion in fines on major brokerage houses and the continual disappointment of analysts' estimates, their recommendations continue to be dominantly optimistic. In a recent tabulation, 46% of Wall Street analysts' picks were buys, 44% holds and only 10% were sells. Well, at least that's up from less than 1% sells in the late 1990s.
I must confess that in my un-Christian moments, I do get some satisfaction in seeing Merrill Lynch, among others, firing its foolish bulls some 32 years after I was dismissed for my negative forecast. But maybe I just regret being born 32 years too soon.
This article was taken from Letting Off Steam, a collection of just-published commentaries by Gary Shilling. Available from Lakeview Publishing, 1-888-346-7444.
