Put Wall Street Analysts on Your Endangered Species List

It's been a bad year for Wall Street analysts.

2008 started off with some of the worst earnings expectations the Street crowd have ever dreamt up. Bear in mind, I don't mean "worst" as in "negative," I mean "worst" as in wrong or inaccurate.

According to Bloomberg Wall Street analysts kicked off 2008 predicting an average 22% increase in profits at banks, brokers, and insurance companies the year. Needless to say, they overshot the mark... In fact, many of the firms they predicted this growth for no longer exist.

Wall Street is not prone to apologizing. But after this screw up a number of firms admitted they were off by a wide margin. Heck, a couple Goldman Sachs' analysts even went so far as to say they were "clearly wrong" on their recommendation of financials in early May. But these guys had nothing on the misguided directions coming from Merrill Lynch's Guy Moszkowski, who incidentally was the top ranked brokerage analyst last year.

Between June 2 and June 11, Moszkowski changed his tune regarding Lehman Brothers four times. He first shifted his stance to "neutral" from "underperform." He then told clients to buy twice-June 4 and June 10-before shifting back "neutral" on June 11. Three months later, the market shifted Lehman from neutral to "no longer in business."

There must have been something in the air, because things didn't improve much for analysts at the close of 2Q08 either. For that quarter, Wall Street analysts only accurately predicted earnings 6.7% of the time for the S&P 500: their worst showing in 16 years.

Now, Wall Street's ability to predict earnings has been steadily worsening ever since Regulation Fair Disclosure barred CEOs and other corporate executives from revealing inside information to analysts before the general public in 2000-yes, up until that point it was 100% legal for execs to give the Street insider information about earnings.

However, even by post-Regulation Fair Disclosure standards, Wall Street analysts' 2Q08 showing was truly abysmal. Again, they were only accurate 6.7% of the time. At that point, wouldn't it be prudent to do away with earnings expectations completely? If not that, then surely you'd expect the Street to issue some massive downward revisions of earnings expectations for the remainder of 2008, right?

Nope.

In fact, analysts still expect S&P 500 earnings to increase in 3Q08 AND 4Q08. And they're doing this at a time in which GDP growth is rapidly being revised to the negative-expected GDP growth for 3Q08 and 4Q08 is -1% and -2% respectively-retail just posted its largest decline since 1992 (the last serious recession) and unemployment is at a seven year high.

It's simply stunning.

In light of this, I expect this earnings season-3Q08-and the next-4Q08-to be full of surprises... to the downside. Earnings estimates are still too high. When reality crushes these daydreams there will be a slew of downgrades followed by increased institutional selling which will exert more downward pressure on stocks.

I'll detail more about the upcoming 4Q08 liquidations tomorrow. For now, do yourself a favor and ignore most analyst predictions coming from Wall Street (I'd say "all" Street analysts, but there are undoubtedly some savvy operators out of the bunch).

Best Regards,

Graham Summers

http://www.globalstockmonitor.com