Tuesday, April 8, 2008

Caution - Anaylst Predicting Bull!

It's all bull!
In my profession, if a PM cannot accurately project how his project will progress - he is sooner or later in trouble. Smart PMs do their due diligence, crunch the numbers, review historical data, discuss their estimation models with SMEs and then project timelines and cost. PMs don't have a crystal ball but good estimation practices lead to reasonable projections most of the time. When estimates go awry - PMs take corrective action by addressing the issue, replanning and restimating. It is ultimately a question of trust, competency and accountability.

Wall street analysts have similar job functions but are presumably not held to the same quality standard. Consider the following equity analyst failing reported at Bloomberg.
  • When Wall Street's almost 1,800 equity analysts figured U.S. earnings growth for the third quarter of 2007, they were 8.2 percentage points too high. Forecasts for the fourth quarter were wrong, too, overestimating profits by 33.5 percentage points, the biggest miss ever.

  • Analysts say 2008 will be the best year ever for U.S. profits, data compiled by Bloomberg show. Earnings for companies in the Standard & Poor's 500 Index will rise 10.7 percent, even after Federal Reserve Chairman Ben S. Bernanke acknowledged that the economy may fall into a recession and banks reported $232 billion of writedowns and losses, the forecasts show.

  • Analysts' recommendations to `buy' or `hold' U.S. shares climbed to 94.5 percent, the highest rate in more than five years.

  • Wall Street predictions in the second half of 2007 were too bullish even after analysts cut them. At the start of the third quarter, average estimates called for earnings to increase 5.7 percent. By the end of the quarter, analysts had cut by more than half to 2.7 percent. Companies ended up reporting a 2.5 percent drop in profits.

  • The forecasts were even farther from the mark in the fourth quarter. Analysts predicted 10.9 percent growth before flipping the projection to a decline of 7.9 percent. S&P 500 companies reported that profit dropped 22.6 percent.

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Rocko Chen said...

Time to load up on shorts!

Mark Runta said...

It is tempting!

Patrick said...

Interesting post. Would you be interested in syndicating your content on the home page of my site? It's an online community of finance professionals ( http://www.wallstreetoasis.com ). I could add an RSS feed that will allow me to promote your blog posts to my home page (when i think it will lead to a good discussion and/or is appropriate), but I wanted to make sure you were comfortable syndicating first. The syndicated post would have a link back to your original post. Thanks, Patrick (you can reach me at wallstreetoasis@wallstreetoasis.com if you have any questions).

Also, if you are willing to provide a link to wallstreetoasis.com that would be much appreciated.