MorningWord 2/22/16: Analyze This

by Dan February 22, 2016 9:34 am • Commentary

In general, I don’t highlight changes to Wall Street analyst ratings. That’s mostly due to the irrelevance of these ratings changes. There was a time when a large investment bank could cause major movement in a stock or stock sector with an upgrade or a downgrade that served as a wake up call to other large institutions about a sea-change in fundamentals. Or you could have a bulge bracket brokerage firm make a change and then have tens of thousands of their brokers pounding the table on the pick to click for a day. But for the most part, people’s faith in Wall Street analysts (and the big institutions they represent) has come and gone.  Regulation of the industry, crackdowns on insider trading and democratization of information has taken its toll on the short term impacts of analyst ratings changes.

But they are still worth keeping at least one eye on to get a sense for sentiment shifts. As you would suspect, Wall Street analysts generally move in packs.

Sooooo this morning, Merrill Lynch upgraded a bunch of transportation stocks that they had been neutral to negative on:


Bloomberg highlighted the upgrade with the comment that “data builds base”:

BofAML analyst Ken Hoexter upgrades ratings on almost half of rail and truck stocks under coverage given stabilization of rail carloads, uptick in bi-weekly truck shipper survey and valuation.
• Dow Transports 10% recovery since Jan. 20 “gives us pause to be overly bullish”
• Rails: UNP (PT $88 from $74), CSX (PT $28 from $25) raised to buy vs neutral; GWR (PT $60 from $51) to neutral vs underperform
• Trucks: SWFT (PT $21 from $16), KNX (PT to $28 from $24) raised to buy vs neutral; WERN (PT $28 from $25) to neutral from underperform

The collapse in shares of transports over the last year and a half (from all time highs in late 2014) is largely the result of the collapse in industrial commodities. A stabilization in commodity prices, with hints of improving demand, would mean this hard hit group could be one of the first to rally ahead of a recovery.

I have no idea if demand is improving for industrial commodities but there seems to be a sudden improvement in sentiment among the financial press. They’ve gone from downright horrible to cautiously optimistic. From the FT this morning:

So you want to keep an eye on changes in sentiment among brokerage analysts and the financial press and cross check with actual data, commentary from companies and price action. That seems kind of simple. But it’s just one input to cross check among multiple ones, especially when trying to pick a bottom in what has been the epicenter of a meltdown.  No one is gonna ring the bell at the bottom, you have to look for clues.


Oh, and if you missed it, I think this is a great read from Mohamed El-Erian for BloombergView:

Here’s the most important part:

The world is experiencing policy and economic realignments that undermine two notions that have served “buy and hold” investors well in the last few years: that global growth, while low, remains relatively stable; and that systemically important central banks continue to be both willing and able to repress financial volatility and boost financial asset prices.

This paradigm is coming to an end. Moreover, what may follow is far from predestined, depending in large part on whether politicians are able to bring about the much needed hand-off from excessive reliance on central banks to a broader policy response. In the meantime, we all better get ready for the return of greater financial market volatility.