Rigged Game: Ever Wonder How Wall Street Analysts (parasites) Are So Good At Forecasting? Hint, It's Not Their Excel Skills

by Tyler Durden

Aug 5, 2016 8:00 PM

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Our readers should have little doubt at this point about our view on the integrity of wall street and equity markets.  In fact, we just spoke yesterday about all the little accounting games that companies play to "beat" earnings estimates in a post entitled "Mind The "GAAP" (Or How The Game Is Really 'Rigged')." 
Well, CFOs can't bear the full burden of earnings management, they need complicit "independent" counterparts on wall street as well.  A recent article in the Wall Street Journal points out how public companies use wall street analysts to manage quarterly earnings expectations and ultimately their stock prices.  The article summarizes the quarterly dance played out between wall street analysts and investor relations teams to "manage" earnings down to a level that is ultimately "beatable" and thus produces a nice stock bounce on earnings day.  Analysts, of course, are willing partners in the game because being a "team player" means better access to management teams, better attendance at bank-hosted conferences and the added benefit of very "accurate" forecasting for hedge fund clients that pay handsomely for their efforts.  As the WSJ points out:

Analysts whose forecasts are far from what companies end up reporting risk losing credibility with clients and could get less access to company management. Those are reasons to listen if a company calls with a suggestion, according to analysts.

Roger Freeman, who left the stock-research industry in 2014 and now works at a technology startup, says: “If someone is trying to get your numbers down, they will highlight all the negatives and not positives, and you’ll come away thinking: ‘Gee, that sounds pretty bad,’ and sometimes take your numbers down.”

To prove the point, the WSJ reviewed over 6,000 earnings reports from 1Q13 through 1Q16 to see just how frequently companies manage to "beat" earnings estimates.  "Shockingly" an overwhelming number of companies manage to report earnings that are exactly in-line or slightly above analyst expectations.  But hey, maybe the analysts are just really good at modeling.

http://www.zerohedge.com/news/2016-08-05/manging-expectations