Why equity analysts are Wallstreet goons!

First off, my apologies to my equity analyst friends... This is not personal, it's business!

You know these guys when you hear a headliner on CNBC or Bloomberg, like "Goldman Sachs downgrades RIMM from Buy to Hold", or "Morgan Stanley upgrades Google from underweight to neutral."  Now, where's the conflict?

1. We believe these analysts have a duty to report a fair analysis to the public and investors. (fair is by itself vague)
2. These analysts work for banks and these banks own positions in stocks.
3. Banks pay the analysts' salaries and bonuses, not the public!

Who do they work for?  Whose interests would they be likely to protect?

So, when an analyst upgrades a stock, don't put in a market order and blindly buy it!  Same goes for a downgrade, don't just sell it!  What's happening here is actually counter intuitive.  The banks aren't in the business of making money for the public, they make money for themselves!  And they do make it, at the average investors' expense.

Just as an example, On Oct 28, 2010 Oppenheimer downgrades RIMM from Outperform to Perform, and on Nov 30, 2010 Jefferies, upgrades RIMM from Hold to Buy!  Two firms, with essentially similar valuation models for stocks see the need to go opposite ways on the outlook for RIMM.  (I'm simplifying, there's more that goes into it.)

Now what's the point of all this?  Remember my post from a couple weeks ago on why stocks go up or down?  Here's the link (Why Do Stocks Go Up).  Read it to understand this situation better!

This basically says that there are only a certain number of buyers or sellers in the market at certain prices, so big volume selling from someone will drop the price because there aren't enough buyers (at the current prices) in the market.  Now let's say that Goldman Sachs has big a position in RIMM, (and I don't mean 1000 shares, I mean 500,000 shares or more) and they feel that the medium-term future is not so good.... and they don't wanna be left holding the bag when the bad news hits... SO, the analyst steps in with an upgrade based on some bullshit qualitative reason that no one will remember a week from then.  The news of the upgrade hits Bloomberg TV, CNBC, and other news wires. The average investor looks at this as a positive sign and decides to get in.... Call broker, or login to online account, hit BUY RIMM @ MARKET.... after all if Goldman thinks it's good, why would it not do well.  So a sea of these buy orders come into the market and the traders at Goldman will sell into it without tanking the price of the stock in the process!

So the upgrade facilities the selling that Goldman will do, they will essentially sell what they don't want anymore to the average public!!!  For me learning this was like I was learning that I live in the Matrix and the world is not what we believe it to be!

Don't listen to analysts!