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Found this while trolling around.



ANALYSTS HAVE NO CHANCE - Big broker analysts are on a
hiding to nothing sometimes and the rest of us are even worse off
listening to them. You could pick any major stock recently (Lend
Lease, Brambles or Telstra) and pluck out a buy recommendation
at prices well in excess of the current price. So lets be cruel and
do it. In order to be fair the broker remains nameless, most
brokers were on the same tack.

On June 6th a major broker published a research note upgrading
their recommendation on Telstra [X.TLS] from Neutral to
Accumulate. Telstra was priced at 660c at the time. The summary
included the comments that "Earnings upgrade potential exists"
and "there is a reduction in perceived risk". On the 11th June
Telstra published a profits warning. On the 12th June this major
broker reduced their recommendation to Neutral again with
summary comments such as "the potential for earnings upgrades
are limited in the short term" and "the stock to remain weak". The
price was 608c down 9% from their recommendation a week
earlier. Now 570c. Everyone who bought through them in the week
prior got killed.

BROKER RESEARCH - THE TRUTH (some of it)

The most obvious point is that research is not written for
mums and dads, it is written for institutional investors. The
difference being the institutional fund manager will buy
stocks that go down as long as they go down less than the
rest. They are judged relative to an index. If the market falls
10% and the fund manager's funds fall 9% he has done
well. This is a different benchmark to the retail client who
wants an absolute return. For instance a Gold analyst will
tell you to Buy NDY and NCM as the best gold stocks. The
research will say "Buy" because the research is written for
the Resources sector fund managers who have to hold
some Gold stocks to balance things out. If you read that
as a retail investor you might buy NDY. But the truth is
NDY is going down because the sector is. The analyst is
merely pointing out it will go down less than the others.
Corporate Responsibility. All listed companies have their
favourite brokers. These brokers pander to the companies
in hope of a corporate deal and fee. These fees can
completely dwarf any other revenue for that broker including
commission on trading. As such all institutional research is
written with corporate responsibilities in mind. If you want
to know who is attached to who you look to see which
broker handled the last corporate deal or share buy back.
ABN AMRO handling the SNX buyback for instance has an
SNX valuation of 554c. Price now 145c. Everyone had a
BUY on Telstra ahead of the T2 float in the hope of
snagging a role in the listing. Corporate fees come first.
Small company analysts are the most pressured to write
research which can mislead. They have to, because the
commission earnt from trading in a small illiquid stock is
just not worth the effort. You have to have a corporate play
in mind to bother writing at all. There are some small
company teams who cover a lot of stocks a lot of which is
independent, but often the team is still there to attract
corporate deals (lots of buy recommendations) and the
stocks they are not attached to are followed for the benefit
of the one that they are attached to. So the pet company
knows what the competition is doing. So beware the big
broker research on Squitty Stock.com. You can bet your
bottom dollar there is a deal in the wings and the Buy
recommendation is not for you.
The bit to watch out for is the BUY HOLD SELL
recommendation, that's when the analyst has to look up
after hours of work and take a whole load of non
fundamental factors into account. What will the company
say, what will the corporate team say, can we write
brokerage with a Hold, will the boss kill me if I say sell. At
big brokers no research can be published without first
being vetted by someone who isn't an analyst. What you
can believe perhaps are the Sell recommendations.
Brokers will say Hold (so as not to upset the company)
and ring their clients and say Sell. If they say Sell, they
mean it. For someone like JB Were to say 'Reduce' means
sell.
All research recommendations default to BUY. Its safe
from a company relationship point of view. Most of the
information an analyst reacts to is from the company. By
definition the majority of it will therefore be good news. The
audience for a BUY recommendation is the whole world.
The audience for a SELL is limited to just shareholders.
"Private Client" research is Institutional research re-edited.
But the recommendations are the same.

IT IS NOT ALL CLOAK AND DAGGER - Despite some ulterior
motives the majority of research represents solid work with
numbers and comment to be relied on. Ignore the
recommendation and its all worthwhile. You need the analysts,
they set the consensus expectations. It is only through knowing
the consensus expectations for a company (right or wrong) that
you can judge any development to be price sensitive or not. From
that point of view it is invaluable to read what the experts think.

NO HOPE - At other times of course, like with Telstra this week,
you have to recognize that research is 'rubbish in, rubbish out'.
Consider the Telstra analyst. Do you think he goes to Telstra and
gets given carte blanche to wander about the Telstra offices and
operations looking at confidential documents and talking to
employees. No. The information an analyst works off is carefully
filtered, often by an 'investor relations' department. These
departments are there to control the information released to the
market, not to tell all. Often the investor relations people are in the
dark themselves anyway. What they don't know they can't blab
after all. So when you see mistakes made, it is often not the
judgement of the analysts at fault, it is the information they work
on. OneTel for instance. Broke since December. Do you think
analysts have been told anything true in the last 6 months?
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Thanks Barcoo...what is the source of this? I'll give you some classic examples of a broker I used "feeding the chooks" just like the chickens in the movie chicken run:

Buy HTA (Float @$2.00, then again at 90c) ..broker was resposible for listing - stock now at 30c
Buy TVSN (Float @$1.00)...broker responsible for listing - stock now 7c
Buy SPL(Float @0.85)...broker resposible for listing - stock now around 50c
Buy PAS @ 1.50 then again at 75c..right the way down to 30c....now I get a letter to SELL!

Boy do I feel a sucker! I've taken their "advice" on all this except TVSN. Crikey's I'm not going to sell Pasminco at .22c, that is at a market cap of around 250 Million..that is only half what they payed for Savage resources assets in the US (when the dollar was @0.75) and Ernst Henry copper gold mine here in Aus COMBINED (AND consequently values the Centry Zinc mine at ZERO!)

PAS is got to be a take over play at .22c..yet the Broker says sell! Stuff giving them the commission, partic when the "advice" has been absolutely incorrect. I've been fed like I chook, "but I don't want to be a pie!" (quote Chicken Run)

AB
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Pasminco: Unless it's Dead, it's Worth Double
By James Dunn & Geoffrey Transom, 20 Jun 2001

Pasminco Limited (PAS) has responded to the Australian Stock Exchange's query dated 20 June, in which it was asked whether
it had any information to release that might explain the fall in its share price from 37 cents on 14 June to 22.5 cents at yesterday's
close. PAS has advised that it has no new information that might affect the value of, or could explain the recent trading in, its
shares.

PAS has reiterated that, as announced on 26 April, it expects to record a loss for the year ending June 30. This follows its first-half
result of an after-tax loss of $37.3 million, which has "made it evident that the full-year result will represent a variance of greater
than 15% year-on-year". It repeats that, as has already been announced, its revenue stream has been hit by the decline in zinc
and lead prices. But PAS states that it is able to meet all of its commitments as and when they fall due. PAS states that it has
made all of its principal loan repayments that are due this (calendar) year; it is not in breach of any banking covenants; and it
currently has undrawn facilities of $125 million in total.

PAS expects its "business improvement program" to deliver a sustainable improvement in the underlying operating performance
of the business at the rate of $100 million a year by the end of (calendar) 2001. "It is unfortunate that the decline in metal prices is
distracting from these gains," says the company. The zinc price has fallen below $US900 a tonne (US40 cents a pound), its
lowest level for two-and-a-half years: PAS breaks even at about $US1000 a tonne.

Compounding its problems is PAS's currency hedging position, which is well out-of-the-money. The option position cost PAS $42
million in the December half-year, at an average Australian dollar exchange rate of 55.4 US cents. That exchange rate has
weakened further, to a spot rate of 51.83 cents at time of writing.

PAS has already announced a review of all of the assets in its portfolio: it will sell any that are not capable of generating an
adequate return on funds employed. It says that negotiations for the sale of the Broken Hill Mine have already commenced: gold
producer and base metals explorer Perilya Limited (PEM) is reported to be an interested party. The Elura mine in New South
Wales, the Rosebery mine in Tasmania and the Cockle Creek smelter, also in NSW, will also be sold.

PAS's major asset, the Century mine in north-west Queensland, is operating at just over 90% of capacity and the company
expects full capacity to be reached by December 2001. PAS expects a 20-year mine life for Century, which it projects to make a
positive contribution to EBITDA (earnings before interest, tax, depreciation and amortisation) in the current financial year.

It appears that the brokerage analysts have responded in the knee-jerk manner we usually expect, and simply extrapolated the
downtrend in zinc prices well into FY02. The current share price is implicitly assuming a zinc price for FY02 and FY03 – and,
effectively, into perpetuity – of about 47.8 US cents a pound. That is ridiculously low, even given that current LME inventories are
high and the current spot zinc price is low – about 41–42 cents a pound. As history shows, the zinc price is prone to swings of
30–50% in each direction over a two-year period – the last upmove lasted from mid-1998 to September 2000 – from current
levels to over 60 US cents. At that point it became evident that the US was in economic trouble – hence the recent weakness in all
base metals.

The reality is that weak commodity prices are the result of weakening demand from the US and Europe – signals that their
respective economies have slowed markedly, particularly in the industrial heartlands. I like to refer to this slowing as the
Greenspan Effect. And, although I fully expect the US to slide into recession (with the first quarter of negative growth to be
experienced in the quarter which is just about to end), I don't expect it to be a long and deep recession. When the US begins
growing again, zinc prices will rise substantially, however the Australian dollar will lag in its rebound; Pasminco would do well to
take currency hedges at 52–53 cents (to the $A) – now – and let the zinc price move where it may.

Pasminco also has too much debt (we estimate it will total about $1.2 billion at balance date) – that is abundantly clear, and a lot
of that debt is denominated in US dollars. However, if this is such a dire problem, it's unclear why analysts were not braying about
it when the $A was at 47.5 US cents a month or so ago.

PAS is currently an ideal takeover candidate. Using the most conservative assumptions I have found – i.e., long-run values of

$A = 67 US cents; and
Zn = 50 US cents a pound,

PAS has a valuation of about 97 cents a share before considering the potential for offloading its under-performing assets and
thus reducing its debt. Even assuming that any suitor got its hands on PAS for half of its embedded long-run value, a stock price
around 50 cents is not out of the question.

The clear favourite as merger partner (or takeover suitor) – from the point of view of potential productive synergies and the low
likelihood of political interference, is MIM.

PAS shares will recommence trading at the opening of tomorrow's (21 June) session.
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Thanks for the Pasminco post..this one I am definetly not selling at current levels. As Dunn points out, whilst their is significant debt(in U.S dollars), I would like to add, a lot of this is secured against a major asset(in U.S dollars)..ie the old Savage zinc operations. These do not have the enviromental and payout "problems" of some of Pasminco's Aussie assets pointed out by Gotliebsen on Business daily the other day. The whole lot must be worth more than 250 Million!
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Hi Folks

Brokers = Salespeople

Morning meetings tell them what to flog.

Fact.

JR

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I agree with JR. I use fundamentals a lot, so I don't really listen to a lot of brokers but I do have a couple of comments:

1. Brokers have no understanding of your own portfolio, risk tolerance etc. It's like some-one giving you advice on what colour to paint your car, when you don't own one.

2. Brokers aren't accountable for their recommendations. I haven't once yet seen a broker who has sample portfolios which track how well their recommendations are going.

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I agree with all the above.

Brokers are primarily salespeople. your longterm portfolio won't pay for this year's car.

Analysts are all too frequently influenced by corporate banking imperatives. At best, they rely on audited reports.

For those who rely on fundamentals, what about the auditors? Who pays them? Who wants to retain the client in future? They have an even bigger vested interest in providing what the management want to publish.


chrischalkley
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Thats it Chris any small investor who thinks they will get honest representation is dreaming

JR
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