Some remarkable truth telling from within the financial markets is reported this morning by Alan Kohler in Business Spectator - a sister publication to Crikey. The story quotes a newsletter from the mighty firm of Goldman Sachs JB Were admitting that analysts “seek to curry favour with management in order to preserve their information networks" and that analysts need to manage their “reputational risks”, so they “engage in herding behaviour”.
Evidence of the impact that these factors have on the recommendations firms give to clients is given by comparing the firms's own prediction of companies as a whole with those for individual stocks. For 2009 Goldman Sachs JB Were is predicting that overall earnings of industrial companies will decline by 15 per cent. However the “bottom up” analysts (that is, those who look at individual companies) are, in aggregate, still forecasting profit growth next year of 3 per cent and 11 per cent for 2010.