Rudi’s Response: US Outlook And Broker Ratings

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FNArena Editor Rudi Filapek-Vandyck often takes the time to respond personally to questions received. On occasion, we believe it is appropriate to share some of these responses with a wider audience. Below are two such recent examples.

Question: Previously, your independent insights on the US markets were keenly followed and worthwhile. It seems that your commentary has now been tilted to defend the Australian markets… How do you plan to proceed in the future?

Response:

Hi Denis,
 
I think it’s only fair to say I made two big and correct calls regarding the US this year. Firstly, at the beginning of the year, I warned everyone that unusually warm weather had been pushing up economic data and that therefore investors were being misled into thinking the US recovery was gaining traction. I think we both agree that was 100% correct. We now have QEternity – says it all, really.
 
Secondly, I have also warned that it would appear US corporate profit margins peaked in Q4 2011. This means downtrend and danger for more disappointments than the market can bear, depending on how high share prices are. While this theme was largely dismissed in Q1 and Q2, it is now firmly on everybody’s radar.
 
I have been stubbornly dismissive of any too positive stories over the past three years, but this shouldn’t be interpreted in a way that I always seek the negative when others are positive or that I simply seek the negative for negativity’s sake.
 
I simply try to analyse as well and as independently as possible. I seek to be correct and as often as possible.
 
Within a broader framework, I am still of the view that the world is gradually coming to terms with a low growth environment in developed economies and a low yield environment for global government bonds. I remain of the view that sustainable dividend payers and All-Weather Performers are an investor’s best friend in this environment.
 
But I am not dogmatic about it all. Were the facts to change at some point then I will re-adjust my views. As I said earlier: I seek to be correct, not to repeat myself and to stick to old views.
 
In recent weeks I have observed there is unmistakably a turnaround (for the better) in investor sentiment here in Australia and it is difficult not to see it. However, you would have noticed that instead of trying to talk everyone into the local share market, I have been highlighting the problems that currently dominate this market: no earnings growth and AGMs that squeeze out bad news announcements.
 
Not sure how any of this can be described as “defending the Australian markets”. I observe that many of the stocks I have been highlighting post 2008 have performed well. They certainly have done much better than local resources stocks of which I have not been a fan, to put it mildly.
 
As said before, I don’t see it as my task to constantly highlight the negatives. I see it as my challenge to figure out what is happening and what is likely going to happen.
 
I can only hope that as I continue my work with the same diligence as I have done in the past, that people like yourself, who have been appreciative of my work, will equally appreciate what I do in the future.
 
Kind Regards,
 
Rudi Filapek-Vandyck
Your Editor
FNArena

Question: why don't you keep track of how accurate broker recommendations have been over the past years?
Ben

Response:

Ben,

With apologies for the delay.

Every once in a while someone comes up with this idea and while it looks like a good one, I don’t think it is. Here are a few reasons as to why.

Firstly, while we report everything under the name of brokers, the ones who are actually calculating and making the key decisions are the analysts. And they do switch on a regular basis as good analysts get poached just like in every other sector.

This means that the recommendation by UBS you are tracking from last year might be from another analyst. Sorry, we don’t have a system in place that takes care of this anomaly.

More importantly, all company analysts are micro-analysers. They simply follow a sector and pick the best ones. They seldom have a bigger picture, or macro-framework. Which means they have pretty much all been wrong on Rio Tinto ((RIO)) and BHP Billiton ((BHP)) over the past two years.

To understand the analysts is to understand that they try to put a valuation to a company and the difference between the share price and that valuation pretty much determines what is going to be the rating/recommendation.

It is up to you to analyse and to decide whether this valuation gap is reasonable, not justified or very much justified. One year ago every analyst had a price target between $40 and $55 for BHP Billiton. That’s when I was in the media telling everyone NOT to buy BHP shares.

In the meantime those targets have come down, following the share price at a distance. That’s the assessment you as an investor has to make. And, of course, I try to assist in this with my own, regular analyses.

The better way to use the input from analysts is to see why they are negative or positive, what makes them change their minds, what are they forecasting, what do they think are the risks? Also, the interaction between ratings, targets and forecasts is much more interesting than only looking at the ratings. To be honest, the rating is more often than not the least valuable insight you can get from all this.

Questions you should ask include: how come if this company is going to grow by 40% next year that not everybody says it’s a buy? How come this particular analyst has a different view from the others? Why is there such a large gap between consensus target and share price?

Personally I view the Australian Broker Call Report as a specialized newspaper. It’s there, every morning to show you the main happenings and insights. Learn to appreciate that the most valuable information is not always among the changes in ratings. Other tools such as Stock Analysis, R-Factor and Icarus are there to offer you a different perspective on things.

I hope this answers your question. Let me know if you have more questions.

I will be travelling overseas soon, but will continue reading emails and responding, as well as coordinating stories and writing, so I’ll be around still, even if I am not.

Cheers

Rudi Filapek-Vandyck
Your Editor
FNArena

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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