November 25, 2010

Less Informed Analysts Don't Serve the Public Good

In the wake of the first dot com boom and subsequent crash, regulation swept through the financial industry, pushing a wedge between those who rated stocks and those who backed them, buckling down on insider information and weeding out a visible few who had not exactly acted with their clients' best interests in mind. With public trust in corporations further declining in the following few years with high-profile scams led by Enron, Worldcom and others, the federal government has played an increased role in watching what businesses can say at which times, both publicly and privately. What is released from companies now comes with lengthy SEC disclosures, authors routinely disclose their stock positions, and Sarbanes-Oxley compliance puts fear into the hearts of public and would-be public companies, to follow the rules - or else.

With this background came news earlier in the week that the SEC was looking into Apple stock analysts who had relied on connections with suppliers and manufacturers in the channel to help predict the company's sales projections. This broader definition of insider trading, if it becomes commonplace, nullifies some advantage and insight the analysts had, and reduces their value to customers.

While most of the SECs' moves in the last decade can be easily tracked to protecting investors from scams, conflicts of interest and pyramid schemes, I have to wonder what this type of move signals. Is the eventual goal to eliminate any real research and intelligence used in the community to level the playing field and make the professional analyst game one that more heavily relies on a gut feel and chart reading? Neither is an exact science.

Assuming the new guide to insider trading is to be adopted, the suggestion essentially means that financial analysts should not be briefed by company employees during the quarter, should not survey those selling the products, their partners or maybe even the customers themselves. The rarified times an analyst can talk with the execs would be limited to the short conference call Q&A periods that occur after each briefing. This would make the already imperfect industry one further removed from real data. Anybody can count numbers after they have been released, but few have proven true abilities to accurately guess a company's direction - and provide real data to customers who don't exactly do this for a living.

What I worry about is not that Apple investors (or others like them) are suddenly going to be in the dark because 1 or 2 guys get slapped on the wrist for chatting up resellers. What this leads to is a company running unchecked with no communication to the outside world, except for every 90 days when they emerge from their corporate offices and tell you how they actually did.

What we need as investors and market watchers is not less access to real data, but more access to information, which we can then use to make good decisions, or bad, based on what we know. There are already enough people out there guessing and writing and throwing stuff on the wall to see what sticks. This just will make it worse.