Wall Street spin turns bad news to good

Discussion in 'Wall St. News' started by capmac, Mar 24, 2006.

  1. capmac


    Wall Street spin turns bad news to good

    Friday March 24, 10:12 am ET
    By Pedro Nicolaci da Costa

    NEW YORK (Reuters) - Talk to Wall Street analysts after a weak batch of economic news and, as often as not, they say to look on the bright side.

    But some critics say this view should be taken with a grain of salt. After all, most big banks failed to spot the 2001 recession until growth had already turned negative.

    "The last thing investment banks want to do is predict a recession, because it's bad for business," said Lakshman Achuthan, managing director at independent research group Economic Cycle Research Institute, or ECRI.

    Take two key sets of data released last week. The government said retail sales plunged by 1.3 percent in February, while the fourth-quarter current account deficit ballooned to a record $224.88 billion.

    The chorus at the large investment banks? Don't worry about it. One month's data doesn't make a trend.

    Like any other business, critics note, banks rely on sales -- and upbeat talk about the economy can't hurt when selling stocks and other investments.

    The sunny disposition of Wall Street economists is clearly a far cry from the behavior of some stock analysts, who in recent years were prosecuted for recommending companies in exchange for lucrative investment banking business.

    Still, consider Wall Street's economic outlook for 2006. The nearly unanimous view is that nothing can shake the American economy's resilience: not a housing slowdown, not rising interest rates, not record national deficits, not even unprecedented household indebtedness.

    This camp sees business investment picking up the slack from an expected slowdown in consumer spending, allowing growth to ease gently rather than abruptly. They see expansion in gross domestic product slowing from an unusually strong 5 percent in the first quarter to a still-robust 3 percent by the end of the year, according to Reuters poll data.

    "Good forecasts sell stock, bad ones don't," said Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business, whose own first-quarter growth outlook is far less optimistic at 3.9 percent. "On Wall Street, you're much better off erring on the positive side than on the negative."

    In just the past week, Goldman Sachs (NYSE:GS - News), Lehman Brothers (NYSE:LEH - News) and Bear Stearns (NYSE:BSC - News) reported chart-busting quarterly profits amid booming demand for their brokerage and deal-advisory services. That is not all they have in common: Each has a higher-than-median forecast for 2006


    But independent ECRI sees a different picture. While refraining from publishing specific forecasts, they worry a recent retreat in prices of industrial materials like metals and natural gas could presage a softening of manufacturing activity in the second half of the year.

    If that happens, such a deceleration could well coincide with a housing-related pullback in consumer expenditures.

    "The not-too-hot, not-too-cold 'Goldilocks' economy envisaged by many economists could turn out to be a mirage," said Achuthan. "That would result in much weaker overall growth than generally anticipated this year."

    Wall Street's tendency toward a positive economic outlook is not new. A review of more than a dozen forecasts collected by Reuters in January 2001 -- just before the economy slipped into its last recession -- shows that analysts at the big banks were unanimous in predicting solid GDP growth for that year.

    In their own defense, some economists argue that Wall Street's perennial bullishness has more to do with the perils of forecasting than salesmanship.

    "Economists are notoriously bad at predicting turning points," said Paul Kasriel, chief economist at Northern Trust. "They're like credit ratings agencies, they don't anticipate things very well."

  2. Nice post there cappy.:cool: