Market Analysts

An article by Stephen Bartholomeusz in this morning's The Age inspired me to respond. I don't intend to share it all here - except a short note on market analysts.

Market analysts trade in "self-fulfilling prophecies". They are paid to predict whether stocks will go up or down, but as a group have more direct influence over that than anyone else. Quite weird.

Market analysts have extremely restricted access to data, but once they make comments about how a firm should behave the sharemarket will punish the firm - so often CEOs do what the market wants rather than what their own analysis says is right. A sample case is mobiles. Hutchison makes a big 15 year investment in 3G. The analysts start saying they need to acquire customers faster - so Hutch invents the capped plan. So the analysts say that Hutch will take share and everyone else is ruined - so the others follow suit to retain share. So the analysts tell everyone the mobile industry is trashed....

I'm still thinking through why firms give so little information. One is a misguided sense that it helps competitors. But I think the other is that the lack of information actually promotes the over-pricing of assets - it sets the "market premium" generally higher - which artificially inflates the cost of capital thus increasing the returns to shareholders from investment in equities. So a thesis is that the reason equity markets have been growing so fast is the decrease in "proprietor" type companies (where at least a cornerstone investor runs the company and has real knowledge of the firms economics) and the greater prevalence of "funds" all of whom are served by an uninformed market.

The IPA and Economic Libertarianism

The extreme form of advocation of market capitalism that in the 80s was associated with "economic dries" and in the 90s promoted the title "economic rationalism" is a variant I refer to as "economic libertarianism". David McKnight calls it neo-liberalism, which I think does a discredit to the word "liberal" - which in the US sense is associated with the idea that Government has a valid economic role.

A variant of it can be seen in today's AFR by John Roskam in an article on CSR. I don't have time for the full critique now - suffice to say the article fails to recognise the consequences of the corporation having achieved the status pf "natural person". It also fails to acknowledge that in the real world "the firm" draws on a number of inputs - all of which expect compensation. The shareholders do not deserve to get all the "upside" over and above the return they expected.

The focus on "shareholder value" has resulted in a degree of managing in the short run that makes it easier for management to externalise costs.

But the most telling point is how his two concluding paragraphs are self-contradictory. He first claims that firms need to confront the underlying assumption that without regulation companies will ignore social, environmental and ethical consequences - but then that the second task is to re-establish the principle that the single best contribution a firm can make is to be profitable (i.e. in a choice between profit and the environment, profit must win).

The IPA item can be found here http://www.ipa.org.au/files/news_1081.html