Change? It’s our obsession.

We’re greeting the changes in Washington with open arms. Being Wall Streeters, it’s the lifeblood of our industry. Change has been a part of, and continues ceaselessly, in our industry; the challenge is to meet it. We’ve embraced the shift by responding to your needs. It’s that simple.

Barack Obama is winning with ‘Change’ – so are we. We’re living and working in an era where ‘stagnant’ is a dirty word. All of us have to learn from our environment and pay close attention. If you’re not adjusting to a variable wind, then you’re going to be blown away.

Wall Street’s changing too…

For five years, Institutional Investor has published a ranking of what the buy-side values most in their research. What Investors Really Want is a ranking that highlights the concerns of institutional investors. The following are lists of priorities over the past 2 years that were gathered in the All-America Research Team survey. Take a look at what has changed…

2007

Rank	Sell-Side Research Attribute
1	Access to Management
2	Industry Knowledge
3	Analyst Accessibility/Responsiveness
4	Special Services
5	Analyst Integrity/Professionalism
6	Useful and Timely Calls and Visits
7	Financial Models Idea Generation
8	Communication Skills
9	Written Research Reports
10	Stock Selection
11	Earnings Estimates
12	Management of Conflicts of Interest

2008

Rank	Sell-Side Research Attribute
1	Industry Knowledge
2	Analyst Accessibility/Responsiveness
3	Analyst Integrity/Professionalism
4	Access to Management
5	Special Services
6	Written Research Reports
7	Idea Generation
8	Useful and Timely Calls and Visits
9	Financial Models
10	Earnings Estimates
11	Research Delivery
12	Stock Selection

Source: Institutional Investor

The Fundamentals of the StreetBrains Formula:

1. Industry Knowledge… That’s StreetBrains.

2. Analyst Accessibility/Responsibility… That’s StreetBrains.

3. Analyst Integrity/Professionalism… That’s StreetBrains.

4. Access to Management… That’s StreetBrains.

5. Special Services… That’s StreetBrains.

We could go on, but you get the picture.

Since our inception, we’ve been two steps ahead of the curve. When we see change coming, we move with it instead of against. In our industry, where there’s a need, there’s StreetBrains – that’s the motto we live by and that’s how we succeed.

Pioneering Website

One item that didn’t even make the list in 2007 was ‘Research Delivery’… Inside StreetBrains’ forthcoming, attractive website and portal, information will be at everyone’s fingertips. We’re giving you research exactly the way you want it. No complicated delivery methods, no unwanted emails… just a one-stop universe of information where you navigate and access remarkable research in the most fundamental and innovative way possible.

We’ve faced the challenges, we’ve embraced change. Sometimes it’s as simple as knowing what people want.

Accountability: Does Yours Add Up?

This past weekend, I walked into my upper west side laundromat to let them know that the wash-and-fold laundry they had returned to me was missing 5 garments. Upon the discovery of my missing items, I thought “Hmm. This must happen from time to time. They must have a lost and found for lost/dropped items, or a way to contact other patrons to track down misplaced pieces. I’m certain this can be resolved.”

To my dismay, not only did the store not have a lost and found, or a system to track down my (favorite) lost items, but the owner adamantly demanded that I “go home and check again” and assured me that her laundromat (and I quote):

“Does Not Make Mistakes.”

This statement infuriated me. I assured her that her business should certainly win an award, because if they in fact had never once made a mistake, as she claimed, then they were the first business in the history of all business to do so. I stormed out steaming, and short $600 worth of my favorite garments, with no one to hold accountable for my loss.

Once cooled off, I started to think more about accountability, and more importantly - lack thereof.


“Your First Loss Is Your Best Loss.” (‘Ace’ Greenberg)

Katherine Burton, hedge fund reporter at Bloomberg News and writer of the book Hedge Hunters, noted at a recent conference that the main thing that sets a great hedge fund manager apart from a mediocre one is their ability to reverse a position – or more specifically, ability to say “I was wrong” and get out of the water before the damages become too great to overcome. This, I thought, is what it means to be accountable. This, is what 'Ace' Greenberg (and the many others who have used this line) meant when he said “Your First Loss is Your Best Loss.” Mistakes will be made in any business (even at my delusional, former UWS Laundromat), but having strategies and processes in place to mitigate risk will help contain damages.

It seems many bulge bracket firms haven’t quite nailed this delicate risk/reward balance either, and instead, the research provided by these firms often sticks with any calls or positions it takes - despite prudent cause to adjust their recommendations.

Perhaps you’re thinking this is responsible, for analysts to not waver greatly in their positions, so as not to upset the overall flow of the markets. But if that is your contention, I would counter with one simple term, which quite succinctly embodies the type of thing that occurs when analysts are 'locked in' to positions:

Sub-prime.


We agree that there is a balance that must be achieved, but we also think that analysts should have the freedom to weigh in the factors they believe are most pertinent. That is, by way of their title, what ‘analysts’ are suppose to do, isn’t it? Analyze the facts at hand, and make recommendations accordingly?

Fortunately, the independent research world has created a safe-haven for analysts to properly utilize their abilities. If they change their mind about a position, they are well within their rights to say so. On the contrary, if they adamantly stand by a call, despite absolute upheaval in the markets, they’re welcome to hold true to that as well – but the point is, they make calls based on all of the factors they feel are relevant to take into account, not the set of factors that are afforded them. Particularly in a volatile market, the ability to be nimble is a critical element for responsible, accountable analysis.

mjb

Any Given Quarter

**Disclaimer: This entry was written by a disgruntled Pats fan who dropped $5k to take a whirlwind trip to AZ only to watch my team fall from grace in the most despicable fashion. The SuperBowl views reflected here are not supported, nor endorsed by the obnoxious, gloating Giants fans I contemptuously call "colleagues."


Whether you were a Patriots fan, a Giants fan, or an agnostic viewer, this weekend’s SuperBowl proved one thing:

The unthinkable can occur on Any Given Sunday...and it did.

If you were tuned in, what you might have seen was an up-until-today mediocre Eli Manning have the game (or 4th quarter, at least) of his career – which included the luckiest of all lucky plays when he scrambled away from an imminent sack and tossed a prayer up to Tyree for a miracle completion.

Impressive? Yes. The result of a calculated and well-designed play? Not so much.

The SuperBowl MVP-crowned quarterback, happens to also be the leader of a much less glamorous NFL category: Turnovers. And Sunday certainly didn’t go by without a few near additions to this category, as Eli, on three separate occasions, threw the football directly into the fumbling hands of the Patriots defenders. Despite being in the right place at many of the right times, the Patriots were unable to capitalize on these errors.

Not to take anything away from the well-executed Giants defeat of the New England Patriots, but our question is this:

Despite one All-Star performance on a random Sunday in February, who would you rather have as your QB:

An 18-1, League MVP, Tom Brady or 14-6, Turnover-leader, Eli Manning?


Take Care of the Ball

We ask about Tom versus Eli, because we think it makes for an interesting parallel to how firms identify their top independent research providers (IRPs). You’re probably wondering, “How so?”

First off, let's understand how many IRPs receive payment. Some firms who utilize the research and insights of IRPs have implemented broker votes for paying outside IRPs. These votes are ultimately set up so that brokers can provide payouts to analysts who make the most accurate calls. Some of those broker vote systems use analytics that will help them to ‘calculate’ who provided top results, and others are arbitrarily decided upon.

I guess our question is really, is this the most reasonable way to pay for – and encourage the consistent production of - quality research? Wouldn’t firms rather pay an analyst that consistently provides quality insights and information, rather than one who happens to accurately nail a quarterly EPS down to the penny? It could happen any given quarter, and you might just be the one to capitalize on this lucky call. But that doesn’t mean his prediction is indicative of future success - just a lucky, one-off guesstimate.

Analysts that provide accurate information should absolutely be rewarded – however, a ‘call-by-call’ comparison against their peers seems to be a flawed model for identifying top quality research and insight.

Bottom line: I’m sure most of us secretly pull for a Cinderella story…but more times than not, smart money is best placed on proven success. When in doubt, it may not be as glamorous, but it’s probably best to hand over the reigns to the guy who’s proven time and again he can take care of the ball.

We Called It

As the adage goes…

“It ain’t braggin’ if it’s true!”

StreetBrains analysts have spent the first 24 days of 2008 beefing up the benchmark for correctly calling market moves. Below are some of the items that StreetBrains independent analysts have nailed in the past few weeks.

(See how smart analysts can be when they’re able to say what they’re really seeing and hearing, rather than being muzzled by investment bankers, traders, and compliance departments?)

Steve Digilio, The Bank Notes, told us in November ’07 that ’08 would bring at least one major bank consolidation or acquisition, and 3 top bank CEO departures/ousters. 24 days in, we have already seen Countrywide acquired by Bank of America, and Jimmy Cane step down as CEO of Bear Stearns.

In September ’07, Larry Rothman of DebtVisions made the definitive call that retail was in a tailspin. To date (from his call on 9/28), the RLX has declined 13.8%.

On January 9th, 2008, Jim Sterling of the Sterling Account (who was up a whopping 44% last year on his calls) wrote a report titled “Throwing In the Sponge” where he advised the exiting of all energy stocks. He still loves many of the companies, but the stocks are going to continue to be battered for a long while out, he claims. Since January 9th, the XLE is down 7.95%.

Gotham Research proves that there’s money to be made, even in a bear market – if you’re nimble. The following 3 pairs have brought in generous returns when closed out today:

IEF/XLE – iShares Lehman 7-10 Year Treasury Bond Fund vs. Energy Select Sector SPDR Fund. Closed long IEF and short XLE spread from 9/21/07 with an advance of 26.04%.

USB/SPY – U.S. Bancorp vs. SPDR Trust Series I. Closed a long USB and short SPY spread from 1/10/08 with an advance of 17.35%.

ONB/VTI – Old National Bancorp vs. Vanguard ETF Total Stock Market. Closed a long ONB and short VTI spread from 12/12/07 with an advance of 18.46%.

Last but certainly not least, Steve Frenkel of PatternWatch, whose several CNBC appearances in the past few weeks you can find in blogs below, has also been consistently spot on in calling the Dow, S&P, Gold, and CCI Index moves. Click here to view his most recent television appearance, where he discusses the current state of the market.

The Value of Vetting

We see it in all sectors, professions, and projects: A vetting process for identifying value. Whether it’s the A&R guys who find us the best bands; the headhunters that find us the best executives; or the search engines that finds us the best information – we are a society that has come to value the processes that fast-track us to top results.

We’re learning the same is true for StreetBrains and its vetting process for qualifying the analysts we add to our brand. To give a rough idea, 400+ analysts have been through StreetBrains vetting process in the past 8 months. However, we have only launched 10 of those as brands. Our purpose has always been that we want to represent great insights and analysis, so we’ve been extremely selective in bringing on new brands who offer insights that cannot be found anywhere else. But we’ve learned from several clients recently that the value of our vetting process is actually much bigger than that.

A recent study by the Noble Group – a UK investment bank – found that financial directors of AIM (Alternative Investment Market) listed companies had a very low awareness of independent research.

The findings show:

75% of respondents could not name an independent research company.

58% did not even try to name an independent research company.

17% thought they could name one but named a broker or an information service rather than an independent research company.

Only 24% could name an independent research company.

Part of the problem with even the best of the best independent analysts is that most clients don’t have the time to go out and seek out and assess the quality of every independent researcher they come across. In theory, they like the idea of using independent research…but, where to find them? We’re hearing more and more often that firms find this ‘discovery’ process to be a daunting task.

By bringing a variety of analyst brands onto one platform after a stringent vetting process, StreetBrains is able to cut an enormous amount of ‘vetting’ time out for the client. That client is now able to focus on finding tradable insights, rather than trying to assess credibility, writing style, or brand focus. In essence, we bring the mountain to Mohammed.

The Noble survey also found that 84% of the surveyed AIM financial directors think that broker research is biased.

While this comes as no surprise to us, it underscores the importance of increasing the awareness and visibility of truly independent analysts. (Truly being the operative word…but that’s a topic for another day!)

Bottom line: if the objective insights of independent analysts can be more easily accessed, it seems that their insights would be welcomed by clients who are clamoring for non-biased research.

The End of Pollyanna Propaganda?

It almost pains us to ‘pile-on’ with yet another blow to Wall Street’s favorite punching bags, but let’s be honest, they’ve brought this upon themselves.

In yet another story this week that bullies research analysts about their collective incompetence (to make the distinction, we are referring to the 'mouthpieces' at big firms who are payed to spew rhetoric, not analysts who are independent and conflict-free), Geoff Colvin, writing for Fortune, brought us ‘Analysts in Fantasyland.’ To excerpt from the painfully accurate account delivered in Geoff’s story:

Maybe Wall Street analysts are more honest and less compromised than they were pre-SarbOx, but recent events show that they're still awful at their most important job: predicting bad news. They haven't lost their habit of falling in love with the companies they cover and refusing to face unpleasant realities until everyone else has already done so. Now, eight years after they were inflating the bubble, we again have to question whether analysts do retail investors any good.

The latest evidence: Analysts have only just discovered that corporate profits in the fourth quarter aren't going to be nearly as strong as they had supposed a month or two ago. The consensus view going into the quarter was that S&P 500 profits would go up 12 percent to 15 percent, a large jump coming on top of the 20 percent rise in last year's fourth quarter. In light of the credit crunch, the housing collapse, and the towering price of oil, that forecast seemed highly - one might say insanely -optimistic. This it proved to be, but only after the quarter began did the consensus view finally lurch into the real world. Their growth forecast is now about 1.5 percent and still falling.

It has been obvious for many months that profit growth would have to slow way down simply because it couldn't continue at recent rates. Profits have been rising sharply the past few years, which makes sense after the hole they fell into in 2001 and 2002. But by early this year they had grown to 12 percent of GDP, way above their historical average of 9 percent. Analysts knew all this, and in case they didn't, various commentators (including Fortune's Shawn Tully) were insistently pointing it out. But the analysts, ever hopeful, chose to believe that U.S. companies would perform magic.

Although their hand was somewhat forced, in-house analysts are finally able to call it like they see it (as long as they talk ONLY about what has already occurred/is occurring). Perhaps it’s better late than never? Could the days of Pollyanna Propaganda be over?

We doubt it, but at least they’re not denying the sky is blue….for now.

DeCommoditizing Investment Research

In the brilliant book, Mavericks at Work (a must read) – there’s a great quote from Vernon Hill at Commerce Bank who says:

“We’ve shown that you can decommoditize a commodity business. Nobody needs another me-too bank.”

The notion of decommoditization is one that the investment research world should take to heart. The lack of insight and value in most investment research has become appalling. When the biggest difference to be found in ten research reports is a 2 cent discrepancy in target price, it’s safe to say that research has become a commodity. But how can analysts change the playing field?

Realistically, it’s not easy for in-house analysts. They are all talking to the same sources as their competitors and learning the same information at the same time (thanks to SarbOx, RegFD and other regs). They all have a mandate to cover specific companies, and truthfully – they really aren’t there to be creative and see/analyze outside of the box. This is a necessary tool, and not one to be undervalued. But is it necessary for firms to have this research from more than one source?

The answer, of course, is no. But big firms – for CYA reasons – need to have in-house analysts dedicated to the companies that their firm invests in. Makes sense. They can’t rely on outside analysts for that. But why would they pay another firm to receive the same research they produce in-house?

Right now, it’s simply because in most cases, they get the research ‘for free.’
(READ: they get it for 3 cents a share as a tack on to their execution pricing.) So why pay for MORE research in addition to that research?

Many firms are starting to understand why. They’re asking themselves what the value is in the commoditized research they currently pay for through their execution, and they’re recognizing how little new information they are accessing. This is leading to a trend in unbundling for some in the industry. It’s possible that decommoditization has already begun. But can it continue?

We believe it can. The feedback StreetBrains gets from clients is that straight forward research is important, but so is insightful, objective analysis. Value is the name of the game – and if indie research providers can step their game up and provide new insights and niche material to their clients, rather than duplicating what firms are already doing in-house or receiving as an execution add-on, decommoditization of this valuable product will occur.

What Makes Research 'Valuable'?

One of the annoying buzz phrases that all independent investment research companies and analysts grapple with is:

What is our value proposition?

While the term itself is cliché and overused, the question is a pertinent one. The simple answer would be to say ‘it’s all relative.’ To some extent, that’s true. Instead of trying to define value, we’re going to outline the questions we (and our analysts) find ourselves grappling with as we develop research that reflects the needs of our clients.

First, does the investor need new, fresh investment ideas? Are they looking for new trends/sectors to look at that they have not paid attention to before?

Does the investor have ideas and just needs to see research that supports or clarifies the ideas? Or does he want research that says the opposite of what he’s thinking/seeing, so that he better understands the full picture?

Perhaps the investor is looking for new, smaller companies who are up and coming? Or insights that are contrarian?

How far ahead do they want to look? Are they long or short term, and are they trying to shift that strategy?

The truth is –it’s simply not a perfect science. Unfortunately, research needs don’t fit nicely into any single one of these boxes.

Perhaps the proper differentiator is much more simplified. What if the analysts are able to tell a story that no one else could possibly tell? For instance, an oil analyst who’s been an oil company CEO, and spent a lifetime in the energy sector; or technical analysts who use a proprietary analytical technique; or analysts who cover 6 times as many companies in a specific sector as most of their competitors?

What better way to ensure that your insights are valuable than to bring to the conversation something that no one else can?

The jury is still out as to whether we’ve re-discovered fire, but, feedback from the StreetBrains ‘Ask the Analysts: 2008 Outlook’ panel yesterday certainly suggests we’re doing something right. (click here for materials from the panel event.)

November 27th, 2007: Happy New Year!!

Remember when you were in college, and you would set your clock ahead by 45 minutes to ‘trick’ yourself into getting up in time for class?

Today, we’re encouraging all investors to ‘trick’ themselves - think like today is the start of 2008. Pop some corks, throw some confetti - and reevaluate the information you base you’re trading decisions on – get yourself back on track to succeed.

As we embark on this New Year, keep in mind that there’s one simple investing mantra that separates the savvy from the inept:

Buy on Call, Sell on News.

Many investors seem unable to avoid the plight of piling onto a sinking ship. Not to overuse our boating metaphors, but, once a ‘call’ is in the news – it’s safe to say that ship has sailed.

Particularly in a world where investing ideas are sanitized and Cramer-ized – trading decisions are often hinged more on what has happened than what will happen. While that strategy might sometimes work in a bull market, the bears will eat you alive.

Unfortunately, many investors don’t have the discipline to resist the allure of a company that’s being hyped in the news. Particularly in today’s world where access to company information is so abundant, many investors mistake awareness [of a company’s present] for insight [about a company’s future] and as a result of the poor investment decisions that ensue, they are left with miniscule returns – or worse – losses.

This week, StreetBrains is hosting an event to help reset the focus for investors. Our ‘Ask the Analysts: 2008 Outlook’ panel will address some of the big calls our analysts are making for 2008 to help investors get out in front of the ball. The analysts will discuss what they are forecasting for their coverage sectors; what will happen to the economy; what will be different by 2009. These are the issues that seed lucrative trading ideas – not today’s Wall Street Journal headlines.

Thinking out ahead of the news – not following the news – is a tough tactic to constantly deploy when most of us find it overwhelming just to keep up with and digest the information that is current. But, discipline and great investment insights will be key to navigating the turmoil that will take place in the markets in 2008.

Here's to '08!

In-House Research: Threat Level: Elevated

Tumultuous markets are leading to an increasingly treacherous landscape for in-house analysts at large and mid-sized firms alike. While the majority of the blame game is taking place in the credit arena, soon, it is likely to penetrate other areas as firms search for ways to regain some of their lost revenue. Before long, the in-house research desks will be asked to stand before the tribunal and prove their worth.

In-house research has been the red-headed stepchild within firms since the fallout in 2001. Seen as a cost center, the research desk has been tossed around from division to division within firms, with no one wanting to take on the ‘overhead’ of supporting them. In a tightened market, the ‘hot-potato’ toss will likely resume for who is responsible for the in-house trading desk.

Are the days of in-house research over? Will we see all research end up being outsourced, where firms can more easily scale their usage of research with the rise and fall of commissions and revenues? It would seem that the day is nearing where these questions are seriously asked.

In any case, it is likely that an increasing number of great in-house analysts will jump ship and move into the independent side of the business to places like StreetBrains.


Making the case for independence

While having a big firm's name to put on your business card used to grant instant credibility for analysts, now, many industry peers will instead make the assumption that your research is a) tainted or b) commoditized. You turn on CNBC, and more and more lesser known firms are popping up as credible, independent sources, whose insights are not commoditized. The playing field is leveling – and rightly so – where the success and credibility of an analyst is more a reflection of track record than affiliation.

Independent analysts are also helping their own cause by proving time and again that it’s not just the big boys who have the tools to get calls right. On the contrary, in a constricted market, it’s hard to ignore the possibility that leaks and cracks in those ‘Chinese walls’ between investment bankers and research desks may deteriorate quickly when a firm’s best interests are at stake. For many institutional investors, it’s just not worth the risk to rely on this type of questionable intel when placing big trades.

So, while highly scrutinized (sometimes unfairly) large investment firms walk the tightrope of finger-pointing and protectionism – the path is being cleared for independent analysts to step up to the plate and establish their value.

While the internal battles ensue at the big Wall Street firms, those analysts who have found the right formula and business model are in a position to capitalize.