Archive for February, 2012

The Wall Street Business Model………will it ever end?

Painfully slow but ever so surely, investors are starting to become enlightened to and understanding of the Wall Street Business Model…..don’t make money for your clients, make money off your clients! Wall Street has done this so remarkably well over the last 50 years that one of the most trusted and accurate market indicators has been indirectly formed from it. Market tops are signaled by a large percentage of individual investors being in the market. Market bottoms are signaled by a low percentage of individual investors being out of the market.

Wall Street accomplishes this by having their analysts give strong “buy” ratings to stocks at market highs influencing individual investors to buy at those tops. Of course, it is Wall Street selling to them. Vice versa, at market bottoms, analysts’ ratings drop to “sell” ratings influencing investors to sell down at the low levels. There, again, Wall Street is more than happy to take those shares off our hands at those low prices. Thank God they are there representing us!

The latest of this kind of atrocity is the story of Diamond Foods. Back at the end of the summer, an independent research firm called into question some accounting practices that Diamond Foods was using. Wall Street analysts quickly jumped onto the story and after investigating found that there was nothing wrong. They reassured investors that Diamond Foods was still a good buy and that all was well. Hell, Wall Street even said that a suicide by a member of Diamond Foods board during this “scandal” was in no way connected to any investigation into Diamond Foods accounting practices.

Fortunately, the FASB was listening to this little independent research firm. It decided to begin its own investigation into the accusation. Lo and behold the FASB found that Diamond was not conforming to standard accounting practices and will be fined and will need to restate its previous earnings. Obviously, the stock is down big today (2-9-12) but the damage is already done. Several Wall Street firms and their analysts have some “splainin” to do! How could a small, independent research firm see the problem while much bigger, better connected firms and their analysts simply missed it?

Do you think it was an accident……a mistake? If so, Wall Street can breathe a sigh of relief because if you think this was not purely a case of, at minimum, incompetence and at worst fraud, then Wall Street’s business model remains safe with no signs of ever ending!