Thursday, May 19, 2016

The Problem With Street Consensus:

The problem with “street” or analyst consensus is the interests of the “street” and the private investor are not closely aligned.

In my last post I referred to an item on Tesla Motors Inc. by Toronto Star columnist David Olive - - “Is the Tesla excitement just magical thinking?” Olive hammers home some valid problems with mounting losses, production questions and the debt levels.

Now a few days latter - an item from Business Insider - Myles Udland – relating to Goldman Sachs and Tesla Motors

I quote in part -

Well, here you go.

On Wednesday, before the stock market opened in New York, Goldman Sachs analyst Patrick Archambault upgraded shares of Tesla.

Archambault put a "Buy" rating and a $250 a share price target on the stock because of what he sees as the market's failure to "fully [capture] the company's disruptive potential."

On Wednesday, after the market closed in New York, Tesla said it would sell $2 billion worth of stock, $1.4 billion of which would be issued by the company.

Tesla CEO Elon Musk would sell $600 million worth of stock to meet a tax obligation related to his buying even more Tesla stock. It's complicated. You can read about that here.

Running the book for that new stock offering? Morgan Stanley and ... Goldman Sachs.

Now if you believe that banks — and specifically Goldman — are bad actors, this sort of deal makes sense. You might, in this scenario, say, "Well, of course: Goldman says nice things about Tesla and then Tesla does a nice thing for Goldman."

This would, however, be a breach of what the banks call a "Chinese Wall," or a separation of various divisions that could come into conflict one another.

Research and investment banking are examples of divisions that could create a conflict of interest and between which there exists said wall — meaning that research analysts don't know who investment banks are doing deals with and investment banks don't know what analysts think of companies outside of published research.

In an email to Business Insider, Goldman Sachs said: "Our Research is independent. We followed all of our standard policies and procedures with respect to our research publication [on Wednesday]."

It seems unlikely that a coordinated breach happened here. That would be illegal and, while I'm not a criminal or a lawyer, it would seem that the point of breaking the law is not to get caught.

But here's what this looks like to many:

The stock upgrade is a detailed argument for why you, the investors, should buy the shares. As a result, investors buy.

This report is delivered just as Goldman's sales force is about to hit the phones to push $1.4 billion of those very shares for a nice fat fee for Goldman and a dilutive hit to the shareholders.

So then there are investors who, based on Archambault's note, bought the shares in the morning only to learn by that afternoon that Goldman would have a hand in diluting their newly acquired ownership stake.

And the popular view says Goldman knew this was going to happen the whole time.

There's an additional potentially uglier mess if you also think Goldman clients were told by Goldman sales-trader types not to buy the stock on the upgrade: What did they know, and so on.

End Quote

Our chart – daily bars of Tesla displaying the big volume spikes of the early April 2016 price peaks of $260 and the subsequent decline to the Goldman pop of May 18, 2016. It seems the investment shepherds were selling in April and the investment sheep are buying in May.

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