TCS Daily

Bulls, Bears, and Blogs

By Dominic Basulto - June 18, 2002 12:00 AM

A lot of talk has surfaced recently that blogs ("Web logs") represent a revolution in online journalism. After all, with their ability to report news on a 24/7 basis with little or no editorial oversight and an abundance of hyperlinks, they represent a perfect vehicle for shaping opinion and keeping tabs on information from a wide variety of sources.

Nobody seems to know quite what to do with these blogs, but almost everybody agrees that unfettered growth of blogs is probably a good thing. Some people want to use blogs as an advertising vehicle. Some people want to use blogs to drive traffic to traditional media outlets.

But what about the relationship between blogs and Wall Street research departments? Can blogs save Wall Street research? Blogs may represent just the antidote to the current problems bedeviling Wall Street investment bank equity research departments. Much as blogs provide a needed system of "checks and balances" for traditional media and journalists, they can also provide a system of "checks and balances" for Wall Street analysts.

Street Wise

In the days before 24-hour financial news, online trading, Internet chat rooms and live video streaming of corporate conference calls, such a notion would have been laughable. After all, who would you trust -- an Ivy League MBA at a white shoe firm or some anonymous guy with a homemade web site? Yet, in the aftermath of the carnage in the Internet and telecom sectors, the answer to that question is not so obvious. And need one mention Enron or Global Crossing or a host of other examples where Wall Street completely missed the bigger picture?
Already, much -- if not all -- information about companies is publicly available. Thanks to the SEC's Regulation FD ("Fair Disclosure"), the average man on the street now has as much information as The Street. In the era of do-it-yourself-research popularized by online trading, it is not unthinkable that blogs may begin to re-shape Wall Street research as much as they have already started to re-shape journalism.

The next time a high-profile analyst puts a $400 price target on a firm selling e-widgets, maybe a blogger with a particular specialty in those e-widgets can check the assumptions behind that $400 price target. Or, better yet, watch the quarterly conference call and fact-check the consensus estimates. What if just one blogger, acting alone, had started to raise the alarm on Enron with a simple blog-posting like, "Well guys, I just read the Enron annual report and I don't understand a word of it"? Quite a few families in Houston might have appreciated that.

Over time, one imagines, some Wall Street analysts would actually become bloggers -- much as some Old Media journalists (
Andrew Sullivan, Mickey Kaus) have become New Media bloggers. Instead of quarterly research notes, maybe analysts could post daily reports on their blogs? Even without this 24/7 blogging, the next step in the evolution of company analysis will likely be a further decentralization of information and influence away from Wall Street and into the Blogosphere.

Anatomy of a Problem

For those with only a passing familiarity with the current Wall Street investment bank scandal, the story goes something like this: During the Internet go-go days of the 1990s, Wall Street equity analysts became the new Masters of the Universe. Analysts like
Henry Blodget and Mary Meeker had the potential to make or break a stock. Instead of creating a Chinese Wall between the equity research department and the investment banking department, Wall Street banks actually encouraged collaboration between the two.

After all, a glowing research report could lead to investment banking business. And that's where the two most lucrative businesses on the Street are: corporate M&A and new equity issuance (IPOs). Once analysts were promised a piece of the pie (as memos and e-mails from Eliot Spitzer's office indicate), it was off to the races.

While Wall Street research has always erred on the bullish side, during the Internet boom, it bordered on the ridiculous -- shares of a company might be down 90%, with internal memos written by analysts calling the stock a "piece of junk", and rumors circulating that the company was headed for Chapter 11. Yet the Wall Street bank would steadfastly keep a "buy" rating (or better yet, a "strong buy") on the stock if it meant the opportunity for more investment banking business. Banks might talk about the relationship, but it was all about the transaction.

The Way of Wall Street, The Way of the Blog

So, what does all this have to do with blogging? A lot, it turns out. Blogs offer potentials solutions to some of the very same problems that contributed to the current Wall Street research mess.

The now tarnished Wall Street research model was marked by the following characteristics:

  • Lack of independence. When equity analysts are compensated, at least in part, for their ability to drive investment banking business, they lose their impartiality. In Wall Street parlance, there needs to be a "Chinese Wall" between equity research and investment banking. Enough said.

  • Strong hidden bias, never revealed to the casual reader. After all, "BUY" reports generate new business, so analysts sometimes jumped through hoops to tout the stock. Moreover, analysts never disclosed their personal ownership in the company or the firm's investment banking relationship with the client.

  • Focus on the transaction, not the relationship. The easiest way to transform research from a "loss leader" to "profit center" is by generating increased deal volume. Suddenly, all those stacks of papers are bringing in business, not just gathering dust. The more deals, the more fees, the more take-home pay for the analyst.

  • Dry, official-looking research reports full of "expert jargon," obfuscating terminology (e.g. EBITDA) and dubious methodology (e.g. using pie-in-the-sky "multiples" to value stocks. Oh, yes, Internet stocks require a higher multiple. Don't you get it?)

What If Blodget Had a Blog? A "Blodg"?

Now consider the characteristics of what makes a quality, highly readable blog. When compared with the characteristics of the tarnished Wall Street research model above, a startling fact emerges: Blogs are almost exactly the opposite of Wall Street research.

  • Independent voice. In fact, blogs love to assert their independence at every turn. They are beholden to nobody, let alone corporate interests. In fact, most bloggers take a peculiar delight in taunting their not-so-distant cousins in Big Media.

  • Strong bias that is ALWAYS revealed to the reader. Blogs announce their orientation and philosophy at every possible link. There are the conservative blogs, the liberal blogs, the pro-Israel blogs, the pro-Arafat blogs...You name it, you can find it. While each blog has a particular "take" on issues, they see no harm in expressing the views of their detractors (and supporters). And if bias isn't revealed, some other blogger is sure to call you out on that.

  • Focus on the relationship, not the transaction. In the blogosphere, there are no transactions. Who cares if somebody touts -- or trashes -- a stock? Bloggers aren't selling stocks. Their currency is ideas, not cash or stock. Instead, bloggers work hard to cultivate a relationship with the reader, sometimes going so far as to announce the slightest details of their personal life every few days or so. And bloggers are responsive -- if you don't agree with them, they are amenable to changing their positions or ideas. There is an implied reliance on "Truth," with a capital T.

  • Plain-looking Web sites, with emphasis on "everyday language." After all, blogs attempt to maintain a conversation, and there aren't too many enjoyable conversations that consist entirely of CAPEX, EBITDA, DCF, ROI and COGS. "Roi" is a French king, and "Cogs" are things that connect wheels, the last time I checked.

Blogs, of course, are not perfect. However, with their focus on everyday language and a tell it like it is approach, they certainly would make an interesting addition to the Wall Street research debate. All it takes is one high-profile Wall Street pundit to open up shop in the blogosphere. Maybe someone like
Louis Rukeyser or James Cramer or Maria Bartiromo, or heaven forbid, even a reformed Henry Blodget. Given the tendency for blogs to proliferate, there would likely be all kinds of "instant experts" entering the fray. Who knows? Maybe a Sopranos-themed blog would be next ("Yo, Tony, fuhgeddaboudit. Dis company's gonna do great").

The writer is Senior Editor at technology news service where he covers the venture capital and e-business sectors.

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