The stock ratings issued by our sister company, Weiss Ratings, Inc., have just been ranked #1 in the nation, according to The Wall Street Journal.
• Weiss Ratings outperformed all the major Wall Street brokerage firms covered by the Journal.
• Weiss Ratings also outperformed all the independents covered in the article.
• Our ratings outperformed the S&P 500 Index by 19.73 percentage points, the best among all the research providers covered.
Plus, there are two other important conclusions to be drawn from the data published in the Journal:
• The large Wall Street brokerage firms have made some significant improvements.
• However, as a rule, independent research providers continue to outperform the Wall Street firms.
Why The Ranking Method Used by The Journal Is Accurate
The Wall Street Journal published the rankings for 23 of the nation’s leading providers of buy-sell-hold ratings for stock investors — including not only large Wall Street firms like Deutsche Bank, J.P. Morgan and Merrill Lynch … but also independent firms like Argus Research, Columbine Capital, Ford Equity and Weiss Ratings.
Plus, the Journal uses the rankings of an independent source, Investars.com, which, in turn, uses a balanced yardstick to measure performance.
“It’s a mathematical formula — not a real investment portfolio. But with this yardstick, if a research firm issues a “sell†rating on a stock that subsequently goes down by, say, 10% (while the S&P goes down only 5%) it gets a credit for the difference — 5 percentage points. Similarly, if a firm issues a “buy†rating on a stock that subsequently goes up by 10% (compared to an S&P rise of only 5%), it also gets a 5% credit. In this way, there’s no bias against bears … and no bias against bulls.”
Here are some more details on the results:
• For the one-year period through May 1st, 2005, Weiss Ratings is ranked #1, ahead of all Wall Street firms and ahead of all independents covered in the study.
• In the same period, Weiss Ratings outperformed the S&P 500 Index by 19.73 percentage points.
• Columbine Capital, also an independent research provider, is ranked #2.
• For the four-year period beginning May 1st of 2001, Callard Research is #1, Channel Trend is #2 and Columbine Capital is #3. All three are independents.
Bottom line: Independent firms outperformed the major Wall Street firms. So investors who used their research would most likely have experienced superior results compared to investors who relied on the research of major Wall Street brokerage firms.
Meanwhile, The Wall Street Journal also reveals some positive changes for customers of the Wall Street brokerage firms:
Positive change #1. Most of the Wall Street brokerage firms are doing a better job than they used to. They have removed a lot of the earlier bias from their research. They’re less likely to issue false “buy†ratings. And they’re more willing to issue “sell†ratings.
Result: In the year ending May 1st, the ratings of nine out of 12 of the Wall Street firms outperformed the S&P, compared to only four in the 2001-2005 period.
And two major firms did an especially good job: Deutsche Bank ranked #3, outperforming the S&P 500 Index by a healthy 16.79 percentage points; and Merrill Lynch ranked #5, beating the S&P by a solid 15.05 points.
These results will vary, depending on the particular time period you use. But they tell me that, with most major Wall Street firms, you can probably trust your broker’s research a lot more than in the past.
Positive change #2. If you’re a customer of one of the top 12 Wall Street firms, and you’re interested in one of the stocks they cover, they will not only give you their own opinion on the stock, but they will also give you a SECOND opinion — the ratings and research reports from one or more of the independent research providers.
The 12 Wall Street firms currently providing free independent research are:
Bear Stearns
Credit Suisse First Boston
Deutsche Bank
Goldman Sachs
Lehman Brothers
J.P. Morgan Securities
Merrill Lynch
Morgan Stanley
Piper Jaffray
Salomon Smith Barney Inc.
Thomas Weisel
UBS Warburg
So if you’re one of their customers, you now have access to independent ratings and research reports at no charge.
And based on the performance results published in The Wall Street Journal last week, it’s clear that you should be taking full advantage of this special service they’re offering.
Also in The Wall Street Journal: New Threats To Your Wealth
Why do you need ratings? Why should you be so cautious about picking the right stocks at the right time?
The reasons are in another Wall Street Journal article, this one appearing on the front page, Thursday, June 9th.
Its main points (in my words):
Four years ago, when the tech bubble collapsed, investors lost $5 trillion. Enron, WorldCom, and dozens of other major firms were driven under by debt, mismanagement and corruption. The old ghosts of deflation, not seen since the 1930s, were returning.
So Fed Chairman Greenspan, spooked by the possibility of financial chaos in America, rushed to the rescue.
He slashed interest rates to the lowest level in 45 years …
He pumped in cheap money like never before …
And, he looked the other way while most of that money was dished out to the public with no-interest car loans, interest-only mortgages, and other easy credit.
Did the Greenspan cure work? On the surface, yes. The stock market recovered, and the economy grew.
But while Mr. Greenspan was patching things up in the aftermath of the tech bubble, he helped create two NEW bubbles that are potentially even more dangerous — the housing bubble and the foreign debt bubble.
What will be the outcome? Here are two possibilities presented by The Wall Street Journal:
| Scenario A. | “The Fed has simply replaced the stock-market bubble with one in housing, which could burst. That would sap the consumer spending that mortgage refinancing and home-equity loans have fueled.†|
| Scenario B. | “Foreign investors could stop buying U.S. stocks and bonds, sending the dollar down and inflation up, prompting both the Fed and bond market to jack up interest rates sharply.†|
What can a central banker like Chairman Greenspan do about it? According to the Journal,
“Faced with an asset bubble, a central bank has two choices: Prick it early or wait for it to burst and try to contain the damage.
“The Fed in 1929 and the Bank of Japan in 1989 tried the first route, raising interest rates in response to rapidly rising asset prices. The result in the U.S. in the 1930s was depression and deflation. In Japan it was stagnation and deflation that continues today.â€
According to the Journal, Mr. Greenspan seems to have chosen the wait-for-the-bubble-to-burst approach:
• In the 1990s, while the tech bubble was raging, he may have talked about “irrational exuberance.†But he did little or nothing to stop it. He waited for the bubble to burst. Then, after the fact, he jumped in to save the day.
• Today, in the 2000s, he’s been following a similar path. While the housing bubble rages, he talks about “froth†in the market. But so far, he has done little or nothing to stop it. Again, he seems to be waiting for the bubble to burst.
My view: Here in the United States, most Americans would love to put off the day of reckoning as long as possible. So they applaud Mr. Greenspan’s approach — they’re very glad he’s not pricking the bubble.
But overseas, most foreign investors don’t own U.S. real estate. So they don’t benefit from its rise.
What they do own is TRILLIONS in U.S. bonds, and these bonds can only be hurt by inflation in the United States — whether from real estate or from any other sector.
These foreign investors are watching the American housing bubble with growing anxiety. If they see the housing bubble is bursting — knocking the U.S. economy and the dollar for a loop — they’re likely to rush for the exits, dumping U.S. bonds.
The Wall Street Journal puts it this way:
“The current-account deficit, the broadest measure of the shortfall on trade and investment income between the U.S. and the rest of the world, has moved into a zone that many economists consider dangerous. It stands today at 6% of gross domestic product, the nation’s total output of goods and services, up from 4% in 2000.
“To finance it, the U.S. now borrows about $2 billion a day from foreigners. As the foreign debt mounts, so does the risk that investors will demand a higher interest rate or lower dollar to keep on lending …
“… foreign holdings of U.S. Treasury bonds and bonds backed by Americans’ home mortgages have jumped 80%. …
“Almost every economist agrees this situation cannot continue indefinitely. The debate is over how, not whether, the global economy rebalances: Will it be smooth, through some combination of declining dollar and accelerating foreign demand? Or will it be chaotic, with a dollar collapse, much higher U.S. interest rates and perhaps a global recession?â€
Former Fed Chairman Paul Volcker says a crisis is likely, and some of the current leaders at the Fed agree. According to the Journal, they’re inclined to err on the side of HIGHER interest rates.
So as I’ve been telling you all along, quarter-point interest-rate hikes just won’t cut it. To make a difference, the Fed is going to have to jack up rates more aggressively … plus add an element of surprise to the equation.
My forecast: In the not-too-distant future, expect an interest-rate shock of a half a point or even more.
Time Magazine: Housing Bubble Vulnerable To Rising Rates
What will higher interest rates do to the housing bubble? For some clues, don’t miss the cover story in this week’s Time Magazine (June 13th), headlined “HOME $WEET HOME.â€
The conclusion I draw: Anyone who fails to recognize the housing bubble is either blindfolded by greed or has an ax to grind. Don’t be among them.
Time describes the housing bubble this way:
“Folks brag about having bought their home in the ’90s the way they used to brag about having bought Microsoft in the ’80s …
“Zealous new investors going into a hot field, chasing market momentum and betting huge sums on the belief that this may be a new era: It sounds disquietingly like the late-’90s day traders …
“[W]hat’s driving the market is low interest rates, herd psychology, speculation and the expectation of unending price increases. Meanwhile, promiscuous lenders are throwing money at buyers like beads during Mardi Gras. ‘Anybody who can crawl in off the street can get a loan with 0% down at three or four times their income’ †says UCLA economist Edward Leamer …
“When people feel rich, they spend whether their wealth is actual or merely on paper. We saw that phenomenon at work during the stock run-up of the ’90s. It’s called the wealth effect, and it’s even more potent with housing.â€
Indeed, many people are spending their paper gains from homes even FASTER than they used to spend their paper gains from stocks. They think the home prices are more stable. But are they? Two reasons why they may not be, according to Time:
First, “a broad drop in home values … would affect a far larger cross section of Americans than did the NASDAQ bust.â€
Second, most investors did NOT borrow on their tech stocks nearly as much as homebuyers are borrowing today on their homes. They use nothing-down mortgages … interest-only mortgages … negative amortization mortgages (in which your loan amount actually grows larger with time) … and more.
Time points out the danger posed by these high-risk loans:
“… if interest rates rise and home values stall or — gasp! — fall, those borrowers may become overwhelmed by steadily rising payments. (Household monthly debt costs are already at an all-time high.) …
“Such trouble would have repercussions for the entire economy. If enough homeowners become swamped by their debts and have to sell, prices would drop, creating a reverse wealth effect and fueling a slowdown.â€
When might this begin?
For an advance warning of what’s in store for home values, I suggest you watch real-estate-related stocks. That includes home-improvement retailers, real estate brokers, construction companies, mortgage lenders and banks.
When the housing bubble is starting burst, at least a minority of company insiders will see it happening. They will sell their own shares in the companies. And they will drive the stocks down.
In the meantime, continue to keep the bulk of your money SAFE! And be sure to check the latest rating of your stocks.
Good luck and God bless!
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
President, Weiss Research, Inc.
eletter@weissinc.com
P.S. Good News!
Starting June 20th, I’m switching from weekly to daily! On Monday, you’ll get my regular email, as usual. No change whatsoever in my approach.
Then, Tuesday through Friday, we’ll expand into a wider range of topics: Today’s stock market … oil, gold and natural resources … bonds and interest rates … personal finance tips you can put to immediate use … and more. Plus, I’ll invite other columnists and guests to bring you a greater diversity of voices and opinions.
The information will always be current, immediate and there for you every morning — no matter what day of the week it is, regardless of what happens in the market. You’ll get more breadth, more depth and more value — ALL for free.
It’s my way of celebrating the resounding success of “Martin on Monday” and thanking you for your loyalty.
But naturally, when it arrives on Tuesday, Wednesday, Thursday and Friday, I can’t continue calling it “Martin on Monday.” So I’m changing the name of this service to “Money and Markets.â€
The first issue of Money and Markets will be in your box Monday, June 20th. You don’t have to do anything to switch over. It’s all being taken care of automatically. Just be sure to watch for the new sender name of “Money and Markets†in your email box next Monday.
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