Can you TRUST Talking Heads, I mean analysts?

I mention the phrase “Talking Heads” on this blog from time to time and I am serious. Most large investment houses get it wrong when it comes to timely stock selections (at least outside of their institutional research departments). When using the phrase “talking heads”, I am referring to analysts and firms on the retail side of the fence.

I have preached that these firms are only looking out for their best interests, not yours. They don’t care about anything but your money; they never look out for the small investor (in my opinion of course)! I wrote a post on my old blog about the coverage of Enron and thought it would be great to update the entry and focus on the “Talking Heads”.

Look below to see how multiple major firms kept sending out buy signals for Enron based purely on fundamental analysis. If they looked at the charts, they would have noticed several breakdowns among every type of chart available (intraday, daily, weekly, monthly, etc…). It didn’t matter what chart you viewed, they all had red flags at every corner and even a novice could have located the correction coming. I am not saying that anyone saw the collapse but simple sell rules should have taken all technical investors out of the stock (I never owned Enron and I am glad).

I have included a condensed summary of the case study based from the Dorsey Wright analysis of the Enron collapse (all research was performed by Dorsey Wright – www.dorseywright.com)
I have no affiliation with Dorsey Wright:

View the entire breakdown through this PDF:
Anatomy of a Collapse – Enron

CBS Market Watch Also provides an excellent long term chart though this Timeline

ENE – Enron

Merrill Lynch:
March 21, 2001: $55.89 Reiterated Near-term “Buy” at Merrill
April 17, 2001: $60.00 Reiterated Near-Term “Buy” at Merrill
August 15, 2001: $40.25 Cut to Near-Term “Neutral” at Merrill
Oct 9, 2001: $33.39 Raised to Long-term “Buy” at Merrill Lynch
Oct 16, 2001: $32.84 Raised to Near-term “Accumulate” at Merrill Lynch
Nov 1, 2001: $11.99 Cut to Near-Term “Neutral” at Merrill
(finally cut after 79% loss – not cut to sell)

Banc of America:
August 15, 2001: $40.25 Reiterated “Strong Buy” at Banc of America
August 28, 2001: $38.16 Reiterated “Strong Buy” at Banc of America
Oct 25, 2001: $16.35 Cut to “Market Perform” at Banc of America
(finally cut after 59% loss – still market perform)

Commerzbank:
March 14, 2001: $62.75 Raised to “Accumulate” at Commerzbank
March 22, 2001: $55.02 Reiterated “Accumulate” at Commerzbank Capital
April 18, 2001: $61.62 Reiterated “Accumulate” at Commerzbank Capital
Nov 9, 2001: $ 8.63 Cut to “Hold” at Commerzbank
Nov 28, 2001: $ .61 Cut to “Sell” at Commerzbank Capital
(finally cut to “SELL” after 99% loss)

Lehman:
March 12, 2001: $61.27 Reiterated “Strong Buy” at Lehman
Oct 24, 2001: $16.41 Reiterated “Strong Buy” at Lehman; “the stock is attractively priced)
(still a strong buy after 73% loss)

**Click to Enlarge Point and Figure Chart of ENE**

The Lesson: Use both Fundamental and Technical Analysis!
And always cut your losers, no matter what anybody says, especially the broker making money from your commissions!