The Five Dumbest Things on Wall Street This Week

(Editor's Note: This is the inaugural edition of The Five Dumbest Things on Wall Street This Week, a look at the ill-advised moves by companies, analysts and market movers and shakers.)

Also in This Column

O'Neill's Fire This Time Grubman's 84 Cent Dissolution Lucent's Linguistics CSFB's Integrity Push

1. Applegate's Scarlet Letter

On Monday, the Lehman Brothers strategist and inveterate bull Jeffrey Applegate released a note that all but called a bottom in earnings. "Evidence is mounting that the V in earnings is now," he urged. By a "V," Applegate means the earnings recovery will resemble a V on a chart -- and that we're entering the part where the V starts going back up.

The day after Applegate's call, the folks at Thomson Financial/First Call told TSC that they had recorded 203 earnings preannouncements for the third quarter, 137 of them negative. That outpaces the rate of warnings for the first or second quarter at the same point in the season. Analysts now expect earnings to decline 9.9% in the third quarter, compared with expectations of 1.6% growth as recently as April Fools' Day, aptly enough.

What are Applegate's reasons? He couldn't immediately be reached for comment, but his note gives an explanation. Second-quarter earnings are "coming in better than expected," he said. As of his report, the ratio of positive to negative earnings surprises was 6-to-1. But companies have been tamping down expectations for months now, and are clearing a very low bar. Plus, the latest batch of numbers masks how bad things have really been for companies.

For investors too slapped around by the market "pros," remember, Applegate has sounded plenty of optimistic notes. Last October, he said tech stocks were undervalued; in January, he hypothesized that the stock market trough might have occurred several months earlier. And in June, he said the market was slowly on the upswing, "climbing a wall of worry."

Applegate has acknowledged his less-than-stellar forecasting and apologized a couple of times for having wrongly called bottoms. But the Don Quixote of the illusory bull market is unbowed, offering up this week what may turn out to be the most embarrassing use of the V sign since Dick Nixon.

2. O'Neill's Fire This Time

There are several potential flash points for the next global economic flare-up: the debt crisis in Argentina, Turkey's further destabilization and any time Paul O'Neill sits down with the media.

The treasury secretary got off to a shaky start in his relations with Wall Street this year after a few public relations Magoos on the dollar and Treasuries buybacks unsettled the markets. The former Alcoa chairman, whose steely (aluminum-y?) grip on his old employer's stock stoked a mini-controversy a while back, reportedly has since told senators, "I'm really learning to be awfully careful of what I say in this town."

In an interview with the International Herald Tribune this week, O'Neill demonstrated his interpretation of carefully choosing words. On the global economy, O'Neill told the Tribune that the view of interconnected markets was simply a "fashion" and that we "need to retire like the Hula Hoop." He characterized predecessor Robert Rubin -- whose assured stewardship of global hot spots and the U.S. economy routinely soothed the savage bull -- as "chief of the fire department."

O'Neill, who couldn't be reached for comment, seems better suited to starting fires. To his credit, he supported an aid package for Brazil and said he wants to be proactive on global economic problems -- something he may have ample opportunity to do in the coming months. But in pooh-poohing concerns about the risks of global economic dominoes (remember the Thai baht?) and in knocking Rubin, who could still be running a victory lap around Wall Street if he chose to, O'Neill still may not understand how to navigate the media, let alone the global economy.

3. Grubman's 84-Cent Dissolution

If someone told you not to buy an 84 cent stock, would you assume he was insulting your intelligence? Would you conclude that person was a fool, and henceforth disregard his advice? Most rational human beings would be inclined to do both -- which suggests there will be more well-deserved tarrings of sell-side analysts' reputations in the future.

Earlier this week, this scenario came to pass when Salomon Smith Barney analyst Jack Grubman downgraded Metromedia Fiber Network (MFNX Quote), which was trading at 84 cents at the time, from a "buy" to a "neutral." The stock has lost 98% of its value over the last year, spiraling in slow painful eddies down from $10 at the beginning of 2001 past the $5 mark in March. It breached the traumatic $1 mark this month.

Most people would laugh if you suggested they hold a stock worth about as much as a doughnut. Yet Grubman persists -- long, long after he can tell investors anything useful about the stock. And it's doubly offensive that he still can't bring himself to say "sell." (Sure, we know the way analyst language works, but really.)

We may never know if that's a result of Salomon's investment banking ties with Metromedia, garden-variety arrogance or faulty optimism -- it's probably a mixture of all three. This morning, a spokeswoman for Grubman said he will not comment beyond what's in his report.

If it's any consolation, Jacob Zamansky, a lawyer with Zamansky & Associates in New York, has floated the possibility of suing Grubman, suggesting his research was unduly influenced by investment-banking concerns. Zamansky's the same guy who won $400,000 for an investor who lost money by following the bullish calls of Merrill Lynch analyst Henry Blodget.

4. Lucent's Linguistics

For a crash course in earnings season lingual gymnastics, look no further than Lucent's latest earnings release. Substitute "utterly disastrous" where Lucent used the word "challenging" and you'll get a sense of the truth.

But it wouldn't be earnings season if there weren't something to crow about. So what does a company say after it's reported a $3.25 billion quarterly loss, axed its dividend, seen its "junk" status bonds put on negative credit watch and warned that it could take a charge of up to $9 billion next quarter?

It talks about restructuring. "We're accelerating our progress," offers CEO Henry Schact, hopefully. Too bad that in this case, the restructuring relies largely on cutting operating expenses, which in turn depends on mass firings, which -- true to Schact's words -- do look to be accelerating. Going forward, the company plans to lay off up to 20,000 people.

As for the rest of FY 2001, it's a "transition and rebuilding year." Sure, like Dresden in 1946. (The company didn't immediately return calls for comment.)

5. CSFB's Integrity Push

Following the example of Merrill Lynch earlier this month, Credit Suisse First Boston said on Tuesday that it would no longer allow analysts to own stock in the companies they cover.

Well, aren't they bighearted. Too bad analysts would rather get a bad rash than own stock in many of the companies they cover. And it's a shame that on the same day the policy was announced, Bloomberg ran a story about how CSFB insiders, including analysts, scored profits after they got sweetheart deals on stock buys.

The fact is, prohibitions on stock ownership are utterly irrelevant to the real conflicts of interest at banks: the power of underwriting departments as well as the brokers who actually push stocks on clients. And that doesn't seem too likely to change by itself, given that Frank Quattrone, head of tech investment banking at CSFB, isn't known for his genteel and retiring nature.

It's too late for the firm to get religion, at least in a way that will convince anybody. It's already lost massive amounts of credibility. Earlier this month, CSFB's chief executive officer left in the middle of criminal and civil investigations into how the brokerage distributed IPO shares. At this point, CSFB talking about its commitment to the "integrity and independence" of its research is akin to Vladimir Putin talking about his devotion to human rights. (The firm couldn't be reached for comment.)

A modest proposal: Some truly contrite brokerage house should force its analysts to follow all their own recommendations in their own portfolios.