The Nudge-Nudge Wink-Wink Attitude Won't Die

Reader reaction to a story here Friday about

analysts' alchemy demonstrates how far apart the perspective of retail and institutional market participants remains.

The story demonstrated how sell-side analysts revised what they were incorporating in their consensus estimates after

Microsoft's

(MSFT) - Get Report

earnings report last Thursday. Their intent seemingly was to make the company's apparent miss of said consensus look better than expected

ex post facto

. Even the folks at Thomson Financial/First Call, the arbiters of consensus estimates, were a bit baffled and somewhat miffed by the analysts' fancy footwork.

Email response to the story from retail investors ran along two main themes:

"Give 'em hell, TaskMaster"

and

"Why should I care, these guys are all crooks anyway?"

Response from Wall Street professionals was also two-pronged, although thematically much different.

Emails from institutional investor/trader types focused on Microsoft, rather than the sell-side coverage (which was the focus of the story). Several emailers defended the company -- noting its ability to grow revenue in a difficult environment. "What will happen when the IT market cycles upward and capex cycles upward?" one money manager wondered. "If you are forward looking at all, you have to be a buyer of this company."

But Microsoft

lowered

guidance for its fiscal fourth quarter and 2003, I replied. Yes, but "everybody" knew Microsoft was going to guide down, the manager retorted.

Some of this back-and-forth was relayed in

RealMoney.com's

Columnist Conversation Friday afternoon, where I wondered the following: If the lowering of guidance was so well known, then how come the analysts were taking their numbers down after the fact? You'd think in this environment they'd want to be seen as being proactive and not just relying on the company's public guidance. (Merrill Lynch and Goldman Sachs were among the firms lowering their estimates even as they issued positive comments about 'Soft's quarter.)

That, in turn, generated the most shocking feedback of all -- defense of the analysts from a buy-side participant who, unfortunately but predictably, requested anonymity:

"Aaron, Stop thinking like a retail investor. If estimates are going up, the share price will usually go up. Microsoft was bid up Friday because it reset earnings expectations to a level where, given any improvement in the economy, estimates should go up from here. The shares had been selling off recently because everyone knew that Microsoft was going to lower the bar, they just didn't know by how much. Whether or not non-operating earnings should be included in First Call estimates is another story (I don't think they should be), but the bottom line is that Microsoft did exceed expectations for operating income and set very reasonable expectations for the future. Consensus numbers were not already lower because analysts (and investors) don't like to see estimates whipsawed all over the place (italics added). There were a number of analysts who publicly stated that Microsoft would have to lower guidance and that estimates would have to come down, it just doesn't make sense to come out with a random number right in front of the quarter and then have to change it a few days later.

The Great Divide

Presuming this emailer is fairly representative of his peers, a few things are clear from this email: First, Wall Street doesn't think much of retail investors (no shock there). Second, buy-siders see the "value add" of sell-side analysts not in their ability to forecast what companies will do, but in their ability to maintain a steady hand in their estimates.

Given what's transpiring with

WorldCom

(WCOM)

shares today -- recently down 33% after its warning late Friday, which was followed by a string of analysts' downgrades Monday -- I'd like to paraphrase from Jim Cramer's

column, which neatly sums up the debate: "Stupid or corrupt," the analysts missed the message of WorldCom's stock (i.e., death-knell) and "they should be ashamed either way."

While the Microsoft situation is less dramatic, the same applies to it.

Third, the analyst-defender's email showed how little attitudes have changed on Wall Street -- despite

Enron

, despite Arthur Andersen, despite New York Attorney General Eliot Spitzer's investigation, despite two years of bear market action, etc., etc.

When I detailed

Brian Finnerty's propensity to recommend stocks in which his firm had a financial stake without disclosing those relationships last July, the most striking thing was that Finnerty really believed he was doing nothing wrong. Furthermore, several readers -- from the professional ranks -- emailed to defend him and other strategists who are frequent guests on financial television and

felt little need to make such disclosures. (Still, none shared Finnerty's habit of persistently recommending stocks in which a conflict existed.)

Finnerty has since left C.E. Unterberg Towbin for a "quieter life" as an investment strategist with brokerage firm Melhado Flynn in Hilton Head, S.C. Meanwhile, financial TV networks,

CNBC

most notably, have greatly increased their public requests for disclosure of conflicts.

Draw your own conclusions about whether there's a connection there, but the emailer's defense of the Microsoft analysts showed how little attitudes on Wall Street have changed -- despite all that's happened and the industry's rhetoric. As my editor noted, that's not surprising given that the personalities largely remain the same.

This column aims to inform retail investors what the professional community is thinking. The opposite is true here. The industry needs to realize there's a price to pay for its ongoing dismissiveness toward the "little guy" and the nudge-nudge wink-wink attitude toward companies and the folks who are ostensibly charged with analyzing them.

For all the talk about retail investors "abandoning" the market, there have been only five months of net outflows from mutual funds since the end of 1999, according to the Investment Company Institute. Stock funds had inflows of $4.7 billion in February (March data should be out this week), and the American Association of Individual Investors' sentiment index showed more than 40% bulls last week.

Should retail investors really desert Wall Street, the resulting losses will make Monday's midday slide look like what it really is: significant, but within the realm of normal given recent market trends.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.