We See What We Want To See – Part 2

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In last week’s blog post, I pointed out the strong tendency investment analysts have to bullishly spin virtually any economic or market development.  Economic growth is roundly and regularly applauded.  As I highlighted last week, many firms similarly applauded economic weakness over the past year, because it was likely to lead to more Fed intervention.

Reading most economic analysis provokes more yawns than smiles.  I found myself laughing out loud this week, however, as I studied a piece by a highly reputed research firm.  A report that over the past three months analysts had dropped their estimates for 2013 earnings of S&P 500 companies from $108 to $101 would logically be viewed as bad news.  What struck me as funny were the mental contortions that analysts will go through to impart a bullish spin: in this case, “$7 cut in earnings estimates reduces the risk of disappointments.”

In a separate report this week, an analyst turned other downbeat headlines into a positive.  From The Wall Street Journal – “Tepid Job Growth Fuels Worry”; Investor’s Business Daily – “Weak Hiring Offers Little Buffer For 2013 Tax Hikes”; and New York Post – “Shame Old Jobs Story”.  He summarized them under his own headline – “Still Climbing a Wall of Worry”. Rarely do you read analysts cautioning against overconfidence, a Slope of Hope, when headlines are upbeat.

It is certainly appropriate to examine the news through a skeptical lens, but be cautious of the analyst whose work almost always results in a positive conclusion.  Ultimately the successful investor has to process data through more discerning filters.