Saturday, July 09, 2005

The Cult of the Analyst: Henry Blodget

Privileged Exeter graduate and aspiring journalist turn avatar of the Internet Boom?

Yep, you guessed it.

Henry Blodget.

I'm reading Gasparino's Blood on the Street right now and damn is it good.

At its simplest, the book is about the Tech Bubble.

But the real treat is the window it gives us into Blodget, who climbed up the corporate ladder to become the most sought after tech analyst alongside Morgan Stanley's venerable Mary Meeker (dubbed the Queen of the Net).

At one point in his career, Blodget was making $10 million a year for following up-and-coming internet stocks.

The infamous call on Amazon made his career, sending a former Prudential trainee and then unknown rookie analyst at CIBC Oppenheimer to Merrill Lynch, where Blodget would run the bank's Research Department, bring in millions in underwriting fees, and catapult the Boom to dizzying heights.

The whole point being that the best analysts during the Bubble weren't objective financial gurus or number-crunchers.

No, the guys whom made the big bucks were rainmakers, psuedo investment bankers who knew how to pitch the Internet revolution to wealthy clients, institutions, and the general public.

Most of them couldn't tell the difference between burn rate and heartburn.

It didn't matter.

Momentum drove equity prices; not fundamentals.

Once Blodget predicted Amazon would baloon into a global enterprise and hit the $400 a share mark (when pundits were declaring AMZN's then current price of $250 a share preposterous), the market did exactly that, rewarding even the most pitiful dot.coms with nosebleed valuations.

And with analysts taking over CNBC, who could resist the Mania.

One study found that Blodget appeared on CNBC, on average, every 3 days.

That's mind boggling.

Old School analysts were Ivy League B-school vets who pored over balance sheets and cash flow statements until they turned blue.

Scientific objectivity was something most of them had instilled and prized early on.

Then these dinosaurs had their jobs usurped by young bucks like Blodget.

Sounds reasonable, given the paradigm shift the New Economy represented.

Whereas profits drove the returns of Old Economy companies, it was eyeballs, clicks, and traffic which gave analysts and investors alike a hard-on for New Economy businesses.

All of them were operating under the mantra "revenues now, market share later."

Blodget's tale is in reality a result of several coincedences: investor greed, pressure management at Merrill (CEO Komansky was being coerced by the Board to either join the technology craze or find a new job), and sheer luck.

Blodget was at the right place at the right time, riding the wave of market euphoria alongside millions of Americans and getting his 15 minutes of fame, all the while adding 6 or 7 zeros to his own bank account.

The cult hero remains unapologetic about having pushed Web stocks (most of his recommendations lost about 80% of their value) so aggressively before finally downgrading some of them after the market tanked, insisting that "From 1995 to 2000, the real risk was missing the rise."

Ultimately, Blodget was banned from the securities industry for life after Eliot Spitzer uncovered that the analyst had been touting stocks (like Infospace and in widely disseminated research reports while privately denigrating them in internal emails.

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