November 23, 1999

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Analyst's Bearish Calls Land Him in Doghouse

By ROBERT MCGOUGH

Staff Reporter of THE WALL STREET JOURNAL

When Laurie Buntain, head trader at Sife Trust Funds, heard that analyst Michael Mayo had recommended selling bank stocks, she swung into action.

No, she didn't sell Sife Trust's big holdings of bank shares that Mr. Mayo had railed against (which were falling). Instead, she angrily grabbed a picture of Mr. Mayo from a back issue of a magazine, blew up the photo on a copier, scribbled "WANTED" over his face and pinned it to her bulletin board.

Mr. Mayo, a 36-year-old analyst at Credit Suisse First Boston, a unit of Credit Suisse Group, says he has been "feeling pain" since making his negative call on May 24. Mr. Mayo dropped in Institutional Investor magazine's influential analyst poll -- in which big investors vote for their favorite analysts -- to the No. 2 spot among regional-bank analysts, from No. 1 last year. "There was some very clear backlash against me" from big investors, according to Mr. Mayo.

Jury Is Out on Bearish Call

The jury is still out on Mr. Mayo's bearish bet. Bank stocks plunged after his call but have roared back in the past month to about the same level as before. But Mr. Mayo knows one thing: "You make a lot of friends when you say to buy a stock," but not when you put out a "sell."

So it goes as a member of Wall Street's most high-profile minority group: Analysts who yell "sell." A mere 0.8% of all analysts' recommendations on Nov. 1 were "sells," according to First Call/Thomson Financial. By contrast, 70.1% of analyst recommendations were "buys," which usually mean the analyst expects the stock to outperform the market. The remaining 29.1% were mealy mouthed "holds."

Sure, investors clamor for objective research from Wall Street. But when push comes to shove, says veteran money manager David Dreman: "People that own a stock don't want to have it tampered with."

It is no longer news that analysts' recommendations may lack objectivity. Or that "sell" recommendations anger the company being criticized. Or that the company sometimes penalizes the analyst's firm by pulling investment-banking business. Or that the analyst can get frozen out of meetings and lose access to a company's financial whispers.

Here's what isn't as widely known: The pressure that negative analysts feel is often from their own clients -- institutional investors -- yes, the very people who would seem to benefit most from such objective market calls.

Motives Are Questioned

"Some are questioning my motives," Mr. Mayo says. They ask him if "I'm in bed with the shorts," or investors who seek to profit from declining stock prices. (Mr. Mayo isn't recommending shorting bank stocks, but he does believe they are going down in price.)

The pressure also comes from another, less-known source: other analysts. Mr. Mayo braced himself, for instance, when he told investors to reduce bank holdings in general and to sell four big banks: Bank One, J.P. Morgan, Citigroup and Chase Manhattan.

But the fallout included shots from his peers. For instance, Thomas Hanley, a well-known bank analyst at Warburg Dillon Read, referred to Mr. Mayo derisively as "Mayo-naise" in a conference call. Mr. Hanley says he believes bank stocks have a bright future, but he says he doesn't want to talk about Mr. Mayo.

Meanwhile, the four banks Mr. Mayo recommended selling have been polite and accessible -- if a bit frosty, he says. Credit Suisse First Boston does business with all four firms, but Mr. Mayo says he doesn't know whether his firm has lost any business to them -- and he doesn't want to know. (The various firms say there was no retribution or have no comment.) Mr. Mayo has gotten the occasional annoyed comment from colleagues in other departments, but he says his research bosses have backed him up.

A Beef Against Banks?

What does Mr. Mayo have against banks? He says bank earnings are of "poor quality," augmented by unusual gains such as earnings from venture-capital operations. To Mr. Mayo, this suggests that banks are struggling to make their earnings targets and that at some point, when their accounting strategies end, they will start missing their estimates, and the prices will tank.

Specific issues Mr. Mayo has hammered on include: an end to banks' efficiency gains; declining credit quality among banks' customers; and an over-reliance on trading gains that could be disrupted by the year-2000 bug.

But some angry bank-stock investors ask: Why be so shrill? They assert that Mr. Mayo's high-profile sell was a bid to gain votes in the Institutional Investor survey of analysts. Mr. Mayo was a source of cocktail chatter at Wall Street bank conferences in April, June and November, says Daniel Goldfarb, a bank analyst at David L. Babson, a money-management firm in Cambridge, Mass.

"Everybody was talking," says Mr. Goldfarb, who counts himself a fan of Mr. Mayo. "Was Mayo right, or did he purely do it for II?"

Mr. Mayo's high-energy, high-contact ways didn't work in his favor. "My impression of him as a human being, is that he's somewhat self-promotional anyway," says Ms. Buntain, the Sife trader and analyst who pinned his picture on the wall.

Anton Schutz, who invests in financial stocks as president of Mendon Capital, says, "I think he truly believed the call he made." But he adds: "The timing was certainly interesting" in its proximity to the Instititonal Investor vote.

Calling a Spade a Spade

Mr. Mayo concedes that he wants his "team ranked high in II, it's a very clear goal of mine. On the other hand, I want to call a spade a spade. If calling a spade a spade means I won't be as high ranked in II," then so be it. He says he thought his long record as a bull on bank stocks, while they were outperforming the stock market, should have cut him some slack with investors.

Mr. Mayo had profitable "strong buy" recommendations going back to 1994 and 1995 on banks such as Banc One (a predecessor of Bank One), Barnett, CoreStates Financial, Mellon Bank, NBD Bancorp, PNC Bank Corp. and Southern National. He put out "strong buys" on other banks in succeeding years. Mr. Mayo calculates that his "strong buys" gained 52% annually compounded since the end of 1994, beating the 25% compounded annual return of the Standard & Poor's 500-stock index. Mr. Mayo dropped his "buy" recommendations in the past couple of years. First Call/Thomson Financial, which tracks analyst ratings, concurs with his recommendation record.

The decline in bank stocks after Mr. Mayo's call didn't alleviate any pressure. Ms. Buntain says that Mr. Mayo was "looking smart because the bank stocks were declining, but not necessarily for the reasons he outlined in May." She and other investors say Mr. Mayo put too much emphasis on Y2K issues posing problems for banks.

Kent Simons, a money manager who manages $1.7 billion at Neuberger Berman and owns Citigroup and Chase Manhattan shares, says he doesn't mind Mr. Mayo putting out a "sell." But like Ms. Buntain, he believes bank stocks declined due to rising interest rates, not because of the earnings issues Mr. Mayo raised. Mr. Simons believes that some banks' low price-earnings ratios relative to the broad market make them "buys."

Lucky Timing

Mr. Mayo says the timing of the rate rise was lucky, but that his job is to analyze bank fundamentals, not make interest-rate calls.

One bank Mr. Mayo suggested selling, Bank One, drifted lower over the next three months -- and then got hammered in price, plunging more than $12 on a single day in August, when it did indeed warn of earnings problems at its big First USA credit-card subsidiary. The stock traded at $36.8125, up 21.25 cents at 4 p.m. on the New York Stock Exchange, down from $59.8125 before his "sell" recommendation. Last month, Bank One warned of a second earnings disappointment.

"I feel vindicated [after] the abuse I took," Mr. Mayo says, arguing that the bank's heavy reliance on one-time gains had tipped him off to problems. Critics say he hadn't pinpointed the credit-card problem.

Just last week, another bank he recently cited as having poor earnings quality -- National City Corp. -- warned analysts that earnings would be lower than expected, and the stock fell. Mr. Mayo didn't specifically have a "sell" on that stock.

Mr. Mayo's other "sells" haven't fared as well as Bank One. Chase Manhattan stock has rebounded to $81.875, down $1.125, Monday at 4 p.m. on the Big Board, after falling with other bank stocks; it was $78.9375 before his "sell" call. J.P. Morgan was at $136.6875, losing $1.9375, in 4 p.m. trading, a bit below the $138.6875 it commanded when he made his "sell." Citigroup has risen to $55.50, up 18.75 at 4 p.m. from $45.2083 (after adjusting for a 3-for-2 split).

Monday, bank stocks declined. The concern: future interest-rate increases.

Write to Robert McGough at bob.mcgough@wsj.com

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