Brokerage Firms Play Pollyanna

Case A: A Wall Street guru was saying unflattering things aboutthe stock market. So his employer, an investment company in NewJersey, requested that he quit. The man says he was told that he wasbad for business.

Case B: Another brokerage firm in New York City that specializesin initial public offerings required its brokers to get a higher-up'sapproval before honoring requests by customers to sell certainstocks. And often it would require the broker to find a buyer forevery share a customer wanted to sell. The firm apparently didn'twant the price falling on a stock for which it had issued positivecomments.

Case C: There was also a story recently in the Wall StreetJournal about how one very respectable Wall Street brokerage firm hadissued a memo ordering analysts not to speak badly about companiesthat were clients of its underwriting department. The brokerage firmsaid it was all a misunderstanding.

More and more, an investor has to ask himself: Is Wall Street'sresearch useless? Maybe even dangerous?

Peter Grandich is the market expert who says he was pressuredto leave AFM Investments in Howell, N.J., because he was too negativeon the stock market. AFM says Grandich's leaving was by mutualagreement and had nothing to do with his negative opinions.

But Grandich says this is the second time in his career that hispessimistic views ran afoul of a brokerage firm's interest. The lasttime was in August of 1987, when Grandich was head of investmentstrategy for another brokerage firm and he issued an all-out sellsignal on the stock market.

Grandich says the management of that brokerage firm asked him torescind the recommendation. He refused, but stayed in the job. Afew months later, the stock market crashed.

Wall Street's business, of course, is to sell stocks and otherinvestments. If a broker told clients not to get into the stockmarket, it would be a little like a car salesman telling aprospective buyer that his autos weren't very good.

So it's rare for Wall Street to badmouth any stock. Usually,the most bearish recommendation coming from a major brokerage housethese days will be to "hold" a stock. Sometimes the worst stocks arerecommended for purchase with the caveat "high risk."

George Salem, who follows the banking industry for PrudentialSecurities, is one of a small group of analysts on Wall Street whohasn't been afraid to recommend the sale of stocks he didn't thinkwould perform well.

Salem says many analysts are afraid to issue sellrecommendations because they fear getting into a squabble withcompanies they are covering.

As far as much of Wall Street research is concerned, "thecustomers aren't necessarily getting objective advice," Salem says.

The problem of biased information is probably worse at brokeragefirms with large underwriting businesses. Because these firms sellstock for the very same corporations that their analysts follow, thetemptation is to go easy on clients.

That's the kind of situation the Wall Street Journal seems tohave uncovered when it discovered a memo distributed by theinvestment bankers at Morgan Stanley telling analysts not to sayanything disparaging about clients. Morgan Stanley said the memo wasmisinterpreted.

In many instances, analysts get around the disdain for "sell"recommendations through semantics. Instead of urging customers tounload the stocks of dangerous companies, analysts will issue a "weakhold."

And then there is the one I like the most - "accumulate foraggressive accounts." It's the equivalent of a bet at the $100window at the racetrack. It's telling investors that they aregambling - although the wording doesn't convey the risk.

Not only are researchers selling ideas to the sales force butthey also "get in love with their stocks," said Perrin Long, along-time follower of the brokerage industry who is now at FirstMichigan Corp in Detroit. "They get too close to their companies."

Wall Street is also in love with the idea of selling stock -any stock, any time. It's no different from a furniture salesman.

Then there are the Wall Street economists, who seem to be amongthe most optimistic and nearly always can find a positive spin.

As long as stock prices remain high, nobody cares whether WallStreet is infested with Pollyannas. But when stocks do decline, andif they come down sharply, Wall Street research is going to comeunder intense criticism.

John Crudele is a financial columnist with the New York Post.His address is Box 610, Lincroft, N.J. 07738.