Stardate 20020327.0847

(On Screen): A stockbroker working for PaineWebber advised his customers that a certain stock they were holding should be sold. His managers didn't like that, and fired him on a technicality.

It was Enron. At the time, PaineWebber's official rating on the stock was "strong buy". But in his letter, broker Chung Wu raised alarm bells about Enron's fundamental situation:

In the e-mail, Wu recommended to his clients that they take some of their Enron investments "off the table," pointing to a "deteriorating" financial situation and noting recent stock drops. Wu wrote that Enron's last quarterly report "indicates liquidity problems and decline in trading margin."

So why did it happen? One of the recipients of the mail was an Enron employee, who complained to Wu's management, who immediately terminated him.

If I was a client of PaineWebber, I'd have to be wondering now just who they were really working for. Me, or the companies whose stock they're touting? And if I was one of Wu's clients, I'd surely have followed him to whereever he's working now, away from PaineWebber.

Stockbroker "recommendations" have been an industry joke for years; everyone knows that they're lying, and trying to suck up to the companies involved. Even in down times, when the whole market is sinking, you find that nearly every stock has at least a consensus "buy" rating.

It is, however, still possible to determine their real opinion. What you follow for a given stock is not actually what they recommend, but how many brokers are even issuing recommendations. When brokers really get disillusioned with a stock, they don't generally switch to a "sell" rating. Rather, they just stop issuing recommendations entirely. (If you can't say something nice, don't say anything at all.) So if the number of brokers issuing ratings on your stock begins to drop, sell that baby.

And that's the problem: they're so concerned with offending the companies that they do a disservice to the investors they supposedly actually represent.