Wallstreet advice badly falters in biggest rally in decades.

This is funny, or not, depending to whom you’ve listened the last couple of months..

Taking Wall Street Advice in Rally Means Owing $6,000

By Lynn Thomasson and Adria Cimino

Aug. 18 (Bloomberg) — Anyone who did what Wall Street analysts advised last March has only losses after the biggest stock market rally in seven decades.

Citigroup Inc., Bank of America Corp. and more than a dozen other firms told clients to purchase European energy producers and U.S. drugmakers while selling banks and retailers, according to combined rankings compiled by Bloomberg. An investor who used $10,000 to buy companies in the highest-rated industries and bet on declines in the lowest since the advance began on March 9 lost everything and would owe as much as $6,000 to cover bearish trades, the data show.

The recommendations didn’t work because companies with the worst earnings led the 46 percent gain in the Standard & Poor’s 500 Index since it fell to a 12-year low five months ago. Securities firms that failed to foresee that the hardest-hit stocks last year would recover fastest steered investors to drug and energy producers, which have trailed the MSCI World Index by more than 24 percentage points, the data show.

“Analysts are attached to fundamentals,” said Romain Boscher, who helps oversee $18.5 billion as head of equities at Groupama Asset Management in Paris. “This is a technical rally, a rally of sentiment. Analysts were too defensive. There was an inflection point and they didn’t see it.”

Health-Care, Oil

Duncan Smith, a spokesman for New York-based Citigroup, declined to comment, as did Susan McCabe Walley for Charlotte, North Carolina-based Bank of America.

S&P 500 health-care providers slipped 0.1 percent today, while oil and gas producers in the MSCI Europe Index climbed 1.5 percent. A gauge of banks, brokerages and asset managers in the U.S. equity index added 1.9 percent. European consumer- discretionary stocks rose 0.9 percent.

Almost half the firms covering American Express Co. advised dumping shares of the New York-based card company in March because of concern falling consumer credit would force a dividend cut. Citigroup recommended buying San Francisco-based Visa Inc. while shorting American Express in a March 11 report. Investors who held that trade until Citigroup upgraded the stock a month later lost 12 percent.

More brokerages are tailoring advice to investors who seek to make money whether stocks rise or drop. In May 2008, Merrill Lynch & Co. boosted the number of companies it rated as “sell” to at least 20 percent of its total coverage in an effort to lure clients using so-called absolute-return strategies.

Negative Return

Merrill, now owned by Bank of America, changed its definitions so equities rated “underperform” are expected to have a negative total return over 12 months or gain the least in their industry or region. Short selling is the sale of borrowed shares in the hope of profiting from a decline by buying them back at a lower price.

Even without shorting, someone who sold stocks rated below “buy” would have missed the biggest rallies. U.S. industries with the highest percentage of “hold” ratings, financial institutions and retailers, beat the S&P 500 with advances of at least 58 percent since March 9. The groups in the MSCI Europe with the most “holds,” banks and commodity producers, surged more than 55 percent in the past five months.

Stock returns haven’t been tied to profits during the five- month rally in global equities. S&P 500 companies that reported a drop in second-quarter earnings have risen 8.4 percent on average in the past month, compared with a 7.2 percent advance for those with increases, data compiled by Bloomberg through Aug. 17 show.

‘Trash’ Rally

“It’s been trash that’s done well,” said Andrew Lapthorne, the head of quantitative strategy at Societe Generale SA in London. “Most analysts struggle to recommend stocks that are rubbish.”

In March, more than half the ratings for European and American energy producers were “buys,” according to data compiled by Bloomberg, as analysts projected growth in emerging market economies would boost earnings. A measure of oil drillers, pipeline builders and explorers in the MSCI Europe has gained 18 percent since March 9, while the U.S. group is up 22 percent.

Analysts were also bullish on Europe’s utilities and health-care companies in the S&P 500, with “buys” making up the majority of recommendations. Power companies posted the only increase in first-quarter profit among the 10 main industries in the MSCI Europe, while drugmakers had the highest income growth in the S&P 500. In the past five months, neither has advanced more than 28 percent. The MSCI World has risen 52 percent in that period.

Average Rating

Overall, analysts rate about a third of companies in the U.S. and U.K. at “buy,” according to data compiled by Bloomberg. Forty-one percent of French companies and 43 percent of those in Germany have that rating.

Analysts recommended unloading shares of European retailers, hotels and restaurants, assigning “sells” to 30 percent as rising unemployment and falling home prices curbed consumer spending. The group is up 39 percent since March 9.

The biggest financial crisis since the 1930s and more than $1.5 trillion in credit losses worldwide prompted analysts to make 28 percent of their ratings on European financial institutions “sells,” Bloomberg data show. The percentage was 14 percent for American banks. Both the S&P 500 and MSCI Europe groups have more than doubled since the rally began.

No Earnings

Downgrades came as earnings evaporated at companies from New York-based American International Group Inc. to Morgan Stanley and Capital One Financial Corp. in McLean, Virginia. First-quarter income plunged more than 74 percent at U.S. raw- material producers and retailers, the most among the 10 main industries in the S&P 500. In Europe, earnings for those two groups sank more than 93 percent.

Brokerages didn’t recognize that shares of banks and commodity companies already reflected losses during the recession, according to a study of analysts’ ratings by Citigroup’s chief U.S. equity strategist, Tobias Levkovich, on Aug. 7.

“Analysts were too defensive,” said Yves Maillot, a fund manager at Robeco Asset Management in Paris, which oversees $11 billion. “They went too low, but they weren’t the only ones. Many investors also missed out.”