Catch-22 on Wall Street

“I’m sorry, sir. I’m afraid I don’t understand your question.” “When didn’t you say we couldn’t punish you? Don’t you understand my question?” “No, sir, I don’t understand.” “You’ve just told us that. Now suppose you answer my question.” “But how can I answer it?” “That’s another question you’re asking me.” “I’m sorry, sir. But I don’t know how to answer it. I never said you couldn’t punish me.” “Now you’re telling us what you did say. I’m asking you to tell us when you didn’t say it.” Clevinger took a deep breath. “I always didn’t say you couldn’t punish me, sir.” “That’s much better…”

—Joseph Heller, Catch 22

We have now reached the point where Wall Street’s Finest will upgrade a company’s stock to a “buy”—or at the very least, no longer a “sell”—after the company has announced it is to be sold for a substantially higher price than when the same stock was rated a “sell.” I am not making that up. It happened just last week—as alert reader Greg Buchholtz brought to our attention—in the case of Tribune Company, the beleaguered media giant whose announcement of its sale to Sam Zell added 6% to the existing share price, and one Wall Street’s Finest promptly upgraded the stock from “Underweight,” a euphemism for “Sell,” to “Neutral,” a euphemism for “We’re Not Sure What To Do With This Thing,” as follows:

TRB: TRIBUNE ACCEPTS OFFER TO GO PRIVATE. WE ARE RAISING OUR RATING TO NEUTRAL The Prudential analyst also raised his price target on the shares to $34—which happens to be the very price at which Tribune’s board agreed to sell to Mr. Zell. Of course, by the time the upgrade appeared, it was already too late to do anything about it. If, upon reading about the after-the-fact upgrade, Prudential’s clients, particularly those who had already sold their Tribune stock for something less than $34 a share on the basis of the previous “Underweight” rating, felt the need to hunt down a familiar old book (quoted here at the beginning) and leaf through it to try to grasp exactly what logic prevailed behind such a move, they might have settled on this passage:

There was only one catch and that was Catch-22, that specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane, he had to fly them. Yossarian was moved very deeply by the absolute simplicity of the clause of Catch-22 and let out a respectful whistle. “That’s some catch, that Catch-22,” he observed. “It’s the best there is,” Doc Daneeka replied.

Of course, that was in war time. Here on Wall Street, Catch-22 means investors should not buy a stock until after it has gone up to the price it is being sold for. Or, as Clevinger might have written the upgrade for Pru,

“I always never said you shouldn’t buy Tribune stock until it didn’t get to $34.”

Jeff Matthews I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.