This is a re-print of a blog posting that appeared in the original Szelhamos Rules blog that ran for precisely 1 year from 2007-8 and was dedicated to the memory of my father, who was a Holocaust survivor. The original title was “Aren’t Rumors Great?” and appeared on October 24, 2007. It is reprinted this evening following Jim Cramer’s mention of the “7 Deadly Sins” during the broadcast of his 7th Anniversary celebration of Mad Money.
Many more, Jim. Let’s make it to at least 14 deadly sins.
I don’t really remember what the seven deadly sins are. I think that rumor mongering is among them, but I’m really not sure. That ugly looking person over there, the one that I saw sneaking out of the crack house told me that it was one of the seven deadlies. But would you really trust someone who strangles kittens? Maybe you might elect them president. You know who I’m talking about, but you wouldn’t want to trust them.
Maybe rumor mongering doesn’t rank up there with gluttony, lust, avarice, Sleepy, Dopey and Doc, but it should.
Today, though, it was a rumor that turned everything around.
Maybe, in hindsight, rumor mongering should be counted among the seven holy virtues. Because, really, is humility that great of a virtue? Couldn’t we just lose humility? There should be some kind of a rotation of both virtues and sins. There just has to be a way to make room for a good rumor.
But I do like rumor mongering. It can easily go both ways. You have to love that kind of versatility. The last time we had that kind of versatility, football players were still wearing leather helmets.
But today, it was obvious that rumor mongering must be a virtue. How else would you categorize something that turns the market around from a 200 point loss? It has to be a virtue. There’s certainly nothing virtuous about a 200 point loss.
The day really started off badly. Merrill Lynch, which just 2 weeks ago announced that it would take $5 billion in sub-prime and bad loan losses came out with their earnings this morning. Funny thing, that in the past 2 weeks they were able to find another $3 billion in losses.
They just didn’t see it coming, I guess.
I’m beginning to think that companies on the scale of Merrill Lynch and others would be well served to consider hiring an accountant. With a loss of $8 billion, they may be a little strapped for cash, but I’m sure that they could work something out with H&R Block. Maybe they could barter. You would think that they would have somebody that could keep an eye on the numbers.
But as it turns out, that bigger than expected loss was pretty much expected, so the damage to Merrill really wasn’t too bad, although the rest of the market suffered as that was new found fear that there were more rounds of bad news around the corner. Part of the reason that no one was surprised is that it appears to be standard behavior to dump all kinds of bad news together when you’re going to have to take a big write-off, anyway. Just get all of the bad stuff off the books and set yourself up for great comparables for next year.
The strange thing is that despite the fact that this is common practice, everyone seems to be caught by surprise in a year when the comparable earnings are released. Invariably, the stock prices surges.
After the Merrill Lynch news was digested there came more confirmation of bad things on the housing front. Another big decrease in new home starts and in existing home sales.
But again, not totally unexpected. So what then spooked the market and turned it from a couple of dozen points loss to a 200 point loss by late morning?
No one had any real clue, unless it was just a delayed response to the earlier bad news. But that’s unlikely, since most big moves come on emotional waves, rather than on well thought out choruses.
So as the Dow was down about 200 I watched Apple and MasterCard shed $5, Google and Goldman each lost about $10.
I took the opportunity to buy back my MasterCard options, again, at a small profit. But those small profits have really been adding up this week. I tried making some other options related trades but really couldn’t get the right prices. I tried buying back Halliburton and Blackstone options, trying to capitalize on their drop in premiums.
Earlier in the day, before the market decided to fall those 200 points, I put in an order to sell Goldman Sachs November $240 options. But it was just at about that time that Goldman decided to start falling. Eventually, Goldman was down nearly $10, so I gave up on the idea of selling the options.
Fast forward an hour or so and the effects of rumor mongering got my contracts sold.
When I got back to the computer, that 200 point loss was gone. All of the losses were erased and I was now the proud owner of a nice premium from the sale of Goldman Sachs options.
What happened? Nothing more than a rumor being spread that the federal reserve was going to drop interest rates again.
What exactly was the surprise in that? Everyone’s been expecting that after next week’s fed meeting there would be an announcement of a 25 basis point cut.
As they like to say in the federal reserve board room meetings, “Uh, duh”.
The big duh, though, is that the rumor had it that the fed would announce a rate cut before their actual meeting.
That’s a little bit unprecedented, except during dire situations.
Is there something that we need to be worried about? Is there something even more dire than what Merrill Lynch has let on? Obviously Ben Bernanke is in a position to know something that we don’t know, but borrowing from the Fred Sandford book for near quotes, “Is this the big one?”.
So the rumor rescued us by 200 points but what happens if the rumor becomes reality? Does the perverse thinking behind the market psychology cause panic and relentless selling. After all, for the fed to pre-empt its meeting with an interest rate cut announcement, things must be pretty dire.
However, my recent pessimism was not well founded and cost me more than I care to think. So now it’s time to rethink strategies.
Based on today’s activity, I think the best course of action is a virtuous one.
It’s time to spread rumors.
At first I thought someone had already beaten me to it, as I heard that Microsoft had taken a 1.6% stake in Facebook for just $240 million.
If you were inclined to believe that ridiculous story, Facebook would be valued at about $15 billion. What’s even more ridiculous is why Microsoft would want just a 1.6% stake.
Turns out that rumor was ridiculous, but true.
It’s all about beating Google to the punch. Microsoft got what purportedly Google wanted. The bigger question is why Facebook would want to be part of Microsoft, even though it’s only a fingernail’s worth, not its whole soul and being.
Rumor has it that Bill Gates uses a Facebook pseudonym to troll for underage internet entrepreneurs.
Just a rumor, but I’m buying it. There’s no virtue in ignoring the obvious.
Want more “Seven Deadly Sins”?