These days, even the most ardent bull would admit that the stock market contains more froth than the head on a perfectly poured pint of Guinness. Many stocks are currently trading at levels that, based on traditional valuation metrics, would have seemed inconceivable just two years ago (although, nearly 60 percent of the stocks in the S&P 500 index are down 20% or more from their 52-week highs). These lofty valuations have brought with them a tremendous amount of volatility to the market. It seems that just about any piece of news or information about a publicly traded company, regardless of the source of that news or the context in which it was revealed, can send that company’s stock soaring or tumbling.

In recent days, some notable events occurred involving the reaction of a company’s stock price to the release of information about that company. Through this article, I hope to shed some light on how, particularly in today’s volatile market environment, press releases and message boards can often exert undue influence on stock prices. If, through this article, I help just one person make a more informed investment decision the next time they are presented with an opportunity to buy or sell a stock based on a “hot” piece of news, then I have done my duty.

PRESS RELEASES
Last Wednesday morning, I turned on CNBC a little before 8:00 a.m. and saw a news flash at the bottom of the screen that read “CISCO NET SALES COULD SLOW.” I was instantly struck by a wave of panic (I own shares of Cisco). In pre-market trading, Cisco was down nearly 8% to around $90. How could this be? Doesn’t, as the company’s television commercial so proudly states, virtually all traffic on the Internet travel across the systems of Cisco Systems? Their sales couldn’t possibly be slowing. Or, could they?

I needed to hear the full story. Had the company issued an official press release? Was an earnings warning to follow? Where were John Chambers and Larry Carter, the company’s CEO and CFO? Why wasn’t anyone saying anything?!!!!

Then it came. CNBC’s David Faber stated that Reuters had reported this “story” and that in fact, no new statements had come from Cisco. Reuters had lifted a quote from the company’s quarterly report that had just been filed the previous day with the SEC. It was a “boiler plate” quote intended to provide investors with a general level of cautionary guidance when reading through the company’s financial statements. Cisco had made virtually identical statements in previous filings including its annual 10-K filing earlier this year.

Within minutes, Cisco’s stock began rallying and ended the day down only 2% at $95 7/8. All of that worrying over nothing. Traders had sent Cisco’s stock on a roller-coaster ride by overreacting to a news headline that had been taken completely out of context.

With today’s proliferation of media, be it television, the Internet or the myriad business magazines in publication, investors have near instant access to an overwhelming amount of company-specific information. While the speed at which the stock market moves dictates that this information be digested and acted upon quickly, sometimes acting too quickly can work to one’s detriment. I bet those poor suckers who rushed to sell at $90 last Wednesday morning would agree.

MESSAGE BOARDS
Conveniently, this brings us to the next topic that warrants discussion, message boards. A well-trafficked message board can provide a wealth of information about a particular company. As this next anecdote points out, however, anyone who takes this information at face value deserves the losses they are likely to incur by trading based on such information.

Last week, two men in their 20’s were arrested by Federal authorities in California and charged with conspiracy to commit securities fraud. The two men, along with a third partner, concocted a scheme in which they used Internet messages boards to manipulate the shares of a tiny Dallas printing company called NEI WebWorld. The trio in question purchased thousands of NEI shares just prior to bombarding hundreds of message boards (which included those of Yahoo!Finance and Raging Bull) with phony rumors about the company. NEI’s stock price was driven from pennies a share to $15 over a three-day period, enabling the swindlers to generate more than $360,000 in trading profits.

I haven’t yet decided who are the bigger idiots - the Bud Fox wannabes (for not realizing they’d easily get caught and for risking jail time over a lousy $360,000), or the morons who blindly purchased NEI stock based on what they were reading on the message boards. Apparently, not only had NEI filed for protection under Chapter 7 (liquidation) of the U.S. Bankruptcy Code last year and ceased its operations, but the false message board postings claimed that NEI was about to be acquired by a company called LGC Wireless Inc. Now, I guess it could have been conceivable that a company called LGC Wireless would be interested in NEI. But, I would certainly try to get a better understanding as to why in the world a wireless communications company would be interested in purchasing a crappy little printing business before betting my money on that rumor.

By: Craig Ettinger