It's not exactly a news flash to say that rumours can affect markets, but the latest spate of rumours have had such a dramatic and immediate affect on a couple of stocks that it really makes you think twice about being in the market at all. Two such stocks are Yahoo! and Lehman Brothers.
As some of you may know, Yahoo! stock has been on a roller-coaster ever since talks began with Microsoft over its buyout and subsequent possible advertising deal. The on-again-off-again deal has left many investors speculating and that eagerness to stay ahead of the pack has meant that many are possibly more willing than usual to put their ear to the ground - listening for any hint of what may be coming. Early last week, a mention by a blogger about the resumption of talks between Yahoo and MS sent the stock skyrocketing almost 8% in a matter of minutes. Almost as quickly as it hit the wires, CNBC killed the rumour by speaking to Microsoft directly and stating that no such talks were taking place or had been planned. Before the CNBC report was through, Yahoo! stock had dived to +2% on the day; that's a loss of 5% in less than a minute.
Lehman Brothers, of course, has been in very much a similar situation. Ever since the collapse of Bears Stearn, the market has appeared to be looking for the next possible victim and the work of short seller David Einhorn sealed the deal - placing Lehman at the top of this particular watch list. Just as with Yahoo!, the market was hungry for any news - regardless, almost, of how credible that news was. On rumours of a possible Bears-like collapse and later on rumours of a buyout by Merrill Lynch, Lehman's stock has been sent reeling - down more than 10% on the day after each rumour surfaced. Mr. Einhorn, of course, would argue that the declines are warranted given the uncertainty in the company's financial reports, but these sorts of stock price moves on rumour alone are scary - pure and simple.
Conclusions? I'm not sure that I have any to offer. I suppose that one lesson that I've taken to heart is to be weary of any stock that is given a disproportionate amount of attention relative to its industry. In today's technological age, communication is instantaneous and rumours spread in seconds worldwide. Before anyone has a chance to affirm or deny a particular rumour, its affects on a stock's price are already fully felt by investors. I do believe that the markets do, eventually, work, but if you're tempted to take advantage of such swings in a particular stock, be prepared to take significant losses as often as you may benefit.
