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Saturday, October 18, 2008

Some rumblings on financial rumours

Rumours are a fact of life. It occurs daily, it happens everywhere, and it can never be eliminated. Some think that because it is a fact of life, we should condone and not speak against rumours. I couldn't disagree more.

Rumours is often claimed to be spread by idle people with plenty of spare time and nothing better to do. Whilst true in some cases (think idle chats), spreading rumours is also a specialized skillset. Used skillfully, it can give you an unfair advantage over others. And precisely because of this, it should be condemned.

There are many types of rumours. Not all rumours are equal. Some are light-hearted, with no serious implications. At the other extreme, lives and/or millions and billions of $$$ are at stake. Only a fool would think that all rumours would have equal impact.

Financial rumours are no different. They've been around since financial markets first existed. They occur daily. They occur everywhere. And they have unequal impact.

Financial rumours usually travel fast. Faster than regulators and Bursa can disseminate true information. Faster than investigators can investigate the truthfulness of the rumour. Faster than reporters can report on the truth. The UMA enquiry and formal company responses are usually regarded as a joke by those in the know. The time delay is often long enough to cause the full damage, to reap the full gains and to allow the perperators more than enough time to escape scott-free. Regulators and laws seems 10 steps behind. Syndicates thrives and prosper since time immemorial, because of this time lag and time discrepancy. Persistent unscrupulous management and/or major shareholders tacit participation are widespread symptom that regulations and enforcements have been inadequate. The extent moves in cycles over time, reducing when there is a strong reminder, and increases when most people forgets, and then decreases when it gets re-discovered and many are doing it, and so forth.

Rumour grows as it goes. The best rumours are the ones that started off as believable. Sometimes, as it gets passed on, the story gets better by design or accident. When share prices are depressed and accumulated, it may start out as one out of dozens of possible management actions. Someone comes out and says it is one of the "top" options considered. Eventually, usually by the time it gets to the masses and reported in the newspapers, it is said to have been approved or a fait accompli by management. At this juncture, the share price accelerates to its peak, because a General Offer for a specific high price is already on the table (according to sources). Usually, at this stage, the late-comers and the lambs find themselves facing the slaughter house, as the initial parties have already made their $$$ money and are already long gone.

My own personal observation of Moolah's blog is that it contains some of these examples, and by far, the most exhaustive in the Net. To long-time readers of Moolah's blog and to those who are sensitized through years and decades of experience, they can smell a potential rumour 10 miles away. And take positive steps to either avoid becoming a victim, minimize potential damage or better still, to profit from it, if it's from the other side.

As a Bursa investor and trader, you can never rely on the regulator to stop rumours from happening. Self preservation and self responsibility comes first. Besides the fact that regulators are always 2 steps behind, you must also consider the possibility of vested interest everywhere.

When markets are quiet, financial rumours are apparently "welcomed" by market participants, because - the argument goes - it adds "life" to an otherwise lifeless market. But when markets are highly volatile (like now) and close to tip-over point (like now), certain financial rumours should be condemned harshly when they are blatantly irresponsible. In times of heightened uncertainty (just see the record level VIX for example), truth is critical and certain unsubstantiated rumours should be harshly condemned.

Sensitized investors and traders can usually tell the difference between rumours and facts. The good ones know the impact on prices, which is not necessarily straightforward. They know that the same type of rumour, leaked at different times, can lead to different impact. They aim to profit from the rumour.

But experienced syndicates know that as sensitised traders joined the game, their share of the cake get smaller. Eventually, they need to find ways to shake off these free-loaders, or their own share gets smaller.

In a market that only allows longs and disallow shorts, financial rumours which are designed to push a stock price up despite having no fundamentals, will have minimal downside for the perperators. The only risk is the "bigger swinging dxxx" who called the smaller syndicate's bluff.

When it comes to giving others unfair advantage over others, my own personal position on this is similar to my own personal position on vice activities such as robbery and theft.

I realize that there are segments in the society who thinks that the loser "deserves" it. They were not "wise enough" to tell the difference between a cleverly constructed rumour and the truth. They were too "innocent" and "too greedy" to believe in such false rumours. These "weak" groups deserved to lose to the manipulators. To win the big money, you must have the "killer instinct". "Sentimentality to those trampled" is a sign of "weakness".

To those of sound moral character, this begs the question - does this mean that it is fair game to manipulate everyone? Consider this analogy - is it fair to lure a fair maiden to a lion's den through manipulation or false promise, only to rape her and dumped her, and justify that she deserves to be raped because she couldn't tell the difference between the rumour and the truth that enticed her to enter the lion's den in the first place? Isn't there a difference between attracting someone into some arrangement based on the truth, versus a false promise or a rumour?

So, you would think such activities should be condemned isn't it?

And yet, even this is apparently not clear cut - according to some. For example, the most often cited reason to stay silent is because you don't have the full evidence. But is this prudent?

Going back to the fair maiden example, it's like saying even if you suspected the handsome guy with the false promise is a fake, you are still not allowed to raise the alert to the fair maiden until you have 100% solid evidence, i.e. after the deed is done. What kind of logic is this?

It should be obvious to all, that a "suspected" rumour which are designed to lead to a certain price action through unfair practices should be alerted quickly and loudly, even if it may seem as condemnation by others who are not so sensitized. Why? Because the consequences of not sounding the alert can be large. The nature of the stock market itself, the lure of easy money, combined with natural greed of investors, tend to lead to excessive speculations, which naturally lends support and success to such vice activities. When the potential consequences are large, the warnings can never be loud enough.

And there is the human and religious angle to this as well. If one is truly a religious person, how does one reconcile such activities with what the religion teaches and one's religious beliefs? Namely, the one that says that if we see a wrong being committed, we should try to physically stop it, and if we can't, we should voice out our disapproval, and if we can't, then, in our hearts, we should at least condemn it in the harshest terms? What kind of people need the extra money so badly, that they are willing to sell their soul to the devil? Is this the kind of people our society should worship?

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