THE JOURNAL & TOPICS NEWSPAPERS | WEEK OF SEPTEMBER 21, 2008
When News Is Wrong, Things Can Get Messy
By MAUREEN PEKOSH
News is everywhere. We get it in the newspaper, on the television and radio, and from the Internet. Because there are so many more sources to get news from, there is more and more information. But not all information is news. That's a problem.
The economy is trending downward. That is old news. Yet everyday there is more information about the economic downturn. Some of this information is solid news. It is facts and figures such as a report on housing starts or spending. It is an earnings report put out by a corporation. It is a deal merging two companies together that has been approved and is actually going forward.
Other information is not news though it gets treated as if it is equally newsworthy. It is speculation that a company is about to be taken over. It is conjecture that a company is going to disappoint with its upcoming earnings report. It is rumor. It is major swings in the stock market fueled by traders looking for immediate returns rather than market moves based on underlying long-term fundamentals.
Analysts after careful study of the economy, particular industries, and specific companies give opinions about the earning future for these companies. While their opinions are learned and generally well researched they are just that - opinions. Readers need to evaluate these opinions in light of other information. They are tools. They are information, which can make news when reacted to en masse.
Recent headlines were made that United was seeking bankruptcy protection again. This caught people's attention. Panic erupted in the marketplace and United stock took a beating, dropping precipitously. In reality, this years old news was the most viewed item on a web site in the wee hours of the morning. This garnered it attention as most viewed item, causing it to reappear even though it was old and nowhere near news. Yet people acted upon it as if it was news. The fact that it was old and irrelevant did not matter until hours later, when the damage had already been done.
Investment banking firms are heading for protection, looking to sell assets or combine with large banks. This seemed unheard of just a few short months ago. Yet the wild flow of information and people's reactions to it has caused overreactions in many cases to what is clearly a market reversal.
Where unsound investments have been made because of poor underlying real estate loans, clearly portfolio revaluation and review of investment strategy must be undertaken. In just one week. Morgan Stanley's stock price has dropped by almost half, yet they did not make individual news because of any major corporate misstep. They are a victim of short selling and information overload.
They may need some time to shore up their portfolio. They may have to write off further mortgage-backed securities. There may have been some employees who made bad choices while in their employ. Yet given time, assuming sound management, there is no reason to assume another venerable company needs to become vulnerable. Sadly, the volume and rapidity with which information becomes available may have robbed many good companies of this time.
My brother-in-law recently mentioned that he thought he should take all of his money out of the bank and park it under his mattress. I advised him to keep his money where it is. This is not the Great Depression of the 1930's being replayed. The previous bull market caused unnecessary exuberance. Individuals and corporations over relied on debt to finance their activities. Once credit became tighter, this overuse of borrowing came to light as what it was - risky and irresponsible.
Traders are capitalizing on bad news and expected bad news. They are selling shares of stocks they don't own, knowing they can buy them back for less when the price drops more as the economy continues to meltdown. Their short selling of these stocks increases the supply of unwanted shares for sale. The stock price is further driven down since there is no demand for these shares by investors and savers in this market.
The government has its work cut out for it trying to counter real news, perceived news, information, misinformation and the actions of knowledgeable financial people who can wittingly and unwittingly manipulate the markets. We do not want the government to control what information people receive - we would be foregoing a basic tenet of our democracy. But we need to be responsible in viewing the information with which we are bombarded, carefully choosing which is truly newsworthy and actionable. Otherwise we will just continue to contribute to the current economic crisis.