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Turfscape (43.76)

On Rumors and Market Manipulation

Recs

10

March 17, 2010 – Comments (1) | RELATED TICKERS: HOG , SVU

Yesterday Harley-Davidson stock (HOG) jumped 8% on the rumor of a leveraged takeover by Kohlberg Kravis Roberts private equity firm. I vented some frustration about that unsubstantiated rumor here yesterday.

Last week, SuperValu (SVU) shares shot up in similar fashion (going up 11% at one point during the trading day) on another unsubstantiated rumor of a takeover. Multiple potential "buyers" were named.

Earlier this month, Dean Foods (DF.N) jumped 8% on yet another unsubstantiated rumor of a takeover by France's Danone Group.

Now, in all these cases, volumes shot up, which led to further speculation that the rumors must have some merit, which led to further buying, which led to further speculation that there must be something to the rumors...otherwise, why would the price and volume be so high, right?

Of course,  when it gets down to brass tacks, it's really just market manipulation. Who? Why? I wish I knew. It's more harmful than it may appear on the surface. Those spikes have real world implication, even if the price corrects within a matter of two days. It's no less harmful than any insider trading. No less harmful than manipulating sales data.

But, how can such unsubstantiated rumors gain enough traction to drive volumes up three times normal in a day? Oh...that part is easy: Reuters and Dow Jones. Big names. Trustworthy names. Truly established giants in the worlds of news and finance. How does this work? Well, Dow Jones publishes a newsletter column called Dow Jones Investment Banker (my, that sounds official and trustworthy). They sit around and come up with wild predictions based on...well, based on nothing more than their coffee room talk, really. Then they put those predictions out to the world in the form of a Press Release: Example here.

Looking at the DJIB column, the HOG takeover gained legs on the idea that motorcycle sales are down and HOG may have more troubles ahead with delinquencies on existing loans from their Financial Services subsidiary. Wow, that would be a really cool acquisition...Let's put that out to the media!

Now, a fancy outfit like Reuters gets hold of this fancy sounding DJIB column and reposts it to all their subscribers (which is every media outlet in the world, essentially) and Reuters says 'HOG likely to be bought in leveraged takeover'...or something similarly concrete sounding. Do they bother to dig any deeper? Do they bother to actually examine the feasibility of such a takeover based on financials of the supposed players in the takeover? Of course not. It's easier to simply say "Neither Harley-Davidson or KKR will comment on rumors".

So, folks start seeing news about a takeover. They see high volumes. They see a price spike...and nothing, absolutely nothing, is truly driving it.

I accept that the market is not completely rational. But this is manipulation, pure and simple. And I, for one, would like the players to be held accountable. Rant over. Thanks.

(Disclosure: Long HOG, no positions in any other company mentioned)

1 Comments – Post Your Own

#1) On March 24, 2010 at 3:07 PM, Turfscape (43.76) wrote:

So...after a week of resting about 8% up, HOG begins to correct. The same pattern can be seen with Dean Foods and with SVU: approximately a week after the rumor of buyout shot up their prices, they started to correct.

It's a shame it happens, but I'm back to acquire mode for HOG. I remain bullish on the long-term prospects for the company, given their restructuring and efforts to reduce manufacturing costs and inefficiencies. The only surprises, from my perspective, that may hit the company are in product relevancy...can they speak to the market in the 32 - 39 year-old age bracket with new models? Can they continue to expand the marketplace for females? For non-caucasian/European demographics?

They've made some progress in the youth direction with the Nightster from a few years ago, with the Iron 883 from last year, and potentially with the new Forty-Eight that was released in January (note: in the world of heavy-weight cruisers, anyone under the age of 35 is youth). But, these models tend to speak to similar audiences. I look forward to seeing (hope to see) expanded offerings for female riders and African-American or Latino  audiences.

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