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Or maybe that should be tweets.  Nah, I'll stick with twits, though stronger language certainly comes to mind to describe a relatively new phenomenon.

In August, billionaire investor Carl Icahn tweeted:

 We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.
The stock jumped almost 20 dollars on this move—a $17 billion dollar increase in value.   Icahn, of course, saw the value of his holdings in Apple increase proportionately.

We’ve seen stocks move up in the past on the news that Warren Buffett is buying shares, nothing new about that, except that Buffett doesn’t tweet his moves in real time.  The Icahn tweet, sent during market hours, caught many off guard and has sparked some questions as to the ethics of such self-serving announcements.

Icahn has made a few more market-moving tweets since his successful pimping of Apple, raising more than a few eyebrows in the investment community.

Bill Gross, the head of PIMCO, tweeted  yesterday:

Gross: Icahn should leave #Apple alone & spend more time like Bill Gates. If #Icahn’s so smart, use it to help people not yourself.
I can’t argue with that sentiment.  But Icahn’s isn’t the latest tweet to roil a stock.  Yesterday afternoon, a research firm called Muddy Waters muddied the waters of a small stock called NQ Mobile.  It initiated coverage of the stock, rating it a ‘strong sell.’  Normally an analyst report by a small research firm on a fairly unknown company wouldn’t have such an immediate effect on the stock, but who needs to spend time reading the report when the tweets go immediately out into the Twitterverse while the market is open?  Sell now, ask questions later.

The company’s stock rapidly dropped 50% in value, and trading was halted for the rest of Thursday, and half of Friday.  There are, of course, threats of lawsuits, tweets being fired back and forth at a rapid pace, company executives calling analysts to explain their financial situation and try to allay fears.

2008 pulled back the curtain on the big rating agencies, showing their reluctance to downgrade companies based on their own self-interest.  But what we’re seeing now isn’t necessarily the flip side of that.  Faster dissemination of opinion isn’t the same as more reasoned arms-length analysis.  

Muddy Waters has earned their reputation as a short-seller, and the company has a history of exposing the shady accounting of some Chinese companies, including Sino-Forest.  I have no problem with this—in fact, I think it’s very healthy that someone’s willing to do the due diligence, even if it means they get sued on a regular basis for telling the truth.  

But sending their results out as a series of tweets while the market is open is troubling.  The company has no opportunity to respond until the damage has been done.  There’s a reason companies report their earnings either before or after market hours—it provides some small measure of stability.

Releasing a bombshell like the tweets by Muddy Waters or Icahn during the trading day opens the door to outright market manipulation.  It is clear that Icahn’s tweet put more money into his pocket.  Could someone at Muddy Waters have shorted NQ Mobile before tweeting their ‘strong sell’ recommendation?  Would that be any worse than what Icahn did?  

It’s clear that the stock market, like pretty much the rest of our economic and political system is rigged to benefit the few and screw the many.  This may just be a more transparent form of manipulation than some others.  Will it be addressed by the SEC?  Congress?  The CFPB?  I’m not holding my breath.

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Comment Preferences

  •  Tip Jar (6+ / 0-)

    There is no snooze button on a cat who wants breakfast.

    by puzzled on Fri Oct 25, 2013 at 12:41:17 PM PDT

  •  People Say, Markets Are Efficient (2+ / 0-)
    Recommended by:
    puzzled, Calamity Jean

    I don't know whether the hypothesis is consistent with the ability to move a price by 4% with a simple tweet; that's not quite animal spirits, more like the greater fool.

    Being an old fashioned sort of guy, I actually believe that the function of the financial markets is to allocate capital and to distribute risk.  The casino like functions as embodied in the NQ Mobile anecdote do not obviously contribute to that end, so I have to wonder if there is not some way to add viscosity to the system and tamp down the dynamics a bit.

    Time flies like an arrow, fruit flies have nothing to lose but their chains -Marx (-8.75,-8.36)

    by alain2112 on Fri Oct 25, 2013 at 02:39:18 PM PDT

  •  meh (0+ / 0-)

    Muddy Waters performs an important service ferreting out China frauds and the fact is they do it for the money.

    Everybody in the market who has anything to say "talks their book", whether long or short.  Of course they want to make money, but they also think the market does not appreciate all the facts and they endeavor to correct that.

    If you are looking for scandals to write up, here is one that needs attention:

    •  more profiteering (0+ / 0-)

      Big pharma has done that with a number of old drugs, including colchicine.  Used to be dirt cheap, now a month's supply is in the $200-300 range.  

      Of course it's still cheap in other countries that don't have our messed-up for-profit health care system.

      There is no snooze button on a cat who wants breakfast.

      by puzzled on Fri Oct 25, 2013 at 03:26:44 PM PDT

      [ Parent ]

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