вторник, 10 июня 2008 г.

Guess what? Juicy stories sell

AT THE risk of doing a Ratner, I have to admit: newspapers are a flawed source of investment advice. Newspapers, in common with your stockbroker, your independent financial adviser, your friend's brother's friend in the City and whoever sends those e-mails about American microstocks that are poised to explode, provide information with an ulterior motive in the hope of making themselves a profit.

A newspaper's ulterior motive, of course, is to entertain. The aim is to tell the most interesting story possible, in an effort to convince you to make the same choice of reading matter tomorrow.

While this may seem obvious, it creates a tricky conflict. In Britain's popular press, the definition of what is interesting is set by the general reader rather than the shareholder. Playing the markets is not yet our national pastime, so the potential audience for good news tends to be dwarfed by readers wanting disasters, scandals and failures. As a result, our papers can sometimes fall into the trap of emphasising the negatives: company profits slump on a day the shares rose, or economies head towards recession when their benchmarks do not budge. Never let the prices stand in the way of a good story.

That is not to suggest that British newspaper coverage is sensationalist or malevolent. It is simply that investors and news editors tend to work off a different agenda. Journalists are, by definition, reporting the past, while investors and analysts are guessing the future. Analysts with in-depth knowledge of any security will work to incorporate all possible good and bad news into the price long before the fact. This collective pricing of expectations is why markets often move in opposite directions to headlines.

So is there any reason why investors should pay attention to the media's worst excesses? If traders can, collectively at least, see through the hyperbole, is it right to assume that the media have no influence on the markets?

Perhaps not, although the actual effect may be quite subtle. The biggest influence on markets seems to be when the bad news is so juicy that it gets every drop squeezed out over days and weeks. Though price reactions tend to be relatively dispassionate when news breaks, a drip-feed of ugly headlines can damage investor sentiment even when the basic reasons for investment are unchanged.

Take BP. The oil group has spent much of the year limping between catastrophes, both real and reported. Its main US refinery exploded. Its Alaskan field lies idle after pipelines wore paper-thin. Its showcase Thunderhorse rig in the Gulf of Mexico faces three years of unplanned repairs. Its oil traders allegedly connived to inflate prices. Its senior management squabbled over succession plans. Its Russian assets were reportedly under threat of confiscation by nettled Moscow officials.

None of these stories knocked a hole in earnings forecasts, nor did they hit shares by more than a couple of points on any single day. Yet between April and September, BP stock dropped as much as 13 per cent, erasing almost a tenth of its value relative to Shell and underperforming ExxonMobil by nearly 20 per cent.

Lucas Herrmann, of Deutsche Bank, says that the sheer volume of press coverage gave an impression that BP's problems were endemic. Investors came to believe that the group had a culture of underinvestment and shoddy business practices, he argues. Moreover, the negative headlines drowned out positives such as BP's Azerbaijan project, which is running ahead of schedule and on budget. Deutsche Bank was advising clients to buy BP shares last week, claiming that its woes were overstated and shares oversold.

So is it sensible for investors to look for embattled companies? While this is a hugely risky strategy, it can be profitable. A little more than a year ago Marks & Spencer finally shook off its reputation as the hapless, dowdy frump on Britain's high street as it became impossible to deny the turnaround achieved under Stewart Rose, appointed chief executive 18 months earlier. Shares have since doubled.

In the latter months of last year, just as the M&S rally began, Compass grabbed the headlines with allegations that it had acted improperly to win business from the United Nations. Yet even before last week, when it settled the case to little media fanfare, the shares had rebounded by nearly 50 per cent.

As for BP, it is far too early to judge whether its recent failings are endemic or unfortunate. But it is worth noting that, as press coverage tailed off last month, its shares have outperformed both their peers and the wider market.

It would be a mistake for investors to ignore newspapers: they are, after all, one of the few sources of impartial, untainted advice available to the private shareholder. But when the average reader's tastes and predelictions are being put first, it may be sensible to try to look beyond the headlines.

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