August 12th, 2011
12:12 AM GMT
(CNN) - For two days markets have been awash with rumors that French sovereign debt was about to be downgraded and that the French bank Societe Generale was in financial trouble. Was it true? At times it didn't matter.
The French market and SocGen's share price were pummeled by investors who decided there must be some truth in all of this. It was only when the ratings agencies reaffirmed France’s AAA rating and SocGen denied all rumors – without even saying what they were – that things got better.
Every day cold hard facts are the fuel that drives the markets: News about a company or country, favorable or not. But markets are living organisms, made up of Alpha type men and women desperate to take advantage of situations real or perceived. So in the absence of facts, they will listen to rumors and try and judge whether those rumors are likely to be true; then buy or sell on the back of them.
For instance, last Friday the big rumor was that the U.S. was about to lose its AAA rating. No one from the ratings agencies would confirm or deny it, so the rumor just got stronger. And the rumor was true: After the market closed S&P did downgrade American debt.
Frequently a company’s stock price will rise a day or two before an announcement of results or mergers as news leaks out. For example, in the airline industry this often happens when word of aircraft purchases trickles out before the official announcement. "Buy on the rumor, sell on the news" is a well-worn phrase, which explains why the share price often falls after the official announcement is made. The money has been made; it's time to get out.
The regulators try to prevent this by requiring share price sensitive information to be announced via the stock exchange so that everyone gets it at once. The exchanges investigate any irregular price movements and deals which suggest someone was tipped off.
Thursday's rumor de jour was that short selling of European bank stocks would be banned regulators. It helped give the market a hefty boost.
In the end, as is usually the case, the rumor proved partially true. Some regulators would ban some short selling. It is precisely because these rumors usually do have a scintilla of truth that they are followed.
Like it or not, scuttlebutt moves markets. Presidents and prime ministers dying. Companies going bankrupt. Contracts won. Contracts lost. Fires. Wars. Coups and crashes. I have heard such rumors many times over the years and always ask the same question: How much credence do we give it? And regardless if I can substantiate it, should I report the fact rumors are there?
I tend to the view that, yes: Report that the market has these strong rumors without saying whether we believe them to be true. I fundamentally believe if something has moved the market, then you have the right to know about it too.
So... come close. Let me whisper in your ear. Have you heard...???