Why investors need to read between the lines of rumour and news

Here’s an investing rule for you: Be skeptical of pearls of wisdom. Any “pearl” that can be summed up in six words or less might have the advantage of making life easier, but often that’s about it, and following these bits of the usual understanding too closely can be a recipe for disappointment.

How to conquer rate of interest uncertainty if you’re investing in stocks

It’s accepted as dependent on proven fact that markets hate uncertainty. Most investors, given an option, like to understand what they’re coping with, and the smart ones (e.g. Warren Buffett) seek out companies that offer steady cash flows, a sustainable competitive advantage and the financial strength to withstand storms.

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Take “Buy low, sell high,” for example. Sure, it sounds good. But what’s your meaning of low? Exactly what do you mean by high? There might be a higher to follow your selling, or perhaps a lower to follow your buying.

Another adage often bandied about in stock trading is “Buy the rumour, sell this news.” It basically assumes that asset prices will increase in anticipation of news developments (the rumour phase), and decline following news developments as investors place their profits. Therefore the time to “get in” is throughout the rumour phase, when there’s high upside to news developments.

In a world of nearly instantaneous news dissemination, of course, the lag from a rumour and a little bit of actual news gets smaller all the time. What seems like rumour soon becomes noise, which before long begins to seem like news. The media cover the noise, that isn’t really news. Even when the actual rumour has been largely discredited or undermined by other developments, the noise can persist, and continue to have an affect on asset prices.

Consider the short-lived run-up in oil prices around the end of recently, when benchmark WTI briefly neared US$34 a barrel. To my mind, it’s an example of the way the lines between news, rumour and noise are becoming blurrier all the time – making following old investing adages a dodgy enterprise.

If you remember, the move came amid speculation the Russians and/or the Saudis and/or the whole Organization of Petroleum Exporting Countries (OPEC) were open to production cuts to create stability to grease markets.

The supply of the speculation was a comment from Russian Oil Minister Alexander Novak on Jan. 28. He told reporters that OPEC had proposed a five-per-cent cut among major oil producers (OPEC and non-OPEC members, like Russia, included), and implied that the proposal was being led by Saudi Arabia. Or, rather, when asked whether this proposal had originate from Saudi Arabia, he didn’t say no.

The result: a flood of reports the Saudis and Russia were about to agree with 5 percent solution, and benchmark crude prices jumped almost 10 per cent.

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Now, was this rumour or news? Hard to tell – it had been almost news of the rumour.

Saudi Arabian and OPEC officials were quick to deny there was such proposal, even though there were reports, naming unidentified Saudi officials, that they were committed to steps that would stabilize the market. That is kind of like a politician saying he is dedicated to protecting puppies.

Anyway, the rumour/news had the ring of truthiness to it (to borrow a phrase from Stephen colbert), since it followed a bromide from OPEC Secretary General Abdalla El-Badri that OPEC and non-OPEC members should interact to resuscitate oil prices, and a fillip from the oil minister of Iraq that Saudi Arabia and Russia were ready to become “more flexible” on production.



So what’s the reality? Well, we still don’t know. Russia says it has meetings with OPEC members. OPEC watchers and media continue to speculate around the possibility of Russia and also the Saudis co-operating. The price of oil has returned around US$30.

What does it all mean? My guess: pretty much nothing.

For one thing, what would be the motivation for the Russians to cut production? They have never shown a willingness to get it done before, as well as in yesteryear, whether they have led the planet to think these were available to cutting output, they did not really do it. (The Saudis without doubt keep in mind that.) Right now, the Russian economy is in such a state of disarray it needs every petro-dollar it may produce. And let’s not forget that the statements of Russian politicians are not exactly renowned for their reliability.

What would be inside it for Saudi Arabia? Sure, they’re paying hand-over-fist for that current price war, but there’s no real sign that OPEC’s heaviest hitter is going to change tack since its strategy of beggaring non-traditional producers might be producing some results. In for anything, set for a riyal.

Then you will find the geopolitical implications, specifically around Syria. Russia backs the Assad regime; Saudi Arabia backs the rebellion. Will we really think they are going to agree – or stay with a contract – on something as responsive to the Mideast as oil prices?

Of course, it could happen. But it probably will not. Meanwhile, if the investor took this rumour-news as a sign that oil prices had found a bottom, she would likely be sorely mistaken.

What the Russia-OPEC deal speculation really shows isn’t a bottom, but that oil prices remain highly susceptible to the merest whiff of optimism.

When confronted with stories that are really neither news nor rumours, investors may want to be careful to read between your lines. When they do, they may see a large amount of horse pucky.