The following is from AOL's Motley Fool;
[EDITOR'S NOTE: Today, Rogue Media and Technology returns to Iomega, makers
of the Zip drive, for an examination of the press' role in either fostering
or forestalling jumpy markets. Is the market efficient? Are conspiracies to
drive prices down real?]
Markets are inefficient. No matter how many times an investor repeats the
words, they speak an elusive truth that's difficult to truly grasp. Among the
several reasons why markets are inefficient is one that continues to
astonish: the flow of information can bear no relationship to its accuracy.
The tale of two comments made during these last few days of market turmoil
tells the story of why the online medium, for all its faults, will prove a
superior medium for analyzing companies. We turn, yet again, to removable
storage company Iomega Corporation, for which it's always the best of times
or worst of times, depending upon who's doing the talking.
The first tale involves comments made on Monday, July 15th on SQUAWK BOX,
CNBC's morning show hosted by Mark Haines. The program is watched by hundreds
of thousands of viewers across the country, including many Wall Street
professionals. On Monday, it featured Meyer Berman, principal in M.A. Berman
& Co. As an Iomega short-seller, Berman came prepared with a string of
negative comments about the company that would almost certainly drive the
stock price down.
And they did. Even before the broader markets began reeling, Iomega was down
over $4.50 a share from its previous close of $26.25. The stock would close
near the day's lows at $22. Even amid an otherwise tumultuous day for the
markets overall and technology stocks in particular, a Reuters' news piece
Monday evening concluded that Berman's comments on CNBC may have been the
principal reason for Iomega's fall.
What revelations had Berman offered the markets that would cause such a swift
and brutal correction? Well, nothing new and nothing much that he could
defend.
According to Berman, Iomega's earnings for the second quarter ending June
30th (to be announced after the market closes on July 18th) would prove an
anomaly. "They'll be better than people anticipate---better than the bulls
anticipate---and my guess is better than bears anticipate," Berman said. But
the prices of Iomega's drives "have already gone down and competition is
going in." The real question, he said, "is whether next quarter they're going
to make money."
These remarks were completely out of step with all comments made in recent
weeks by analysts at J.P. Morgan and other investment houses that cover the
company. On top of such damning commentary, Berman made an even more
astonishing claim. Iomega, he said, would have to sell over 90 million
removable drives in order to justify its current valuation in the mid 20s.
This simply "won't happen," he said. As Berman must have known, the company
only recently announced that it had sold 3 million storage solutions. Thus he
was saying that even without increased competition and price cuts, the
stock's price was way ahead of itself.
To CNBC's credit, Haines greeted Berman's remarks with real skepticism.
Berman suggested that the computer industry heavyweights supporting the
competing LS-120 drive were not going to just let Iomega's Zip drive "take
over" the market. Haines replied, "Well they don't have to sit there and let
Iomega take over the market. Iomega has the market. [The LS-120 backers] have
got to come and take it away."
In fact, though Berman was the expert guest, Haines seemed to know much more
about Iomega's products than Berman did. He countered that the LS-120 drive
is much slower and more expensive than the Zip drive. When confronted with
even a modicum of resistance, Berman had trouble justifying his position. To
longtime Iomega watchers, this analyst melted into a puddle of incoherence
that ended with a remarkable public taunt: a recitation of a sonnet by
Shakespeare, which he dedicated to THE MOTLEY FOOL, the most popular online
financial forum, and "the Iomegans" who call the FOOL home.
Within the Iomega folder in the FOOL, the "Iomegans" greeted CNBC's interview
with Berman with a variety of opinions. Some agreed that Iomega may be
overvalued in a market where technology stocks, even those reporting good
earnings, were being crushed.
But the more widespread sentiment was disgust at CNBC for giving this man
such a mass media forum for views that most Iomega investors in the folder
considered erroneous and merely self-serving. Some participants wondered anew
about the mainstream media's complicity in helping short-sellers like Berman
drive the stock's price down. As the argument went, Berman was trying to
drive the share price down so he and other shorts could cover their positions
before Thursday's earnings report.
Many in Fooldom called for more balanced reporting, suggesting that CNBC
should have brought in some Iomega bull to debate Berman. Others called for
an SEC investigation, suggesting anew that there may be some organized
conspiracy by shorts and the mainstream media to drive Iomega's stock down.
Still others said to forget these media conspiracy theories and get back to
the company, whose earnings and track record would themselves right the stock
over time.
Iomega bulls in Fooldom have actually been firing missives to CNBC for many
months now, chastizing and correcting what they perceive as the anchors'
mistakes regarding Iomega, and applauding the anchors' slow but real progress
in understanding Iomega's business. Haines' judicious ripostes to Berman in
part revealed the fruit of this campaign by such disgrunted viewers.
Berman's very appearance on CNBC, though, seemed an affront to Iomega
loyalists. The disgust derived not just from the fact that his comments were
killing the stock but from the fact that he was the second short seller in a
week to be given a mass media soapbox on CNBC to trash the company. The
previous Friday, reporter David Faber had interviewed David Rocker, a hedge
fund manager who is believed to have had one of the largest short positions
in Iomega. Rocker's comments contributed to Iomega's drop on Friday to the
mid 20s.
Haines would not speak about Rocker's appearance on CNBC. But he did say via
e-mail that the guests for SQUAWK BOX are chosen by the show's producer and
two bookers. "None of them has any interest in any stock. (We don't pay them
enough that they can afford to buy stocks :-).)" The show chooses regular
guests that "we believe to be interesting and informative," he said. These
regular guests appear roughly once a month, as their schedules permit. Mr.
Berman was last on about a month ago.
Haines also responded to broader questions concerning the media's role, or,
in his view, non-role in Iomega's saga. His response is worth considering in
detail.
"As for the concern by some Iomega shareholders that CNBC plays a role in
depressing Iomega's or anyone else's stock price, I am a bit confused. In
order to believe that, one must believe that all over the world, investors
will completely ignore the fundamentals of a company if they hear negative
opinions in the media. Sorry, but this defies logic. If a company
demonstrates that it can make money at an increasing rate, its stock will be
bought.
"To argue that money managers and fund managers, charged with investing
billions of dollars, are going to base their decisions not on whether a
company is growing, but on whether someone interviewed on TV likes the stock,
strikes me as absurd. There's an old saying, 'Money goes where it's treated
best.' It has always been true, and always will be true. How else can one
explain the fact that IOMG moved relentlessly upward during what some
perceived as a relentless storm of negativism from the 'establishment
financial media?'
"And since May 22nd, the stock has moved relentlessly downward, despite a
virtually uninterrupted string of positive reports regarding agreements for
wider distribution of Iomega products. If those patterns don't prove that
media coverage of a stock has little to do with which way it goes over the
long term, then I don't know what kind of proof could ever be convincing.
"As I see it, the problem with *some* Iomega shareholders is they *love* the
company and its products and in their ardor, ignore a *critical* part of
investing . . . valuation . . . how much one is paying for a share in the
company's future. To make money one need examine not only whether the
company's products or services will do well, but what *price* one has to pay
for a share of that company. BOTH factors must be examined in order to make a
rational investment decision.. . .Except for a very brief period, from early
May until late June, the market has assigned a value of no more than $30 to
IOMG stock.
"IOMG longs may not like Mr. Berman or what he has to say, but the cold fact,
determined by a free market of willing buyers and sellers, is that since May
22nd, he has been very right and they have been very wrong. Thus, to argue
that CNBC should not put him on the air is to argue that we should
deliberately ignore someone whose advice over the last two months has been
very profitable for anyone who acted upon it. Conversely, those who argue for
some sort of 'balancing' or 'offsetting' opinion are arguing that we should
put on television someone whose advice would have lost you a ton of money
since May. Am I missing something here? If we were talking about ANY OTHER
STOCK, would you take that argument seriously?
"Mr. Berman's views on IOMG's technology did not go unchallenged by me. But,
his views on the stock's valuation are purely subjective and I am in no
position to challenge them. The only thing I can know for sure is that he has
been right for months now. If an IOMG bull appears on the program, his/her
view will not go unchallenged, either. But as far as what the stock 'should'
be selling for, only the market gives the answer that any of us can accept as
'true,' and it will do so regardless of what Meyer Berman or [Iomega CEO] Kim
Edwards or J.P. Morgan has to say."
Haines' comments are worth quoting in such detail in part because they are
the product of the online medium's ability to provide a broader give-and-take
than the traditional media can permit. On the surface, Haines' views also
seem absolutely reasonable in extolling the inexorable logic of the market to
assess real value amidst all the talk pro or con. In fact, Benjamin Lipman
(MF Ben), one of the most valuable contributors to Fooldom's ongoing
discussion of Iomega, himself waged an almost identical battle all day Monday
in the folder against investors expounding on media conspiracies.
Taking the long-term view, we have to believe that the truth---whatever it
is---will out. Still, as John Maynard Keynes once said, in the long run we're
all dead. Intermediate moves, however we define the time frame, are of
concern to all investors because that's where we live. But in the
intermediate period, inefficiency of one sort or another rules markets.To
ignore the role of the mass media in contributing to those inefficiencies
seems silly.
Despite what we might think about investors, well-placed public comments like
Berman's on CNBC, can and do influence investors even if they only act as the
final straw the tips the scales one way or another. To say, as true Foolish
investors do, that these movements are immaterial in the longterm is at best
an incomplete response since a stock's price is never unaffected by investor
psychology. And investment psychology is not ephemeral but historically
meaningful. Volatility in a stock contributes to overall confidence in that
stock and in the company itself.
Examined closely, Haines' comments subtly deflect his own role in Iomega's
volatility. Haines was comfortable challenging Berman's view regarding the
technology and pricing of Iomega's Zip versus the competition. But he
indicated that questions of valuation are "purely subjective" and thus were
outside the scope of the interview. Yet surely Berman's comments regarding
Iomega's valuation depend on his arguments regarding Iomega's products. To
the extent that these arguments seemed uncovincing to Haines himself, then
the question of valuation should in fact have become the principal issue of
the interview.
Pressing that topic would have raised the kinds of issues that ultimately
should matter most to investors. How, for instance, did Berman arrive at the
idea that 90 million drives sold by 2000 was factored into Iomega's stock
price? Viewers were left with absolutely no idea. The numbers, in truth, seem
merely pulled from J.P. Morgan's recent buy recommendation on the stock.
Moreover, if there is no serious competition to the Zip drive, then Berman's
view that Iomega's earnings would be hurt by increased competition looks
laughable. Haines obviously asked Berman "tough" questions that suggested
these conclusions. But to the degree that he failed to expose Berman as
someone trafficking in the plainest form of misinformation---clearly for his
own financial gain---then Haines contributed to the market misperceptions
influencing the stock.
Indeed, as such unfounded information gained wide circulation via CNBC, the
whole system became nearly reflexively self-reinforcing. Berman would prove
right about the stock not because he was right in his analysis but because he
made the comments on national television where they would have considerable
influence. Because he was right about the stock, he would continue to get
invited back onto national television. In turn, Haines could continue to
believe that the market itself was both the final and only arbiter of what
was true and that the media had less than no influence over the matter.
-- Louis Corrigan (RgeSeymour)
NEXT: In Part II of this story, Corrigan looks at Compaq's LS-120, which has
been touted as a competitor to Iomega's Zip Drive. Have exaggerated claims
for the LS-120 been made? What will its real impact be? |
