Sell the Rumor, Buy the News

A topsy-turvy world we’re living in—Bloomberg came out with a story about how selling a company short when there’s a rumor of its imminent takeover nets 14% returns, on average.

This goes completely against the grain of what The Hourly G learned as a newbie back in the day: Back then, the motto was Buy the rumor, sell the news.

It made sense back then: A company was rumored to be in play—id est, it was a good company, with a strong balance sheet, strong (and rational) growth projections, etc.—so you bought it on the rumor, and watched as it rose, because other people realized it was a good company, and therefore a good buy, until eventually the rumor was proven true (in which case you sold and banked your profit) or not true (in which case you sold before all the other schmucks who’d bought the false rumor sold).

Easy-peasy Japan-easy.

But now? WTF? On top of the Bloomberg observation, there’s the undeniable fact that, what with Benny and the Federal Reserve Dingbats running the show, we’re all slaves to their pronouncements. Think about it: Has there been a single major market move over the last year-to-two-years, in either equities or bonds, that was not triggered by some bit of news from the Fed? And haven’t they all driven the markets higher? At least in nominal terms? Whenever the bubble in stocks or bonds looks like it’s losing air, there goes The Bernank, pumping on his pump, to pump it up even higher, to keep it all from crashing down.

Therefore, QED: Sell the rumor, buy the news.