In April of 2013, the Associated Press twitter handle was hacked and a tweet went out which claimed that the President was injured in a bomb attack on the White house. While the tweet was quickly deleted, it caused a fall of nearly 1% on the Dow Jones.
News, regardless of its authenticity has major impact on the stock market as the investors and traders rush to take advantage. In the days before the advent of business television and the Internet, access to news was an edge one hoped to gain over time.
Fake news isn’t a recent phenomenon either with the earliest advice on staying alert coming from Joseph De La Vega in his classic book “Confusion of Confusions” where he talks about manipulators spreading false news by dropping a letter “at the right spot”.
While we assume Fake news to be False news, it may not be the case every time. Once in a while, the news turns out to be true despite the repeated denials by all parties concerned. The Vodafone / Idea merger news was first seen as yet another scouting mission but turned out to be true. On the other hand, the news of a impending merger between IndusInd Bank and Bharat Financial has been in the air for quite some time despite repeated denials by the parties concerned.
On most days, stocks with the largest volume gain compared to their historical volume are those that have had a news item. While most such news items are noise and one to be discarded, some contain the signal one is watching out for and as much could be a trigger for an action.
News has Value: suggests a new paper by Adam Hale Shapiro, Moritz Sudhof and Daniel Wilson. But given the choices in terms of news content, it’s easier to pick a needle from a haystack than give credence to news reports that are carried despite repeated denials.
In late 2012, a leading Indian business paper wrote about how old private sector banks could be takeover candidates thanks to the passing of Banking Laws (Amendment) Bill by Parliament. It even quoted Bank of America Merrill Lynch analyst Rajeev Varma who said that there’s a high possibility of many of the new banks considering acquiring the older banks with large distribution networks.
What is interesting about that news article was the way old private sector banks had moved in the recent months. Here is a chart of their return during the year 2012
In 2009, a stock named Pyramid Saimira went up big time. The news was: SEBI had demanded that the promoter make an open offer for about 4x the market price. There was a SEBI letter too, and the stock went up on the news because hey, there’s going to be a big buyer.
But the news was fake. The SEBI letter was forged and planted by a promoter, Nirmal Kotecha and distributed by a journalist with the Economic Times, Asst Edit Rajesh Unnikrishnan. SEBI indicted them later but the damage on price was already done – Kotecha managed to sell 15 lakh shares on the “fake news” day.
Yesterday, business channels went overboard on how the Delhi Government would lower Aviation Turbine Fuel from the current 25% to 1%. What was left unsaid was that this was supposedly applicable only to flights to the smaller cities. This is being done under the Umbrella of the “Udaan Scheme”.
There are two conditions: the lower fee is applicable only to flights departing from Delhi and second, this is applicable only to flights to select airports which currently do not have any flights (remote, underserved & unconnected Airports). When you consider that, the news isn’t a big deal.
Yet, Airline stocks shot up as speculation started on how much impact on the bottom like this will add to the Airline companies. 25% to 1% sounds great, but here’s another fine print: small aircrafts already attracted an ATF tax of just 4%. So this isn’t a real big cut. Also since the Indian Aviation Industry is extremely competitive in terms of pricing, not all benefits will flow straight to the bottom line. (If ATF taxes are cut, ticket prices will also fall)
Every other day, we tend to hear breaking news that seems to impact stock prices of a sector / Industry. But how far do these have an impact on the stock price in the immediate to the intermediate time frame?
A Yale study by Wesley S. Chan concluded that, stocks that experienced negative returns concurrent with the incidence of a news story continued to underperform their size, book-to-market, and event return matched peers. Stocks that experienced good news show less drift. On the other hand, extreme return stocks that had no news headlines for a given month experienced reversal in the subsequent month and little abnormal performance after that.
What the above study indicates is that news has a real impact in terms of short term returns. The real question is, should one care?
Belief in news is a mess. As we have seen in Brexit, US Elections, and even Indian elections like Bihar and yesterday’s UP, the mainstream news is not always clued in to public sentiment. Just believing that news reflects sentiment is not correct; sometimes the news itself is used to “create” sentiment, and many times the reality is different. You have to now distinguish between: Signal, Noise and Bias.