In the annals of my television viewing history--right up there with the last Seinfeld episode and the first South Park I ever saw (the one about Mr. Hankey)--Thursday, March 2, 2000, shall forever be etched. That was the day 3Com spun off its growing PalmPilot business in an initial public offering.
I had gotten hooked on day trading approximately six months earlier, while researching a story on the differences between on-line trading and day trading (basically, in the former you send an E-mail to your broker to buy or sell a stock; in the latter, you're hooked-up directly to your broker's server, and you can buy or sell on your own). And I was doing reasonably well until that fateful day in March when my greed hitched a ride on Wall Street's hype machine.
Throughout the week, the on-air "talent" at CNBC had been exuberant at best, irrational at worst, repeatedly calling the PalmPilot offering "the most greatly anticipated IPO in history." The mistake I made was believing them. And believing them is not difficult.
Watching the early morning antics of Joe Kernen (aka "The Kahuna"), David Faber (aka "The Brain"), and Mark Haines (just Mark) on Squawk Box--described in a press release as CNBC's "popular pre-game financial news show"--I began to sincerely like these guys.
Faber gets married in New York's Rainbow Room and goes off on a two-week honeymoon. Instead of bringing on a guest host, they replace him with a cutout of Austin Powers, which ends up getting nearly as much air time as Faber did.
Or consider the show during Take Your Daughter to Work Day. Kernen bounces his gorgeous four-month-old infant on his lap and sings, "It's going to be a bad day today. We have a lockdown," because Nasdaq futures are off 110 points shortly before the bell rings, indicating a major sell-off.
While the financial world holds its breath for the outcome of the regularly scheduled meeting of the Federal Open Market Committee, Haines follows Allen Greenspan's briefcase as he walks to the gathering. Should the "Brief Case Indicator" cam reveal a thin valise, the rate will go unchanged, he claims. If the case is thick, brace yourself for at least a 25-basis-point hike in the federal funds rate.
Irreverent, intelligent, and more than a trifle funny, this trio's act, viewed every weekday in about 400,000 U.S. households, generates a lot of positive regard. And with that comes an assumption of trust.
My faith was also based in part on the fact that they'd made me some money. For I was quick to learn--and cash in on--the "CNBC Effect." It's in nearly every day trader's personal playbook.
CNBC has "created their own little day-trading culture," says Chris Wheeler, a trader and the host of daytradingstocks.com, an information service. "I know traders that just watch CNBC and only play the stocks they mention. It has a cultlike following."
While several of the day-trading manuals I paged through mention the phenomenon, The Complete Idiot's Guide to Day Trading Like a Pro puts it this way: "If you're going to day trade, you're going to watch television. All the time. From sunup to sundown. Why? Because all the other day traders are watching television too, and trading on what they see and hear. Is CNBC reporting on a particular stock this morning? Watch it move!"
Yet according to day trader John O'Donnell, head of the educational Web site onlinetradingacademy.com, of the estimated 12,500,000 on-line investors in the country only 50,000 or so real pros, to quote the cable channel's own motto, "profit by it."
"The professional traders know what CNBC is all about," O'Donnell says. "The tragedy is the public doesn't have a clue."
CNBC is "a retail source of financial information," he says. "It's not at the wholesale level. If you're using CNBC, you need to recognize you're very late in the professional news curve.
"What's the alternative for Joe Lunchbucket? He needs to subscribe to the expensive news services, like Bloomberg, which runs about $1,500 a month. There is no free lunch--you gotta pay somewhere along the line."
While CNBC receives the same financial news feeds as many professional traders, O'Donnell says "their editors cherry pick the most salient points for their viewing public, based upon demographics. Their audience is mostly regular Joes, not the institutional investors."
O'Donnell says professional day traders watch CNBC "to time when the public gets the information. And we've usually taken our position 30 minutes beforehand."
He's amused by what CNBC calls news. "Have you noticed who they usually have on for interviews?" he asks. "They interview the high-tech analyst from Goldman Sachs, and the recommendation is almost always on the buy side. That's because 99 percent of the public has never shorted a stock," meaning, never bet that a stock's price is going to fall, as the pros often do. "The game," O'Donnell concludes, "is sort of rigged against the retail investor."
CNBC is by no means alone in the game. Wall Street reporting has exploded along with the markets, and many claim there's as much irrational exuberance. "True, there have always been losers as well as winners in the stock market," write Marcia Vickers and Gary Weiss in a recent Business Week critique of their media colleagues' newfound function as Wall Street's hype machine. "But never before has Wall Street raised expectations quite so high--and never before have the media joined in quite so willingly as cheerleaders and stock-pushers."
While there's certainly enough blame to go around, CNBC has become the main feeding trough for the on-line trading herd--due as much to its entertaining and unabashed blend of facts and feelings as the speed of coaxial cable.
The most pervasive complaint leveled against CNBC in the business press has been its most noticeable impact--helping to create and foster market volatility. Sometimes CNBC doesn't even have to mention a stock to give it a lift.
Take Apple Computer. Its stock is recommended in the day-trading literature as a good one to practice with, due to its relatively high volume of shares traded daily (high volume equals liquidity, meaning you can buy and sell at will) and the usually significant price fluctuations during intraday trading (meaning it'll often go up and down a few, if not more, dollars a day). Consequently a lot of beginners are playing with Apple alongside the pros.
While studying the real-time behavior of AAPL (Apple's Nasdaq symbol) on my computer trading screen one day, Kernen began a comparative analysis of two computer companies on my TV screen, neither of which was Apple. One of his favorite phrases when comparing companies is "apples to apples." Shortly before he spoke, there was a lull in Apple trading. Upon the first utterance of Kernen's favorite phrase, trading picked up. I suspect I witnessed at least four half-listening neophyte traders buy the usual day-trading minimum of 100 shares. About 30 seconds later, perhaps upon realizing their mistake, I watched three immediately bail out by selling.
While O'Donnell treated the episode as unsurprising, the issue of CNBC contributing to market volatility, especially in the technology-laden Nasdaq, elicited from him a rather loud "So what? Thank God stocks go up and down. That gives us a chance to buy and sell. I don't have a problem with volatility. We live in volatile times."
However, "the primary beneficiaries" of such volatility, O'Donnell admits, "are the brokerages houses, who also happen to sponsor CNBC."
This symbiotic relationship hasn't escaped day trader Jay Yu either.
"CNBC is very positive for brokerages," says Yu, operator of a popular day-trading chat room, undergroundtrader.com. "Their coverage has added volatility to the market. Absolutely. So they're loved by the market makers," those who create the market for a security by buying and selling the stock on behalf of a large investment bank, a brokerage firm, or their respective clients.
"When CNBC mentions a stock, it'll pop a point or two," Yu explains. "But the smart guys are shorting the stock, because it'll tank after the pop when the rally isn't sustained and the panic buying turns into panic selling.
"The thing that perpetuates the CNBC effect in traders' minds is that after hitting a home run, they tend to think the exception is the rule. They keep doing it--they keep jumping on the CNBC mention.
"The little people," he concludes, "learn the hard way."
That's basically what happened to me. After a few months of racking up small profits, buying and selling the stocks pumped up by CNBC, I figured it was my turn for a home run on "the most greatly anticipated IPO in history."
Shortly before trading got under way, CNBC's Nasdaq reporter Tom Costello was excitedly passing along what his market maker "contacts" were telling him--Palm was expected to open perhaps as high as $300 per share.
Consequently, a few seconds after trading began, when I had my first chance to buy in at $151.25, I snapped the stock up, pumped up by the mistaken belief I could flip it in two minutes for $295.
While a trade after mine hit the day's high of $165, within 30 minutes Palm had tanked to a hundred bucks a share. The eager buyers, of which CNBC consistently spoke, never showed up. Palm closed the day at about $95.
The next morning during premarket trading, I found a more sensible idiot than myself willing to pay only $98, so I let him have it, drawing little comfort when it tanked even deeper that day, closing near $80. Last time I looked (June 13), it was at $27.
Bottom line: While CNBC may occasion as much news as it covers, as a trader I generally profited by it. As a journalist, though, I found it ethically alarming. At least until I recently heard Kernen, a former stockbroker, describe himself to his on-air colleagues.
"I told ya, I'm not a journalist," he said. "I'm not part of the media. I don't want to be part of the media."
See what I mean? How can you not trust these guys?
Art accompanying story in printed newspaper (not available in this archive): illustration/Mike Werner.