More on Scott Moritz and the Jim Cramer Street Misinformation Engine
August 5th, 2007
Daniel Eran Dilger
While awaiting Troy Wolverton to return from vacation so he can set the record straight on his questionable reporting for the Mercury News, CNET, and the Street, let’s take a look at the Street itself, and why that site constitutes a black eye for anyone who writes for it.
Jim Cramer’s False Information Business.
Last fall I reported on a ‘crazy’ Jim Cramer video for the Street where he bragged about seeding false information to cause uncertainty in the market and subsequently cause short term price manipulations in stock, easily worth millions of dollars for those manipulating.
At the time, Apple’s iPhone wasn’t even out yet. In his video, Cramer talked about seeding rumors of the iPhone being rejected by Verizon so he could later announce that it was indeed available on Verizon. Clearly, he had no inside information about the iPhone at all.
Up is the New Down.
The same strategy could also be used to falsely assure the public that the iPhone would work with all mobile providers, then later create worry and disappointment that the iPhone was unique to AT&T, despite the fact that every popular phone ever released in the US has been launched exclusive to a single carrier:
- the Palm Treo 650 was exclusive to Sprint.
- the LG Chocolate was exclusive to Verizon.
- the Motorola RAZR was exclusive to Verizon Cingular.
By suggesting that up was suddenly going to be down and then rallying his audience to expect a new upside down reality, Cramer can then announce that up is really up, and leave the market greatly disappointed about missed expectations.
Fomenting Turmoil in the Market.
Cramer outlined how he operates using Research in Motion–the highflying maker of the BlackBerry–as an example. “You got to control the market. You can’t let it lift,” Cramer explained on video. “When you get a Research in Motion, it’s really important to use a lot of your firepower to knock that down, because it’s the fulcrum of the market today.”
“You can’t foment,” Cramer said. “That’s a violation. You can’t create yourself an impression that a stock is down. But you do it anyway because the SEC doesn’t understand it. That’s the only sense that I would say that it is illegal. But a hedge fund that is not up a lot really has to do a lot now to save itself.”
“This is actually blatantly illegal,” he noted, “but when you have six days and your company may be in doubt because you are down, I think it is really important to foment. If I were one of these guys, foment an impression that Research In Motion isn’t any good, because Research In Motion is the key today.”
“It might cost me $15 to $20 million to knock RIM down, but it would be fabulous because it would beleaguer all the moron longs [investing in RIM’s success].” After creating a loss by fomenting a false outlook with bad news, manipulators can then take advantage of their own downswing in share price and profit.
“It’s important to get people talking about it as if something is wrong with RIM. Then you would call the [Wall Street] Journal and talk the bozo reporter on Research in Motion and you would feed that Palm has got a killer it is going to give. These are the things that you must do on a day like today. And if you are not doing it, maybe you shouldn’t be in the game.”
Cramer’s game isn’t about capitalizing on information and investing in successful companies or short selling companies with problems, it’s about creating a false outlook to tear down the value of successful companies.
Apple: the Ideal Short.
Turning his attention to Apple, Cramer continued, “It is very important to spread the rumor that both Verizon and AT&T have decided they don’t like the phone. It’s a very easy one to do. You also want to spread the rumor that it’s not going to be ready for Macworld [Expo].
”And this is very easy, because the people who write about Apple want that story. And you can claim that it is credible because you spoke to someone at Apple, because Apple isn’t in [a position to comment on unannounced products]. It is an ideal short.“
Cramer was right on that point: the Mac press is overwhelmingly negative about Apple, and revels in bad news, regardless of how credible that news is. Anyone honestly questioning false reports is labeled a heretic and ostracized as a religious nut for not toeing the party line. Apple’s ability to outperform the market and the ease of manipulating news related to it makes Apple stock easy to manipulate. It just takes a seed.
Seeding false reports of bad Apple news is easy, as Cramer explained, ”If I were short Apple, I would be working very hard today to get that. And the way you would do that is pick up the phone and call six trading desks. And say, listen, I just got off the phone with my contact at Verizon, and he has already said ‘listen, we’re a Lucky G [LG] house, we’re a Samsung house, we’re a Motorola house. There is no room for Apple. They want too much. We are not going to let them in. We are not going to let them do what they did to music.’ And that’s a very effective way to keep a stock down.“
”What’s important when you’re in that hedge fund mode is to not do anything remotely truthful. Because the truth is so against your view that it’s important to create a new truth, to develop a fiction. The fiction is developed by almost anybody who is down by 2% or up 6%. You can’t take any chances, you can’t have the market up any more than it is if you’re up 6.“
With Fictions Like These, Who Need Reality?
When Cramer was asked by his interviewer about the fundamentals of the market–the actual performance of companies–compared to the mechanics of the market–the artificial actions taken by traders in a game of buying and selling shares–he dismissed the idea saying, ”The mechanics are much more important than fundamentals.“
”Who cares about the fundamentals? Research in Motion just blew out the quarter. But look what people can do. That’s a fabulous thing. The great thing about the market is that it has nothing to do with the actual stocks.
“Maybe two weeks from now the buyers will come to their senses and realize that everything they heard was a lie. But then again, Fannie Mae lied about their earnings for $6 billion. So, it’s just fiction and fiction and fiction.
”I think it’s important for people to realize that the way that the market really works is to have that nexus of: hit the brokerage houses with a series of orders that can push it down, the leak it to the press, and then get it on CNBC; that’s also very important. And then you’ll have a vicious cycle down. It’s a pretty good game. It can be played for a percent or two.“
Digging for Gold.
After observing many cycles of this misinformation game, few people continue to trust Cramer’s very transparent ‘news.’ In order to continue to set false expectations and then surprise the market with humdrum reality, or to float false reports that contradict a very positive reality, the Street uses a number of other writers who seek to get their invented findings and tips published on a variety of other outlets.
Mac rumor sites report that writers for the Street incessantly ask for links to their articles. Prior to January’s Macworld Expo, similar iPhone rumors were announced by Digg’s Kevin Rose on his podcast. He claimed to have found out from sources near Apple that the iPhone:
- would work on all major US providers, including both CDMA and GSM networks.
- would incorporate two batteries, one for playing music and one for running the phone.
- would have a slide out keyboard, be extremely small, and possibly include a touchscreen.
- would cost $250 for a 4 GB model or $450 for an 8 GB one.
Rose clearly didn’t even come close on the iPhone. He insisted that he didn’t make his information up, leaving the only possible explanation that he was fed his ideas by someone who either wanted to make Rose a joke, or who wanted to make money off Rose’s reputation for leaking news.
Never mind that what Rose actually announced was both implausible for the mobile market and technically non-sensical; Rose’s rumors were trusted by some because he had earlier leaked details about other Apple products a day or two before their announcement.
Develop a cult following, and nobody will even care if what you say is true. They’ll continue to defend it even after they realize it is not true, as Digg readers did.
Don’t Know What’s Happening? Make Stuff Up!
After the iPhone was announced in January, Cramer issued an absurd expectation that Apple was going to offer the $500 iPhone with months of free mobile service–worth over $1400–to ”build market share.“ AT&T was cited as a source.
While completely nonsensical, the line was picked up by Gizmodo, which later ”smashed“ the rumor by printing a retraction. Rather than finding facts and printing reputable analysis, the Internet press had started a cycle of iPhone news-making:
- publish some outrageously ridiculous bit of supposition from a non-credible source and get Diggs.
- retract the silliness, not as a correction but as a heroic vindication of truth, and get more Diggs.
- continue to refer to a series of absurd ideas others had printed as if they were credible, and get Diggs.
- build a series of myths into a complex mythology presided over by silly wags and non-credible sources.
- Get Diggs.
Sites like Gizmodo and Engadget require lots of silly ideas per day to stoke enough web-click traffic to pay for their existence. Both commonly pilfer legitimate discoveries and reporting done elsewhere without properly attributing those sources. That’s okay for Digg, because credible sources are not demanded by the armies of Digg users who flock from one tantalizing bit of guesswork to the next merely for entertainment purposes.
In a system devoid of any fact checking or reputable sourcing of ideas, there’s simply no difference between reporting news and manufacturing it. Both serve the publisher; Gizmodo and Engadget act as though they bear zero accountability for what they publish as they benefit from throngs of web traffic that continue to come whether they get any facts right or not.
The Impact of False Information.
Engadget stumbled upon the power of publishing false information in May when it printed an email–purporting to be an internal Apple memo–stating that both Mac OS X Leopard and the iPhone would be delayed for several more months. That false report had a short term but significant impact on Apple’s stock price.
Engadget’s Ryan Block insisted that–in his game of trying to publish rumors faster than everyone else–accuracy and his own credibility took the back seat to web traffic. When sensational news is too good to be true, it has the power to herd more Digg users over to take a brief look.
[Ryan Block - Valleywag]
Since then, the Street has issued a series of reports conveying information that was clearly inaccurate and entirely the work of internal invention.
The iPhone’s launch was regarded as the most blockbuster for any consumer electronics device ever. Yet Scott Moritz published a Street report saying that it had ”missed a 1 million unit sales target and rivals are rejoicing.“ Moritz wasn’t just inventing something to say to get airplay. He was seeding false information to manipulate Apple’s stock price downward.
His report was purportedly based upon inside ”whispers,“ but the reality was that he misrepresented the position of analysts covering the iPhone.
He conveniently failed to point that analysts had really set targets between 150,000 and 300,000; during the launch, some raised their estimates for the weekend to twice that. None had ever set a million units as a realistic goal, let alone a minimum threshold of failure. Moritz clearly lied.
Client Side Reporting.
Moritz’ misleading reporting was accompanied by Street colleague Brett Arends, who had published ”Five Reasons Not to Buy an iPhone.“ It echoed the marketing talking points of rivals Verizon and Sprint, and sought to establish the idea that the iPhone was outrageously expensive.
That idea was further exaggerated in a followup story claiming that the iPhone cost upwards of $17,000, if only the money were instead invested over a lifetime and no taxes were ever paid on it. Arends failed to point out that competing smartphones actually cost more than the iPhone, even those with a teaser price of $99. Arends wasn’t reporting on the high cost of mobile phones or the benefits of investing, he was seeding false information to drive down Apple’s outlook.
The Street’s articles are laced with quotes from Roger Entner of IAG Research, who regurgitates the Verizon line about as well as Rob Enderle blindly gushes about the wonders of Microsoft. Both offer little to support the actual merits or ability of their sponsors to deliver; they are simply hollow shills. That gives the Street multiple reasons to print false information about Apple and other successful companies.
Moritz subsequently announced that Apple was earning fantastical profits on the iPhone from its revenue sharing plan with AT&T and insisted that the deal was unprecedented. This wasn’t true, as RIM also quite publicly earns a revenue cut from service providers. Moritz then issued a sudden warning–falsely attributed to an investment group that doesn’t even cover Apple or tech stocks–that Apple was cutting its orders with suppliers in half.
These continual cycles of false reports tug investors up and down in short term manipulations. Even worse, they serve as protofacts for junk science journalists piecing together theories that otherwise have no support apart from the ramblings of those who are intentionally seeding false information, either for their own benefit, for that of their clients, or a bit a both.
Serious Questions for Serious Journalists.
It also raises serious questions about any journalist who cites false reports as the foundation for articles inciting fear, uncertainty, and doubt about Apple and its products, or any other successful company.
The fact that Troy Wolverton of the San Jose Mercury Times is fully aware of the Street’s misinformation campaign–and willingly served to advance those interests while writing for it–casts doubt upon his ability to cover Apple as a supposedly impartial reporter.
Brett Arends and Scott Moritz are not reporters, they simply generate torrents of false information. Anyone citing them as reputable sources of news is equally guilty of spreading false information.
Great Job With the Consistently Wrong Coverage.
In a video published by the Street, Cramer praised Moritz for his coverage of Apple, which included his story of ”speculation“ that Apple was cutting its iPhone orders in half. When asked for details, Moritz described the story as coming from a ”boutique research shop“ but also conceded that ”it doesn’t make much sense.“
The nonsensical story said that Apple pre-ordered 9 million phones but then canceled half its order. Apple doesn’t maintain a year of channel inventory for any of its products. The Street invented this. Moritz claimed to be reporting the reasons why Apple’s stock dipped down, but his fake reports are the reason. Cramer even credited his reports as ”self fulfilling.“
When asked about over the top reports complaining about the iPhone’s battery needing replacement in two years, Moritz also had to concede ”I’m not sure it’s an issue.“
The latest story from the Street, a source that delivers no useful information about Apple and a string of false reports, claims that an iPhone nano is due in the months leading up to Christmas.
That makes me even more confident in repeating that there’s no chance of Apple releasing a smaller version of the iPhone this year.
Thanks to Jared Updike for the links.
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