When Gerald Ford was in the White House, he said it was like living in a goldfish bowl – the world’s eyes were on him at all times, day and night. Given the way the financial media operate today, companies could say the same thing. In the last ten years there has been a virtual explosion of financial media from web sites featuring up-to-the-minute news to specialty cable channels providing 24-hour coverage of business and the financial world. Why did the business media flourish throughout the 1990s? The answer is twofold: more people invested in stocks than at any other time; and the market was hotter than hell.
The 1990s bull market – with its soaring stock prices and thirtysomething CEOs – was a phenomenon that demanded real-time coverage. Specialty cable channels like CNBC, CNNfn, online financial magazines and news sites like CBS Marketwatch.com, TheStreet.com and SmartMoney.com stepped in to provide real-time stock quotes and live interviews with CEOs.
As the market surged to record-breaking heights, the people positioned at the center of the financial media’s stage became celebrities on Wall Street and Main Street. Dot-com CEOs like Amazon’s Jeff Bezos, AOL’s Steve Case and DoubleClick’s Kevin O’Connor became celebrities in their own right, armed with ideas instead of revenues and suntans instead of suits.
Now that the market has plummeted everyone is looking for someone to blame, and some accuse the media. ‘The media are guilty of raising investor expectations, and journalists played a key role – as much as analysts or more so – in creating the bubble economy,’ claims Eric Reguly, business columnist for the Globe and Mail in Canada.
Others hold a different view. ‘If you believe the markets go up or down because of the media then you are dumber than a box of nails,’ claims CNBC Squawk Box host Mark Haines, who admits he has a reputation for sounding surly. ‘The media affect the market at the edges, no question about it, but this market was going to go up regardless of what we did, and it was also going to go down regardless of us as well.’
Leading the hype
Despite what Haines says, CNBC has more than a peripheral effect on stock trading. In fact, of all the media outlets that sprang up during the bull market, CNBC has probably had the most influence on the market. Plenty of companies have watched their stock price soar after their CEOs appeared on CNBC. ‘During the heyday of the wild market ride, one of my clients had his stock go up more than 20 points from $6 to $26 in the three-and-a-half minute time space he was on CNBC,’ attests Michael Kempner, president and CEO of PR and marketing company, the MWW Group.
The things CEOs say on CNBC can drive their stock up or down, even if their comments lack context. Case in point: In 1998, K-Tel CEO Philip Kives explained his e-strategy on CNBC and said he was personally helping finance the project. ‘When the CEO from K-Tel announced ktel.com the stock rose, but it turned out he didn’t have any money,’ claims Haines. ‘When a CEO says he’ll put in [his own money], it means he can’t raise any. The stock rallied because people only hear what they want to hear.’
Making headlines
The fact that a simple appearance on CNBC can send stock prices soaring is testament to the power this channel wields. However, CNBC’s role in boosting stock prices in the short term is only part of the story, according to Phelps McIlvaine, vice president and portfolio manager at Saturna Capital. ‘The media absolutely played a role in raising stock prices, but what is even more disturbing is the role the financial press plays in fueling the culture of expectation among investors,’ he suggests.
Once inside what McIlvaine calls ‘the media’s momentum theater’, it’s only natural that missed earnings will create an avalanche. The financial media, by virtue of their size and velocity, are a company’s gateway to public opinion. When a company releases earnings guidance, the media amplify that message and create a heightened buzz surrounding the upcoming announcement.
McIlvaine brings up the example of PeopleSoft, which he says was a ‘company that was never caught up in the talking-head-in-front-of-the-microphone earnings game, and as a result they had a very different culture.’ When PeopleSoft finally began commenting on its earnings expectations – and then subsequently missed its expected numbers – the stock tanked.
‘The analysts thought PeopleSoft had failed in the sense that the company was doing fine until it came out and created expectations,’ reports McIlvaine. ‘When PeopleSoft came back to the analyst community and said things were going to be better, it was too late because the company had lost trust with the public and no-one was interested in the company’s story anymore.’
McIlvaine contends that the media have created an environment where a company’s earnings are secondary to investor expectation. ‘If the expectation is low, then investors may be pleasantly surprised when the company comes in higher; if the expectation is high, everyone is disappointed when the number is low,’ he says. ‘The actual number no longer matters, it’s what we expected that counts.’
Today, companies have adapted to this culture of expectation and, as a result, many downplay their earnings guidance. ‘Microsoft is constantly coming out with slightly better-than-expected numbers,’ says McIlvaine. ‘This is testimony to the company’s ability to misguide expectations slightly lower, so that by the time its quarterly earnings hit the media, they have already won the battle.’
That’s entertainment
Although companies have been playing the earnings surprise game for a long time, alleges Richard Bernstein, first vice president and chief quantitative strategist at Merrill Lynch, the financial media are guilty of sensationalizing corporate news in order to attract advertising dollars. ‘The media are not in the business of giving good information – they are in the business of attracting advertisers,’ he says. There is motivation for CNBC, CNNfn, BusinessWeek, Fortune et al to be entertaining in order to capture people’s attention and boost their audiences, says Bernstein. ‘When their readership goes up or their Nielsen ratings increase, they can raise their ad rates.’
This sounds awfully cynical, but take a look at CNBC. The network’s popularity is partly attributed to its ability to make financial news as entertaining as Monday Night Football. In his book Fortune Tellers, media critic Howard Kurtz writes, ‘The network was consciously modeled on ESPN’s Sports Center, as if the correspondents were a bunch of jocks sitting around talking about the World Series or the Super Bowl. They made a big deal of the opening bell at the New York Stock Exchange, treating it like a ceremonial first pitch.’
The network’s ‘pre-game’ morning show, Squawk Box, which runs weekday mornings between 7am and 10am, features off-the-cuff banter between host Mark Haines and reporters. Haines describes himself as ‘not so much a journalist but a talk show host.’ He says, ‘What I do is partly journalism, but I also do some provoking and entertaining.’
Bernstein says most of the information published on the internet, in magazines, and on TV and radio is useless to professional and individual investors. The only message investors need is that a diversified portfolio yields strong returns over the long term, which ‘doesn’t make very good airplay when it’s repeated over and over again on TV.’ Bernstein thinks that good, solid financial journalism is a dry realm of numbers and statistics, and that it is dramatically different from the souped-up, punchy, play-by-play coverage CNBC provides.
Bring back the cynics
Some say the financial media played a role in hyping the market by failing to ask the right questions. ‘The main problem with financial journalists is that we are not skeptical enough and we don’t have enough financial training,’ says the Globe and Mail’s Reguly. ‘In 1998, we should have been more critical in reporting on companies.’
Reguly wonders where all the skeptical journalists were while the media made heroes out of bullish CEOs who were using air time to sell their stories. Amazon.com’s CEO, Jeff Bezos, is the classic example of a media-friendly CEO whose business was scrutinized by the media too late. Made popular for his disarming charm and visionary enthusiasm, he was all over the media. In 1999, Bezos graced the covers of Wired, BusinessWeek and Fortune, and was nominated Time magazine’s man of the year.
Although the media lavished attention on Amazon, they seemed to overlook the company’s huge debt and lack of profitability. With the exception of a Barron’s May 1999 cover story, ‘Amazon.bomb’, very few journalists questioned the company’s hyped valuation.
‘Amazon is a factory and many journalists didn’t have enough understanding of business to know that the technology is merely an enabling vehicle,’ suggests David Weiner, senior managing partner at National Public Relations in Toronto. ‘The media jumped on Bezos’ story because it was the most glamorous thing going, but when the bubble finally burst, they realized that business fundamentals still apply.’
Merrill Lynch’s Bernstein thinks the reason the media were not more skeptical of companies like Amazon was that their audiences did not want to hear it. ‘Skepticism of the market was very unpopular,’ he says. At the height of the bull market, Bernstein received a number of media requests because he was one of the few analysts talking about the market’s overvaluation. ‘During some of the television interviews I did on CNBC, CNNfn, PBS, etc, things got a little testy because I was a naysayer. The reporter would essentially tell me how I stupid I was.’
Telling it straight
Obviously the media’s role in fueling the bull market, hyping stocks, creating investor expectation and turning financial news into entertainment is a matter of opinion. Although analysts and journalists have their own views, almost everyone agrees the media have become players in as well as observers of the market. ‘The press attempts to report reality and, of course, it does it better or worse sometimes,’ summarizes Floyd Norris, chief financial correspondent for the New York Times. ‘One thing we have learned is that it’s important for members of the press to become their own analysts.’
Maybe the media should have been more skeptical of companies like Amazon during the bull market. Maybe the right questions should have been asked. And maybe the naysayers like analyst Richard Bernstein should have been given more credit. In truth, there were journalists like Floyd Norris and the Globe and Mail’s John Partridge and plenty of others who wrote critical pieces during the 1990s market boom. Their views were simply not popular when everyone was making money. Now that the markets have shifted, so has the media’s sentiment. After all, the press can only sell stories the audience is willing to pay for.
