| Selling the Fact |
27 October 2003
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Amazon Beats Expectations -- Stock Drops
Amazon's third quarter numbers came out last week, and they were better than market expectations. The e-tailer managed to beat expectations by a penny a share earning 11 cents a share, excluding certain items; third quarter last year, the figure was zero cents per share. On such good news, the stock fell about 2.5%. What is the market thinking?
Amazon wasn't the only stock to dip after its good earnings come out. E-bay ran into the same thing, and DaimlerChrysler wishes it had such troubles. Yet the market is doing something that the average investor never learns until after an unsuccessful trade -- buy the rumor, sell the fact.
Markets are based on information. If everything there is to be known about a commodity were known, prices would never vary. Price fluctuations are the result of new data entering the marketplace. Earnings, which US public companies have to report on a quarterly basis, constitute that new data. But because everyone knows that the data are coming, and because industry savvy analysts claim to be able to guess about where the numbers will be, positions are taken in the stock before the news comes out. When the announcement is made, the profit is booked, and that means a lot of selling on good news as positions are squared.
America, and other market economies, does a poor job in teaching this kind of fact to its populations. It is perfectly understandable, and it doesn't violate any of the world's laws regarding supply and demand -- indeed, it underlines them. Yet there are a few retail investors who are down a few dollars because they bought Amazon stock when the good news came out. And know they know that data coming out means liquidating of positions. It's an expensive lesson that the public schools could teach, except that well-taught economics leads to politics. And one can't have that in the classroom.
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