For those reading these pages for some time now, you’ve noticed that I believe strongly in the rise of the financial blogosphere’s influence on investor decision making (see our New Rules of Investing), the power of long-tail content (blogs writing about stocks) and how investor relations is changing in its wake (see Dominic Jones’ IR Web Report for great coverage), and how compliance is struggling to keep up with new technologies (see Bruce Carton’s terrific work). This next story seems to tie all these various facets of my focus together.
BusinessInsider has a great piece regarding a blogger’s analysis and how the company under his analysis is stepping up to the plate to address it. Zero Hedge, a blog written under the pseudonym of Tyler Durden (Brad Pitt’s character in Fight Club), recently took aim at the National Rural Utilities Cooperative Finance Corporation in a blog post. This more recent post was a follow-up to a the seminal piece published on the same blog entitled “Exclusive, In Search of the Next Big (Widening) Thing“.
Zero Hedge’s contention was that the NRUC’s CDS, the tools traders use to price risks of defaults in corporate bonds, were trading as if the company, a co-op basically with the role of “middleman between the capital markets and the U.S. government and cooperatives”, was implicitly backstopped (trader parlance meaning supported/backed) by the U.S. Government. They’re not and don’t seem to have received the same level of scrutiny that TBTF (Too Big to Fail) financials like AIG and Citigroup are receiving. This should mean that there should have been significantly more default risk inherent in NRUC’s bonds. There wasn’t.
Until Zero Hedge came along. After the publishing of Zero Hedge’s piece, NRUC’s CDS did go up, causing the firm to take note of the financial blogger and take him to task publicly.
Anyway, Zero Hedge’s allegations, alongside other research firms, were addressed in a formal press release put out by the firm:
Blogger Strikes at CFC, Electric Co-ops
On March 8, an anonymous blogger who goes by the alias Tyler Durden (the same name as Brad Pitt’s psychopathic character in the movie “Fight Club”) wrote an unflattering opinion of CFC securities in his blog “Zero Hedge.” The blog, which circulated across the Internet, complained that CFC’s credit default swaps (CDS) were trading too tightly to U.S. Treasuries, a sign of strength.
Whether right or wrong in his analysis, the firm addresses his allegations and additional points Zero Hedge made in his post throughout the rest of the press release. Read the whole press release.
Couple of important things to note in this article:
- Financial bloggers impact security prices: Whether or not firms like it, financial bloggers (even those publishing under pseudonyms) can impact security prices. In this case, it was bond/CDS prices, but it could certainly be stock prices (like some of went on last year regarding BIDZ at SeekingAlpha). Like all analysts, some bloggers do more professional research than others. The bar here is very low and like it or not, influential financial bloggers can affect security prices.
- Companies need a strategy to address bloggers: Sending cease-and-desist letters doesn’t cut it as a strategy. Once a firm recognizes that the playing field is changing, it’s time to accept and figure out how to address these new blogger-analysts. The firm above addressed it head-on and publicly. Other firms may decide to address and communicate with bloggers more proactively. Regardless, to ignore this issue means that companies are ill-prepared to deal with crises, like the one we described above could have devolved into.
- IR professionals have to get their heads in the game: Just targeting Fidelity doesn’t work anymore. Fidelity frequently doesn’t want to hear your pitch and to put it bluntly, there are a lot of influential, smart, analyst-bloggers out there that can get their hands around your story better and leverage their networks to drive interest and dollars to your client. Why go for all-or-nothing by only targeting the largest of buy-side firms?
- We need a standardized set of compliance rules: Companies are slow to opt-in to this new paradigm partly because they don’t understand the ramifications. How does Ebay’s IR pro deal with tough questions on Twitter? How do corporate CEO’s handle online Q&A’s, like OptionXpress previous CEO did with SeekingAlpha? There is no doubt that the SEC sees the Internet as the financial communication medium of the future. Beyond that, what’s permissible and what’s not is still not clear enough for any real adoption by numerous publicly-traded entities.
