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Short the Rumor Pays 14% on Takeover Tales That Don't Come True
"Electronic news services, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies between 2005 and 2010, according to data compiled by Bloomberg. A total of 104, or 14.5 percent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 percent, betting on declines yielded average profits of 1.2 percent in the next month, an annualized gain of 14 percent.
Opportunities to employ the strategy are increasing as mergers recover from the worst recession in more than 70 years, data compiled by Bloomberg show. After bottoming in 2008, the number of unconfirmed stories about possible mergers surged 71 percent to 611 last year from 2009, data compiled by Bloomberg from more than 50 news providers and brokerages show."
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"By the time market chatter is publicly reported, it?s been passed around trading desks via instant messages and e-mail and is usually old news, according to Todd Salamone, an equity analyst at Schaeffer?s Investment Research in Cincinnati. Profiting from the reports is impossible because shares have already rallied, he said.
"I don?t know where that stuff comes from," he said. "The rumors tend to create a pop, and eventually the fundamentals and technicals take over, especially in those situations that prove to be only rumors. It?s a very short-term event." "