Delaying the announcement of bad news is an old trick in the business world. Company CEOs and CFOs often look for ways to soften bad financial results or to hide them altogether. After all, who would buy their company's stock if the company's products, services or finances were facing problems? Nothing too shocking about that if you have been following companies and markets for a while. But that doesn't make it right. Let's look at two examples.
Two-Year Old Clinical Trial for Big Pharma
Suppose you were an executive at a publicly traded company that had developed a new kind of cholesterol-lowering drug to ward off heart attacks – and then you found out that it failed a clinical test? That's the dilemma that executives at Merck and Schering-Plough faced with Zetia and Vytorin, two drugs they partnered to develop. One clinical test showed that the drugs actually added plaque to the arteries, which makes it more likely rather than less likely that a patient taking the drugs would have a heart attack.
Here's the kicker: The companies just announced the clinical test results this week, even though they learned the results nearly two years ago.
Backdating Stock Options
Or suppose you were an executive at a publicly traded company who helped out some of your employees by making sure their stock options would register a date when the stock was at a low point. The reason? So that they would be entitled to collect a profit when they bought and sold them later at a higher price. That maneuver is called backdating stock options, and CEOs who have been caught doing it without getting the OK from their boards of directors have begun going to trial. This Wednesday, a judge decreed a sentence for Gregory Reyes, the first CEO found guilty of stock option backdating. Reyes, the former CEO of Brocade Communications Systems, got sentenced to 21 months and fined $15 million for having backdated stock options for hundreds of his employees for two years and then hiding his actions.
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We here at Elliott Wave International have a prescription for those who would like to avoid these kinds of double-dealing. We suggest getting off the addiction to following the news and the delayed reporting from companies and getting ahead of the curve by following the Wave Principle.It focuses on the overall patterns in the larger financial markets and describes how the social mood of people in large groups changes, swinging from pessimism to optimism and back again in a rhythmic, natural sequence.
So, for instance, when Starbucks announces this week that it is restructuring its management and slowing down its growth strategy (Wait a second, you mean I won't be getting that Starbucks coffee house in my basement, after all?), you can already be apprised of its slide into hard times. Here is what the Elliott Wave Theorist pointed out one year ago in the January 2007 issue:
"Another sign of slipping brand power is the recent fall-off in sales for a wide range of sugary products and caffeine-laced drinks that were refreshment mainstays during the long bull market…. Krispy Kreme, once a “sweet deal for investors” and doughnut [and coffee] lovers alike, has lost almost 75 percent of its value over the last year. In a similar reversal, Starbucks shares fell sharply when sales came in way under expectations.
"The socionomic implications of this flight are clear: the sugar rush and caffeine buzz that kept consumers tuned in to the high-energy and social imagery of a bull market are subsiding, because they are incompatible with bear market psychology. Bear markets are anti-fitness, so this is not a health kick. People just don’t want to feel jazzed up as much as they used to." [emphasis added]
Socionomics is the social science that Elliott Wave International's founder, Bob Prechter, has developed to explain how changes in social mood from positive to negative motivate action – such as turning away from iconic companies that sell coffee.
One Last Note
On days like today in the financial markets, you can almost see social mood changing before your very eyes. With the DJIA, the S&P 500 and Nasdaq all off by 2% or more today, the sell-off has resulted in a 10-month low for these markets.
Do you know what ultimately happens when social mood turns negative? It is reflected in the financial markets as a bear market. Prepare yourself by reading more below about our Financial Forecast Service, which includes The Elliott Wave Theorist. A brand new issue is online now. DETAILS>>