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Bloomberg Customers rally isn't the riddle it might seem

Posted by: Aaron Pressman on February 7, 2006

The currently ongoing fourth-quarter earnings report season has had its share of flukes, inconsistencies and overreactions. But what to make of today’s action in shares of controversial Internet retailer The stock of Overstock, symbol OSTK, got hit pretty hard the past two days, falling from a closing price of $24.65 on Thursday to $22.75 yesterday. But today the stock jumped up almost 7% to $24.28 after trading as high as $25.12 during the day. Oh, I guess CEO Patrick Byrne defied the shorts and posted better-than-expected earnings? Nope, missed by a mile. The company lost 22 cents a share versus analysts expecting a moderate loss of 5 cents a share. Revenue of $318 million was about 5% lighter than expectations too. So what gives?

First, note that is a company that has been the subject of much back and forth between journalists (including at BW), short sellers betting on a price decline and CEO Byrne, among others. There's even a lawsuit. I really, really don't want to get into all that here. (If you're interested, blogger Jeff Matthews is a leading critic and outlines some of the bearish case here and here. Bob O'Brien takes the other side on his blog, The Sanity Check).

In any event, don't be mystified by today's action. It's a manifestation of the oldest of Wall Street adages. Start by going back to the recent trading history. In mid-December, at the height of the holiday retailing season, shares started dropping. Word on the street, or at least on some blogs, was that the company was having problems with its computer database systems. After hovering around $40, the stock sinks below $30 on December 28 and then under $25 by late January.

What was happening? Clearly people were selling and shorting based on the RUMOR of a bad Christmas. And, as I mentioned above, Overstock got all the way down below $23 just yesterday. So, any Wall Street drone can tell you what happened today, after the official report, the confirmation, the NEWS, right? The stock is up because those bets on a bad Christmas are getting closed out on the profitable side of the ledger. Today's rally only makes it back to Overstock's price two days ago. Buy on the rumor, sell on the news strikes again.

p.s. tip o' the cap to the Internet Stock Blog for keeping up with Byrne's twists and turns.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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