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Did Stocks Rally Because of an April Fool's Joke?


Why did stocks rally today? (link to snapshot) One reason, says Barry Ritholtz, is “an internet April Fool’s hoax that backfired.”

I’m not so sure, but the story is a good one:

Doug Kass of Seabreeze Partners is an expert short seller, a skeptical investor who is so bearish — and brave enough — that he recently bet against legendary investor Warren Buffett’s Berkshire Hathaway (BKRA). On Apr. 1, Kass sent out a note saying he’s changed his mind about it all.

His short funds, designed to bet against the stock market, are going long. He initially thought stocks would decline 5% to 10% this year, but now he thinks the S&P 500 will hit 1,666, up 26% from this point.

If you knew Kass’s previous market commentary, at this point you would figure out that he wasn’t serious. Even if you didn’t know Kass well, it might raise your eyebrows when Kass predicted that oil prices will fall below $50 per barrel or that financial stocks should double by year-end. Also, Kass writes, “Housing has definitely bottomed,” and “a housing shortage is possible within 12 months.” Yeah, right.

The end of the note leaves no doubt that Kass is just joking. “April Fool’s Day!” he writes.

But financial journalists initially took Kass’s note at face value, Ritholtz says.

Ritholtz says he saw credulous coverage by the Wall Street Journal, MarketWatch, CNN Money and Bloomberg. He provides links to those stories, which no longer mention Kass. In the pre-market rush, reporters might have skimmed Kass's note, and then posted quick stories. By the afternoon, or perhaps much earlier, they apparently realized and corrected their mistakes.

Ritholtz thinks the Kass stories boosted the market's opening mood, leading to a 3.59% jump in the S&P 500 by the close on Apr. 1.

I'm not so sure. I talked to one respected source who watches market sentiment closely, and he hadn't heard of the Kass story at all. Plus, the rally built throughout the day -- after it was quite clear that Kass was joking -- with most of the credit going to good economic news.

Still, there are some interesting lessons here:

1. Note to journalists everywhere: If you're pressed for time and absolutely must skim something, always read the last sentence.

2. A good sense of humor is hard to find, on Wall Street or elsewhere. Kass reportedly apologized, saying he "was only trying trying to make some traders, who have been having a tough year, break a smile." Read his note and let me know if you disagree, but I just didn't find Kass's note funny at all. The only thing Kass is guilty of is telling some bad jokes.

(Gags and money usually don't mix. But, for a rare funny note from a financial professional, do yourself a favor and read PIMCO's Bill Gross's brilliant July 2007 "Investment Outlook," which presciently predicted the credit crunch -- with repeated references to Paris Hilton's stay at the L.A. County jail.)

3. If Kass did affect the market today, this probably says more about the market than it does about Kass's influence. Sometimes the market, notoriously irrational and hard to explain, is just looking for an excuse to go up or down. With billions of investment dollars stuck in savings accounts, low-yielding bonds and other safe investments, investors seem to be itching for the chance to put their money to work. Of course, if economic and financial conditions get worse -- as, remember, Kass still is predicting -- they'll be sorry. But for now, investors will take any opportunity to buy, buy, buy.


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