The Rumour Mill, a Menacing Web

As rumours goes this was a doozy! But before we dwell on it, let me say that what is buzzing about social circles, and the internet is just that, an unsubstantiated rumour based on a projection from one man. It was a rumour that was started by an American online newsletter and picked up several other bloggers. The rumour is that one of Canada's largest banks is close to financial collapse. The interesting part of all this was that it spread throughout the world, and when I got wind of it, it morphed into word of mouth.

It is important for all involved to note that the source of such an alarming rumour originated on the internet, and “as of our press run,” no reputable journalist print source had broke out with the story. Sadly, this is truly the acid test when sifting through the chaff. Because, this type of rumour mongering has the effect of becoming a self fulfilled prophecy and can affect stock trading, which in turn can cause a loss of income for those people investing in the markets.

The source of this is a Mr. Dan Amoss, a Chartered Financial Analyst® and managing editor of the online Strategic Short Report. In a four page blog titled, “The Next Major Stock Set to Crash,” the blogger Stock Gumshoe reports that Amoss will expose this Canadian bank as using shady accounting tricks to hide losses and lying about being able to pay a massive $1.5 billion dividend scheduled for 2009. Amoss teases the internet community by stating that this bank is 192 years old and employs over 37,000 people. The conclusion was from Amoss that, “The news of this bank dropping like a stone would hit the financial markets so hard — creating a tsunami of fear in a previously thought “safe” banking niche — that it’d make the panic of 2008 look like a cake walk…”

The internet community was quick to research the clues on such 'reputable' sources as Wikipedia. In very short order readers began to comment on these blogs putting their two-cents worth into the discussion. Such as “The bank never goes 'broke'. If the bank runs out of money, it can issue as much as needed by writing it on an ordinary piece of paper. In Canada, the banks can print as much as they need,” and “He did not say what his source was. The bank was described to him and the one that fit closest was BMO,” and my favourite, “Stop this, my mom works for the BMO, your scaring the hell out of me!”

This type of news is somewhat easy to believe in light of the current economic environment we find ourselves. Bloomberg News on the same day this rumour was milling about reported “Profits Decline at Two Canadians Banks.” stating that both the Bank of Montreal (BMO) and the Bank of Nova Scotia reported third-quarter earnings decline on rising loan costs. According to these reports the BMO's net income for the period fell 21 percent in it's fifth straight profit decline. In the same report the ScotiaBank reported a 1.9 percent decline in profits.

In the USA, where our banking institutions would enjoy some foreign investors stock trading, the banking story is extremely bleak, so much so that in contrast to the American experience just last February, Barron's, the online journal from The Wall Street Journal, reported “A Canadian Bank Plays It Safe…and Smart,” which painted the Canadian banking experience as strong in light of the global economic crash, and singled out the Scotiabank as “tight-fisted and old-fashioned, and has boosted its earnings and dividends consistently for more than a decade.”

But let us consider the source. When Amoss came out with his projection, he did not name the bank under scrutiny. In fact, he announced that at noon on August 24th he would come out and expose the Canadian Bank that was going to crash. Interesting that he picked a time and day of his release, after giving the world a clue to which institution this was. In fact, his report was scathing in accusations, so much so, that if he was only using conjecture he was opening himself up to legal scrutiny. Amoss is a financial analyst, and like many of those who believe to be connected, or in the know, may use their sources to their financial advantage.

Noon came on the 24th, and what was discovered was interesting. By the time his deadline was met, the internet community had already come to the conclusion that the bank in dire straights was the BMO. Now the interesting facts. At the open of the trading day, the Toronto Stock Exchange was trading BMO stock at $51.20. By 1:30 PM the same day the stocks fell to $49.13 and closed the day out at $49.10. This from a stock that held its trading between 51-52 dollars.

Whether the $1.85 day drop in trading was influenced by the rumour mill surrounding the BMO is really not the question. It would be fair to say that those trading knew of Dan Amoss’s report and could very well have been caused the selling of the shares that lowered their value.

Whether the BMO is in for a financial beating we still do not know, however by the end of the day, the BMO had cuts its dividend. One thing for sure, in today’s unstable economic outlook, rumours of financial collapse in any sector cannot help the situation. In the world of the internet, the rumour mill has become a menacing web.