Truth Serum: Stox et Veritas

<I>TSC</I> aims to set you free from the rumormongers' grasp with its newest column.
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The truth, it said in bold letters atop the front doors of Brooklyn's

Xaverian High School

, shall set you free.

The stern Xaverian Brothers likely were right to point us in that direction. Unfortunately, finding the truth is tough, especially in a murky world inhabited by rumormongers, hucksters and charlatans. The trafficking in rumors, especially on the Net, can turn investors' heads and flip stocks upside down. Nowhere is the buzz of gossip louder than among those who chase potential takeovers, and that pursuit has become a cottage industry sandwiched between the bull market and rambunctious M&A activity.

Sometimes the rumors come true. But more often, they don't. The rumors become part of a nasty game played by insiders preying on ill-informed investors anxious for a strike. These nefarious rumormongers sometimes want to get rid of a stock they're lugging. They plant a rumor and pitch it to a naive journalist, and there's the potential for a rising stock price and a nifty exit. The best at this game concoct rumors that seem so probable ... but never seem to come true.

In an effort to put this rumor mill into context, we'll be cooking up a

Truth Serum

of our own. Sure,

Cramer

has been

kvetching about this kind of column. In this case, he's right. There are far too many rumors moving far too many stocks and costing far too many people far too much money to let many more pass without mention. Besides, it's something all of our reporters do in the course of a day anyway; JJC just gave us a cool idea for a name and a place to keep all this stuff on the site.

Even the more reliable indicators of old aren't what they used to be. Previously, we were taught that the smart money played options in takeover situations because it understood how to use leverage. Now, pro traders giggle like schoolgirls about the opportunities to sell overpriced calls to the frothing masses who think they're privy to special information. Unfortunately for those masses, they're trading less on inside information than a dynamic that lets a roadside snack shack get $10 for a pack of

Pokemon cards.

The Reach of Rumor

There'll be no shortage of ideas.

The rumor genre is healthier than ever. Rumors have been part of Wall Street as long as pinstripes, but the Internet has thrown open the doors to a generation of individual investors who have been weaned on a bull market.

The investors, who have abandoned their brokers to start trading online, have become targets of touts who specialize in smaller stocks, especially the less-liquid, easy-to-push-around kind.

Case in point:

Books-A-Million

(BAMM)

and its rumored acquisition by

Borders

(BGP)

for $21 a share.

That one saw daylight on

JagNotes

early July 6, found its way to

DayInvestor.com

and eventually landed on

CNBC

. The stock popped 18% in the first 90 minutes of trading as the market sunk its teeth into the rumor.

By Thursday, however, the followers of that particular whisper were disappointed. Borders didn't come through with its offer, and Books-A-Mill was back down.

The rumormongers likely couldn't have done the same to

Chase Manhattan

(CMB)

, so they stick to using the big New York bank as the suitor du jour for whatever financial firm might be in play.

JagNotes and its sage Dan Dorfman, who resides somewhere between the "in-" and the "-famous," did that with Chase and

Merrill Lynch

(MER)

recently, even though the rumor is about 18 months old. But give credit where credit is due. He hit on

CMGI's

(CMGI)

agreement to buy a controlling interest in

AltaVista

from

Compaq

(CPQ)

before it was announced.

This kind of chatter isn't limited to the Net.

Business Week

is duly proud that its

Inside Wall Street column regularly moves stocks. Maybe it should be as concerned that only a handful of the more than 30 deals predicted in the space this year have actually happened.

But hey, Inside Wall Street's Gene Marcial did nail talk of a possible

MCI WorldCom

(WCOM)

and

SkyTel

(SKYT)

deal in early April, a couple of months before it actually happened.

Unfortunately for investors, the likes of Dorfman, Marcial and endless Internet M&A gossip centers get paid even if they're wrong.

We should all be so lucky.

But we're not. That's why every Wednesday we'll let you know what the rumor mill is dumping on the market. We intend to make the updates more frequent as we get up to speed. The plan: Spot a rumor, chase it down and provide some insight into its veracity. Sure, some we dump on may actually happen, but our intentions are honest because we hold no positions in individual stocks (except

TheStreet.com

(TSCM)

) and because if someone we quote has a position in a stock, we tell you.

In addition, as we progress, we'll keep score of the market-moving rumors to let you know if any of these pundits or Web sites are credible. When we're done, we hope investors will know who to follow, who to ignore and who, indeed, will be set free.

We'll be depending on our readers for sources, rumors and ideas. Send any to our Truth Serum hotline.