Cramer Describes The Tipping Game

Publish date:

What do you do when someone gives you a hot tip? Take Friday. I am sitting around minding my own business, answering about two dozen e-mails about how unhelpful customer service has been, and suddenly two brokers come flying in with news that


will get a bid from

Johnson & Johnson

this weekend.

I don't know what you do, but let me tell you what I do. First thing, I hit the stock up. It's already jumping. Ah hah! That, for those of you trading from a cell phone in a corn field outside of Cedar Rapids, means that you are darn late to this bogus rumor.

These phone tips are the telecommunications equivalent of a Ponzi scheme. What probably happened here, if I can reconstruct the scenario, is a couple of people have been buried alive in this laggard drug company. Rather than trying to make money legitimately, they have to resort to chicanery, chain letter chicanery, to get it going.

First, they seed the upside by buying out of the money Allergan call options for a limited amount of capital. Then they start calling their brokers and tell them that they saw a guy from Johnson & Johnson sniffing around the Allergan offices. Or that they heard J&J is anxious to make a quick stock buy with their rich shares. Whatever. Just enough to get it going.

The bad guys probably generate a ton of commission. So the brokers pretty much take the bait as a matter of course. The brokers then begin hitting all their trading wires talking up the mythical J&J for Allergan bid. Some will even add a $42 purchase price for a little cinema verite.

After the stock goes up about a point and a half, these same bad guys call their buddies at





Dow Jones

-- and

for all I know -- and say that Allergan, a laggard, is edging higher because of the J&J "bid."

By this time the bad guys are also beginning to sell all of their stock while it is furiously being bid up by the tippees who are early to the rumor. Soon the stock is up a buck or so in a flat market -- that's when I get the call -- and then the next thing you know some reporter somewhere looking for something to say ascribes the rally in Allergan to J&J's $42 all-cash offer.

No one from either company is going to comment on whether a bid is in the works. But by the time we get a few pro forma no comments the bad guys have sold all of their stock into the big press push. Now they are dumping the out-of-the-money calls for a huge gain.

This game used to be played daily with

Dan Dorfman



who got a kick out of stopping trading in stocks by mentioning these mythical bids. (Gotta love that First Amendment. Do you think Jefferson and Madison sat around saying something like "the right to free speech, the right to assemble, the right to dissemble to Dorfman?") Fortunately, Dorfman's gone and the reporters on television now are a far more responsible lot and they attempt to find out whether something is real. And to their everlasting credit they generally won't squawk it just because a stock is up.

Nevertheless, it is awfully hard to say no to these things, particularly when the stock is hopping and the options jumping. So, in the end, even if the reporters shoot them down, these rumors fulfilled their evil purpose.

What can be done about this game? It's been going on since time immemorial, so probably nothing. But, as someone who has traded since time immemorial I can tell you that I have lost far more money than I have made playing these things. And even if the source is right and Allergan does get a bid -- unbelievable as that seems -- you will never, never come out ahead. This is not some sugar-coated Aesop-fable analysis. I have looked at my numbers over and over again. The one time the mongers get it right will NEVER make up for all of those out-of-the-money calls that expire worthless. Never. Fifteen years of trading on rumors, during the greatest period of takeovers ever, tells me that it ain't a winning style. Don't be tempted; you will regret it.

So do what I did to the brokers, I said "thanks, but no thanks." And I went back to my customer service damage control, undoing all of the mischief and havoc these well-meaning troglodytes have generated.


Random musings:

Some things are just too important to outsource. And customer service is one of them. I have heard what you, fellow club members, have to say. Some have of you have criticized our customer service desk for being ineffectual. I can't control editorial. I can't dictate coverage. But I can control how we treat our members. We're going to make changes to improve customer service...By the way, those who would have bought the most active stocks the day before the crash in 87 would have made out like bandits one year later!!!

James J. Cramer is manager of a hedge fund and co-chairman of

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Mr. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he welcomes your feedback, emailed to