'Soft Thoughts, Hard Questions

Watch out for more phony stories and market movement ahead.
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The burst of rumor and subsequent market

activity yesterday in

Microsoft

(MSFT) - Get Report

was an important lesson. In this volatile market, it's too easy to jump on what looks like news, make a few trades and lose money.

Q&A Today with Jim Seymour on

TSC

Message Boards. When word started spreading on the Street that Microsoft and the

Justice Department

were (a) making substantial progress towards a settlement, (b) about to announce a completed settlement or (c) somewhere in between, Microsoft shares started moving up. All morning, Mister Softee had traded around or just under 96. But by around 1 p.m., bigger buying kicked in, and the price moved up about 5 points to a little more than 101.

At 3 p.m., reality sank in, and the price fell 2 points, eventually closing around 98 1/2. No big losses, no big gains, but lots of thrashing -- all over a rumor that smelled pretty phony from the beginning. This one defied logic for several reasons. People found it easier to trade than to think yesterday. The clues:

  • The big one: It was too soon. The kind of negotiations Judge Richard Posner is mediating between the two sides takes time. It's highly unlikely an agreement could have been reached so quickly.
  • Confidentiality. If you were buying Microsoft because you thought you'd picked up a legitimate leak (hmm ... contradiction in terms?) from one side or the other, or maybe even the judge's office, you were whistlin' "Dixie." Each of those three entities -- plus, of course, U.S. District Court Judge Thomas Penfield Jackson -- has every incentive to keep this absolutely buttoned up until every T is crossed and every I is dotted. If, in the end, an agreement can be reached. No leaks.
  • The state AGs' problem. As tough as the DOJ has been here, my sources keep telling me it's the state attorneys general, part of the DOJ action, who are making the loudest and most unreasonable demands and are thus the biggest impediments to settlement. Ironing out their political and ego problems is going to be the biggest source of delay in this effort.

I still think we'll see a settlement based on reason -- by which I mean one dealing with Microsoft's future behavior. But I'm pretty clearly in the minority here: Most observers expect a settlement or verdict that requires dismemberment of Microsoft (known as a "structural remedy").

Someday I'll go into the horror story that would be for PC users and the computer industry. But not necessarily for Microsoft shareholders.

For now, watch out for more phony stories like this one. And start thinking, as an investor, about the effects of both behavioral and structural remedies on Microsoft's suppliers, OEM customers and competitors. Beyond Microsoft shares, what else do you want to be ready to move on quickly, if and when a real announcement on the conclusion of this case comes down?

What happens with Microsoft's PC-making OEMs if there is a settlement requiring less-restrictive contracts for those OEMs? What happens to the operating-systems wannabes:

Red Hat's

(RHAT)

Linux,

Sun's

(SUNW) - Get Report

Solaris and

Be's

BeOS?

One prediction I can guarantee will come true: We've got a bumpy ride ahead.

Be sure to check out today's other installment of Tech Savvy.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are, or have been recently, consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.