How to Watch CNBC

As an active trader, I have found that CNBC is practically useless as a source of information about the stock market.  They do have one good show - Jim Cramer's Mad Money.  However, this show is good because of its entertainment value, rather than because you get any good or useful investing or trading information from it.  It's fun to watch Jim throw his chair - but his stock advice seems to be no better than flipping a coin. 

On occasion there can be something interesting on Kudlow's program, such as when someone like Barry Ritholtz is on it, but most of CNBC is worthless.

But there is an area where I have found CNBC useful - its commercials.  That's right, the commercials are the most informative part of CNBC.

There are two kinds of commercials on CNBC: commercials where a company is advertising to gain customers, and commercials where a company is advertising itself.

The first type, commercials where a company is advertising to gain customers, include such things as advertisements for online brokers.  These companies are advertising on CNBC because that's what their potential customers watch.  When you see a Scottrade commercial, obviously Scottrade is trying to get your business.  Same with ads for IBD and other companies that are in the investment industry.  These commercials can be safely ignored.

The second type, the commercials where a company is advertising itself are the interesting ones.  These companies are not advertising to potential customers, they are advertising to potential investors.  They are not advertising their products, they are advertising their stock.

It costs a lot of money to advertise on CNBC.  These companies that are advertising their stock are throwing their money down a rathole.  What is interesting is knowing who these companies are.  Over the years, a lot of heavy CNBC advertiser companies have had significant problems.  For example, five years ago, Enron and Worldcom advertised heavily on CNBC (and note, the Worldcom ads were not to get MCI customers, they were advertising the company).   We know what happened to them.  Another lesser known heavy advertiser was a company called Peregrine Systems, which ran ads showing a bunch of people bouncing or juggling something endlessly.  Peregrine Systems went bankrupt not long after the advertising deluge.

So watching who is advertising their company today may well be a useful indicator of future financial performance.  Of course, not all of the companies that do this are going to go bankrupt, but it is useful to see who is wasting their money.

I've noticed that a lot of oil companies have been advertisers lately.  This may be a special case.  Companies like ConocoPhilips and BP are heavily advertising their companies (stocks).  But these companies are making tons of money right now and are very worried about some kind of windfall profits tax.  Doing a lot of advertising is a great way to increase legitimate expenses and lower profits so as to make a windfall profits tax less likely.  But these are exceptions to the rule.

So when you watch a commercial on CNBC, ask yourself the question: Is this company advertising its products to potential customers, or is it advertising itself?  If it is advertising itself, you know a stock to stay away from.

Comments

[Brett Grendahl]

Good points. Trying to watch CNBC for actionable education about how to trade stocks is fruitless.

Every day will steer you in a new direction. Success is found in finding a consistent view of how to act.

Brett
www.TidalwaveTrader.com