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Maytag's Spin Cycle

James Surowiecki
Posted Thursday, Sept. 16, 1999, at 5:03 PM ET

If you weren't paying attention last week--and even if you were--you might have missed the dramatic fall in the stock of washing-machine maker Maytag, which began on Wednesday and continued through Friday. Although Maytag has gained a lot of attention recently for its fantastic high-end Neptune washer and its high-powered CEO, it's not exactly the kind of company that makes your ears perk up. But the story of what happened to Maytag, or more precisely the story of how Wall Street reacted to what happened to Maytag, is such a clear illustration of the Street's conviction that there's nothing wrong with inside information as to be almost a parody.

Maytag's stock was driven down because the company is going to fall far short of earnings estimates in the next two quarters. Unfortunately, Maytag investors didn't find that out until the company announced the shortfall Friday morning, after two full days of massive selling on no news at all. Well, no public news, that is. Clearly lots of people knew something.

Now, Maytag insists that it didn't even know things were going to be so bad until its sales numbers came in, and that it didn't tell any of its big shareholders to get out before the bad news broke. Perhaps. But trading volume on Wednesday was three times normal, and trading volume on Thursday was six times normal. A lot of that, of course, was just momentum selling, as people leapt out of the way of what quickly became a falling knife. But the size of the trades was such that the whole situation looks decidedly sketchy.

Here's the quirk in the whole story, though. Among the people raising the possibility that large shareholders were informed in advance are analysts at some of Wall Street's biggest investment banks and brokerage houses. And among the people most annoyed by the company's late announcement are those same analysts. Why? Because when they talked to Maytag Thursday night, the company reassured them that nothing was wrong, and that there would be no change in their earnings forecasts.

Let's get this straight. The analysts are annoyed because Maytag didn't tell them that something was wrong before it told the public that something was wrong. In other words, Maytag didn't give the analysts the chance to tell their clients to sell before other investors realized something was wrong.

Of course, this reaction was accepted as par for the course on the Street, even though if Maytag had told analysts anything, it would have been as blatant a case of selective disclosure as you can imagine. And I'd say this was astonishing, except for the fact that selective disclosure remains a painfully common practice. Non-institutional investors are excluded from company conference calls and snubbed by investor-relations people. Companies continue to disclose material information to analysts before issuing press releases. And they spend far more time talking to large shareholders than they do talking to the public.

The ironic thing, then, is that Maytag did the right thing Thursday night, even if it looks as if someone at Maytag might have done the wrong thing a couple of days before. When analysts call, looking for information that will help their clients and only their clients, companies should just say, "Buzz off. If we have something important to say, you'll find out when everyone else does." Oh, I how long to be a fly on the wall for that conversation. (Well, actually, I don't want to be a fly, since they have short and miserable lives. But you get the point.)