See it all at www.nasdaq.com. Select Major Market indices.

Could it have been worse? Is the Pope Catholic? Does the bear sh1t in your portfolio?

Watch six and keep your...

-- eyes_open (best@wishes.2all), April 13, 2000

Answers

I wonder how the entity that turned the market on 4/04 with its voracious purchasing of futures feels now? Artificial manipulation of markets just prolongs the inevitable.

-- J (Y2J@home.comm), April 13, 2000.

J:

Which entity are you refering to that turned the market around on 4/4? Do you have names or is it "Them" again?

-- Jim Cooke (JJCooke@yahoo.com), April 13, 2000.

Jim,

If you were trying to establish a futures position of a very large size, would you delicately buy your way into the position so as not to move the market, or would you barge into the market somewhat like a bull in a china shop, almost guaranteeing that the market would move away from you, thus making the total cost of your position more expensive to purchase?

On the other hand, if you were trying to turn the market, you would indeed rush in like the bull in the proverbial china shop so that everyone would notice what you were doing. I would guess that George Soros, Warren Buffet, Bill Gates, and the like don't move into markets in this manner. So please tell me who does?

-- J (Y2J@home.comm), April 13, 2000.

Oh no, not "Them"!!! Giant ants scare the beejeebers outta me! 8-}

-- DeeEmBee (macbeth1@pacbell.net), April 13, 2000.

How do you feel about giant ants that control margin trading accounts.

-- David L (bumpkin@dnet.net), April 13, 2000.

Margin call causes concern

April 12, 2000

CHICAGO SUN-TIMES WIRES

If there are two words that can spook the market faster than "Alan Greenspan," they are these: margin call.

"That's not a social call," said Mitch Zacks, portfolio manager at Zacks Investment Management in Chicago and a Sun-Times investing columnist. "It's more like having the Grim Reaper drop by for lunch."

The tab for that lunch is running around $265.2 billion and counting.

That's how much investors have borrowed from brokerage houses to buy stock, about nine times greater than in 1990.

"There's a record amount of stock being sold by companies [in initial public offerings] and by company insiders, and individual investors are borrowing heavily on margin," said Charles Biderman, CEO of financial-researcher TrimTabs Inc. of Santa Clara, Calif. "So, the smart money is selling, and the people who are buying are usually not the smartest buyers. It's a scary situation."

Investors borrow money to buy stock in the hope that the stock will increase in value. The stock purchased on margin is used as collateral against the value of the loan.

If the stock goes up, the investor can use the profits to pay back the borrowed money plus interest charged by the lender.

But if the stock price falls, thus lowering the value of the lender's collateral, the lender makes a margin call, which requires the borrower to put up more cash to ensure that the loan is repaid in full.

The Federal Reserve Board, which regulates margin borrowing, currently requires investors to have at least $2,000 in a trading account to buy on margin. In addition, investors are limited to purchasing $2 of stock for every $1 in their account.

Most major companies, acting independently last year, made it harder to buy risky technology shares on margin by increasing the amount of money investors needed to put up in advance.

Margin calls usually are covered by selling the stock purchased on margin, a dynamic that contributed to the sharp sell-offs in the market lately, including Tuesday's 132.30 point drop in the Nasdaq.

Although the dollar figures are huge, stocks purchased on margin represent a relatively small percentage of the total value of all stocks on the New York, American and Nasdaq stock exchanges. But it's a percentage that's growing ominously, in the estimation of many.

Stocks purchased on margin at the end of February accounted for 1.53 percent of the value of exchange-listed stocks, up from 1.37 percent on the theshold of the 1987 market rout, and only 1 percent in 1994.

The fear among many analysts is that if brokerages call on investors to make good on those loans, investors will suck the lifeblood out of the market, ending the longest bull-market run in history.

Indeed, margin calls in the last couple of weeks forced some investors to cash in stocks that have tallied solid gains in recent years, and those sales helped drive down Nasdaq stock prices, virtually wiping out all gains so far this year.

Even the most bearish analysts pooh-pooh any comparison to 1929, when stocks purchased on margin accounted for a precarious 9.16 percent of total Big Board market capitalization right before the crash.

Further, 1929-era investors put up only 10 cents on the dollar to buy on margin, so when the margin calls started, the stock market fall turned immediately into a collapse.

Nevertheless, some market gurus are anxious enough to seek tighter controls on margin accounts, including an increase in so-called maintenance accounts, or the amount of money an investor must keep in an account to serve as collateral against stock bought on margin.

The NYSE and Nasdaq currently require that the portion of the account held with the investor's own funds be no lower than 25 percent of the total value of the account. If it falls below that, a margin call occurs.

For instance, an investor buys $10,000 in stock, with $5,000 cash and $5,000 borrowed.

A margin call could be expected if the value of the stock falls below $6,666. The investor still owes $5,000, but his cash stake in the overall portfolio has fallen below $1,666, or below 25 percent of the total value of the account.

Despite the scare, neither the New York Stock Exchange nor the Nasdaq stock market has immediate plans to make it harder for investors to buy stock on credit. And officials at several major brokerage firms said no further restrictions were planned to curb margin investing.

Mike Dunn, a spokesman for online firm Datek, said Datek has no plans to increase maintenance account requirements.

Dunn said recent sell-offs affect just a small percentage of investors who purchase stock on margin. "Investing in the markets has certain risks to begin with," Dunn said. "When you buy on margin, you add to that risk."

http://www.suntimes.com:80/output/business/margin12.html

-- - (x@xxx.com), April 13, 2000.

They're even more scary, which is why I went to cash many moons ago.

Jim Cooke, a chap named "Cash" (good monicker), and your truly have been discussing the actions of the markets on a couple of other threads. It seems clear to me that there was a concerted effort by some big players (funds, most likely) to defend the market from a complete crash on Rollercoaster Tuesday, but my theory is that this was a "one-off" event. The funds are run by seasoned professionals and I think they made the decision to risk losing some serious capital in order to avoid an even more catastrophic result on that day.

What they cannot and will not do is continue to fight the trend for weeks on end. Look what's happening at the end of the day lately. That late selling (2PM onwards) almost has to be professionals at work, whether closing out margin accounts (gotta ensure that the firm gets its money) or exiting losing positions themselves. I would hate to have their jobs right now. The party is well and truly over and now the heavy lifting begins in earnest.

It appears that many people made the old mistake of "confusing brains with a bull market." Many of them are now discovering that markets move up AND down, and anyone on the wrong side of the trend loses. Me, I'm a fan of JFK's Dad, who avoided the Great Crash by cashing out months before Black Monday. He was quoted later as saying, "Better to be out of the market two months too early than one month too late."

Tomorrow may be truly ugly. That late drop on the Nasdaq has to have a lot more folks looking around for the exits. Too bad there aren't nearly enough to let everyone out safely. Saw a few comments on various investing boards about lousy liquidity today. You can't sell if no one's buying, and that's how real market panics start.

-- DeeEmBee (macbeth1@pacbell.net), April 13, 2000.

As I posted above this thread, I think the market is going to crash. The Feds know this, the brokers know this, it's just a matter of timing.

For those who lost the URL, www.fiednbear.com has lots of good links and information.

Todd

-- Todd Detzel (detzel@jps.net), April 13, 2000.

Margin calls usually are covered by selling the stock purchased on margin, a dynamic that contributed to the sharp sell-offs in the market lately, including Tuesday's 132.30 point drop in the Nasdaq.

Granting that margin trading tends to be destabilizing to the market, I wonder if the italicized statement isn't putting the cart before the horse. In order for a margin call to occur, the purchased security has to plummet. If the market were fundamentally on firm ground, why would the bottom be dropping out of so many stocks, that margin calls could trigger a meltdown?

-- David L (bumpkin@dnet.net), April 13, 2000.

Like other forms of debt or leverage, margin is a force magnifier. Lovely as long as prices go up, but hell on wheels in the other direction. Sell-offs for other reasons (say, because someone got cold feet when they realized that Cisco's current market cap could be used to buy the entire gas and utility industry of the U.S.) get boosted because more sales are forced by margin calls. Margin calls aren't trigger events, but they most certainly contribute to the magnitude of declines, which then snowball as more margin calls are made.

-- DeeEmBee (macbeth1@pacbell.net), April 14, 2000.

Dee:

I'm reading those threads you refer to with interest and will jump in if I feel that I have something to add that either of you haven't covered. Hasn't happened yet :^)

I have no quarrel with the idea that forces within the market act with enlightened self interest. I was questioning the idea of the mytical "Them", the ones that actually control everything in the markets. This type of magical thinking does not help one to understand what's happening in the markets.

David L:

The stock covered by the margin only has to fall by either 25% or 30% (depending on the broker requirements) to generate a margin call. In todays's markets, this is not a very big fall and certainly not a collapse. If it only happens with a few stocks then most investors can meet margin calls with other cash. If it starts happening to more than a few, they have to start selling appreciated stocks to raise cash. The more this happens, the more prices tend get driven down. If it happens long enough, the investor can't meet the margin calls because he has nothing left to sell and he loses his position.

The above is only true for people buy actual shares on margin. A problem of much larger magnitude is those who buy futures contracts. These positions have to be settled daily. A long string of declines can wipe out a lot of futures positions, especially if they didn't pick the right hedges. That's why we're hearing rumors of hedge funds in trouble.

Just to keep things in perspective, the total market capitalization for 1998 (the latest year with figures I could find) for the NYSE, NASDAQ, and AMEX is about 12 trillion dollars. The best estimate of total margin commitments is about 250 billion dollars. A lot of money but only about 2% of the total market cap.

-- Jim Cooke (JJCooke@yahoo.com), April 14, 2000.

Jim,

You said, "I have no quarrel with the idea that forces within the market act with enlightened self interest. I was questioning the idea of the mytical(sic) "Them", the ones that actually control everything in the markets. This type of magical thinking does not help one to understand what's happening in the markets".

Let me give my argument as to where I believe that you are in error.

First, if forces within the market act with enlightened self interest (they do), who stormed into the futures market on Tuesday, April 4 to turn the NASDAQ collapse? This type of maneuver does not have the self interest of making money as its goal, for if making money was the goal, there are far better ways to enter the market than what was demonstrated on that day. I say it was some entity that was not concerned about the money that was at risk, but rather something else. DeeEmBee stated, "(funds, most likely)" in a response, but this is patently incorrect in my opinion. A mutual fund isn't playing with their own money, it's the investors' money. Why would Fidelity use investors' money to try and prop up the most expensive market in history? Better yet, with cash levels in mutual funds at all time lows, and being faced with probable redemptions that day, HOW would Fidelity prop up the most expensive market in history? With their own capital? To believe that Fidelity would fritter away their OWN money trying to prop up the most expensive market in history is surely more ludicrous than believing that the Government is using OUR tax dollars to keep it afloat (at least until after the election).

Second, your use of "mystical" and "magical" as a way to discredit my argument is a cheap shot. You may believe that "Them" is mythical, but it was obvious to experienced Wall Street traders (and even to some novices), that a huge amount of money came pouring into the futures markets that day at the same time that a Clinton flunkie was on television telling America that everything was okay with their 401-k plans. I will ask you again Jim, if it wasn't the Government that stampeded into the futures market that day, who was it? Soros, Gates, Buffet? Or do you buy into the mutual fund scenario?

Lastly, I never claimed that "Them" control everything in the markets. To the contrary, I said that their artificial efforts would merely prolong the inevitable. I believe that I have a very good understanding of what goes on in the stock markets. I would say that it is your thinking that is "magical".

-- J (Y2J@home.comm), April 14, 2000.