Wall Street's cloud -- margin calls

Source: Associated Press Publication date: 2000-04-05

NEW YORK (AP) -- The decline in high-tech stocks can be like a death in the family for small investors receiving margin calls, and therefore, it will get an undue share of the blame.

Margin is money borrowed on the market value of stocks, and when a sharp selloff lowers a stock's value the owner has two choices: put up more money or sell at least some of the shares.

More than money is lost; the future may be too. Gone also may be the dreams those stocks were meant to finance -- the new house, the travel, the gifts, the pension. At the extreme, the entire future.

But margin calls, not just on individual investor accounts but on hedge funds too, are but one of many factors that played a role in the precipitous decline that for a time last Tuesday erased close to a trillion dollars from the Nasdaq stock list.

Many of the stocks hit hardest had been bid up to foolish levels. A good many of them were promotions of venture capitalists intent on peddling them as public companies and then selling out.

As stocks swooned Tuesday, the pace of margin calls increased. Some investors couldn't find buyers for the out-of-favor stocks that were tumbling and had to put up cash or unload blue-chips from their portfolio to satisfy their lenders, spreading the selloff.

But long before, enormous pressures had been building because of excesses in borrowing and investing, and hardly any trader existed, no matter how naive, who wasn't aware of them. On Tuesday, one or several pressures tripped the trigger.

The Justice Department anti-monopoly case against Microsoft, the epitome of high-tech, had been overhanging the market. The Federal Reserve had been issuing cautionary statements and raising interest rates. Oil prices were rising. Taxes were coming due.

In addition, consumers were borrowing too much money, and much of that money went into the stock market, where it could immediately double its value because of margin, and then grow geometrically.

Nothing, it seems, could cloud the dream of higher prices to come, those higher prices often based on the vision of a high-tech world in which smart investors would share as one of the creators.

While perhaps not sharing that vision, mutual funds, loaded with money after February's record input of more than $40 billion, and seeking to look good at quarterly reporting time, bought into high-techs, pushing them still higher. But the omens persisted.

Academics contributed to the concerns. Yale University economist Arthur Shiller's book, "Irrational Exuberance," called attention to the perilous heights of some stock valuations. And Nobel laureate Franco Modigliani, who won his prize for analyses of savings and financial markets, also offered his cautionary advice.

But no number of warnings could damp the enthusiasm of those who believed that the new generation of technologists and their companies would remake the world, and possibly outer space as well.

State attorneys general discussed ways to continue suits against Microsoft, which a federal judge had decided was a monopoly. And class-action lawyers gathered material to do the same.

At the same time, the expiration date of many "lockups" neared. It meant that insiders of earlier initial public offerings of stock would be free to sell their vast amounts of shares and options. In theory, such selling could further depress share prices of their companies.

Mechanical factors were involved. Ironically made possible by the computer age, large institutions preset their computers to sell when certain criteria, such as when a market index falls below or rises above a key level.

So many factors to consider, and no simple answer!

And accounting for the downturn helps explains only half the problem, because many stocks on Turnabout Tuesday recovered all they had lost and added more atop that. How could a market that splattered itself reshape and bounce like a ball an hour later?

Computer trading again? Perhaps. But another product of the high-tech age, instant communications, also played a role.

Five years ago they used to say that a rumor in Singapore was heard on Wall Street in a few seconds.

High-tech now has split the second, compressing months of trading into a few hours.

And now, added to all the other explanations, is fear.

It isn't just the fear of a margin call; it's the realization of it. For those small investors who had a vision that glistened, the future is now dull as an unwashed window. Count them out. The Associated Press News Service Copyright 2000 by The Associated Press All Rights Reserved

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-- Carl Jenkins (Somewherepress@aol.com), April 06, 2000