> Author: RightNow
> Subject: Wetherell on the market
> Date: 4/16/00 11:56 AM
> Recommendations: 35
> By: dwether
> Reply To: None Saturday, 15 Apr 2000 at 6:47 PM EDT
> Post # of 110757
> To all on the Raging Bull message boards:
> I am sharing my perspective here in the hopes that it might help
> some better understand what has been going on with the market, in
> general, and Internet stocks, in particular. Perhaps all of this
> has been posted. If so, consider it further affirmation, but I have
> been too busy to be able to notice. Being a public market CEO, I am
> not free to comment on what might happen in the markets, but I am
> free to share my perspective on what has happened, so here goes.
> One caveat: These are my opinions and only my opinions and are
> offered up solely for consideration and discussion, not as
> investment advice.
> It is not a simple situation. Involved are many factors, including:
> 1. the sharp run up in the tech and Internet sectors in the last
> six weeks of 1999, creating significant tax payments due April 15,
> 2. the amount of stocks purchased on margin, which is partly
> responsible for the late '99 run up,
> 3. too many companies going public that were not ready,
> 4. several unrelated events which occured within a short period of
> time, in particular:
> - Abby Joseph Cohen's comments on her lightening up on stocks,
> - predictions by a Goldman analyst that Microsoft would miss their
> revenue target,
> - Safeguard Scientific stating that they are done investing in B2B,
> - the CPI hitting .7, and
> - the put to call ratio hitting a low on or around March 10, which
> coincided with the highs of the market. (Admittedly, this last
> event may be, in part, what precipitated Ms. Cohen's comments.)
> Individually, no one of these factors was enough to cause the crash
> we have just experienced, but taken together, they were more than
> the market could bear.
> If I had to attribute the recent sharp selloff to one factor, it
> would have to be the policy of the SEC allowing clients of
> brokerage firms to purchase huge amounts on margin. Many firms have
> open policies allowing up to 100% on margin. Depending on your
> balance sheet, some firms allow almost 200%. This causes sharp run
> ups in good times and even sharper declines in bad.
> In a way, the Internet is responsible for the volatility in the
> markets. The Internet has accelerated the number of individual
> investors. This coupled with the aggressive margin policies of many
> of the online trading firms has exacerbated market directions. It
> is a new reality of the new economy that the SEC needs to take into
> consideration in setting margin policies.
> This ability to buy such large amounts on margin may not have had
> as severe an impact in the past, because there were not as many
> individual investors with so much money to invest in the past.
> Also, there had never been so much wealth created in a short period
> of time as the last six weeks of 1999. By January 1, 2000, the
> stage was set for disaster, which is why we have experienced such
> extreme volatility this year. It is not the fault of these
> individuals, for it is human nature to take full advantage of what
> rules permit. Sometimes we need to be protected more from our
> nature and from the realities created by new phenomena, such as the
> Internet driving more individual investing.
> Case in point: Tremendous tax payments were due, and many that made
> huge gains in the last six weeks of the year did so primarily in
> the tech and Internet sectors. Hoping to further these gains, many
> left much, if not all, of their money in these sectors until tax
> time and many were on heavy margin. Selling to cover taxes helped
> cause prices to decline, producing margin calls, producing more
> selling, and so on. Layer on the unrelated events mentioned above,
> and it produced not just a bear market, but a crash.
> In my humble opinion, due to the significant increase in individual
> investors in the market, I believe it is time for the SEC to review
> ways to ratchet down the amounts allowable on margin.
> Someday, hopefully soon, enough pundits will come out and say that
> the market is oversold, encouraging institutions to get back to the
> business of investing, but until margin rules are altered, expect
> continued volatility in the markets from time to time. Certainly,
> this does not help anyone recover losses, but understanding better
> what has happened may help prevent the recurrence of these
> unfortunate recent events in the market. Until the SEC makes a move
> to protect us from our nature when it comes to buying on margin, we
> will need to rely more on self discipline. Unfortunately,
> throughout history, when it comes to investing, self discipline has
> not been one of our better traits, especially as a collective. For
> this reason, we need institutions to help guide our behavior.
> If we are in a healthy economy, and for the most part, we are,
> markets should not crash. This points to one or more faults with
> the market system. IMHO, the only fault here is the amount we are
> allowed to invest on margin.
> Respectfully Submitted,