Wetherell on the market


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David Wetherell, CMGI's CEO, on the recent market drop:


>    Author: RightNow
>    Subject: Wetherell on the market
>    Date: 4/16/00 11:56 AM  
>    Recommendations: 35
>      http://www.ragingbull.com/mboard/boards.cgi?board=CMGIOT&read=88110
>      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,
>      2000.
>      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,
>      David

Gerald Oskoboiny <gerald@impressive.net>

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