I thought I'd feed the bears some raw meat for breakfast:
August 6, 1999
Securities Firms Raise Margin Calls
On Steep Losses in Internet Stocks
By REBECCA BUCKMAN and MITCHELL PACELLE
Staff Reporters of THE WALL STREET JOURNAL
This is getting to be a real pain in the Net.
Amid steep losses in Internet stocks, securities firms recently have
uncorked a flood of "margin calls" to investors who have bought shares
with borrowed funds, requiring them to immediately put up more cash to
offset declines in their portfolios. Meantime, some tech investors are awash
in red ink. And some hedge funds focusing on Internet stocks have
swooned.
Thursday's rebound in Internet stocks prevented more carnage. If
Thursday "had been another very strong down day for the Net stocks, the
credit departments [at brokerage firms] would have been pretty busy,"
says Bill Burnham, an e-commerce analyst at Credit Suisse First Boston
Corp.
Mr. Burnham isn't sure where the market's headed now -- much depends
on the government's release of new employment figures Friday. But the
analyst says some are viewing Thursday's market action as somewhat of a
"sucker's rally ... everyone buys because they think the correction's over,"
even though the market could be "really just sort of catching its breath
before it turns over again."
Officials at several big online-brokerage firms, including Charles Schwab
Corp., Ameritrade Holding Corp. and DLJdirect Inc., a unit of Donaldson,
Lufkin & Jenrette Inc., said margin calls have been rising. Fleet Financial
Group Inc.'s U.S. Clearing unit, a securities-clearing company that
processes trades for hundreds of brokers, said calls were up
"substantially." Online investors are particularly enamored with fast-moving
Internet stocks.
At TD Waterhouse Group Inc., a major discount and online brokerage
firm based in New York, margin calls have soared 75% to 100% in the
past two or three weeks, says Joseph Barra, an executive vice president in
charge of the firm's securities-clearing operations.
Investors on many Internet stock-message boards were bemoaning the
recent market plunge. One anonymous poster on a discussion group
devoted to America Online Inc. -- a stock that has plummeted 35% in less
than a month -- even wrote a quick poem. Lines included: "Oh baby!
Smell the Fear! Reminds me of Apocalypse Now! Helicopters
Blastin/Blastin/Blastin ... I love the smell of Fear ... OH Baby!"
But some investors were trying to keep their cool. David R. Stockwell, a
software programmer from Centerville, Va., says his stock portfolio,
heavily weighted in Internet stocks, is down roughly 60% from its high of
around $500,000 in April. But he says he tries "not to worry about it,"
adding: "If it takes 20 years, it will eventually go back up... . I don't know
when."
Indeed, Mr. Stockwell, 35 years old, Thursday bought 100 more shares
of one of his big, existing Web holdings, online broker E*Trade Group.
The stock is down 62% from its 52-week high in April, but Mr. Stockwell
says his total return on E*Trade, which he first bought about a year and a
half ago, is more than 100%.
Meantime, Mr. Stockwell is pulling back. "For a while I was making three
or four trades a day," he says. Now, he is hanging back and clicking the
"buy" button on his computer screen only about once a week.
It is a phenomenon well-known to Internet brokers, who have seen big
pullbacks in trading volume growth over the past two or three months.
Earlier this week, analyst Stephen Franco at U.S. Bancorp Piper Jaffray
Inc. said online-trading volumes rose just 8.2% in the second quarter, a
marked slowdown from the 49% surge in the first quarter.
Brooklyn, N.Y., podiatrist and Net-stock enthusiast David Gleitman says
he isn't curbing his frequent trading, which he sometimes does on a laptop
in between seeing patients. But he did unload half of his 4,000-share
position in AOL on Wednesday after getting a margin call from his broker,
Charles Schwab.
The call was small, only about $6,000, Dr. Gleitman says. But it caused
him to step back and re-evaluate his AOL position, which he decided was
just too risky for the short term. Still, Dr. Gleitman has been in and out of
the stock before, and "I may consider stepping right back in," he says. His
portfolio, which he says hit seven figures in January and April, has plunged
about $200,000 in the past three weeks and now stands under $500,000.
Despite the recent increase in margin calls, the market decline forcing the
calls has been "more of an orderly downturn," contends TD Waterhouse's
Mr. Barra. That's in contrast with the sharp market dips that have shocked
investors over the past several months, he says. So while the uptick in
margin calls "may sound like a lot ... in this type of market, you're pretty
well prepared," Mr. Barra adds.
Among the precautions taken by TD Waterhouse: raising the margin
"maintenance requirement" on more stocks, mostly high-tech and Internet
issues. The requirement, normally 30% at TD Waterhouse, is the minimum
amount of equity that investors must maintain relative to their total account
holdings if they want to continue trading on margin.
TD Waterhouse's list of stocks with maintenance requirements higher than
30% has roughly doubled since January, when many brokerage firms
scrambled to restrict borrowing by investors against volatile Internet
stocks. Still, the list constantly changes based on the volatility of specific
stocks, the firm says.
But TD Waterhouse no longer has any stocks subject to 100% margin
requirements, Mr. Barra said. Big Internet stocks such as Amazon.com
Inc., Yahoo! Inc. and Lycos Inc., which had been "unmarginable" earlier
this year, now are subject to only a 50% requirement, Mr. Barra says.
At Charles Schwab, the nation's largest discount and online broker, "we've
seen slightly increased margin calls," said spokesman Dan Hubbard,
though he said he wouldn't term the number of calls "significant." Tightened
margin requirements Schwab put in place several months ago could have
helped prevent a larger number of margin calls, he adds, since the
restrictions have forced investors to trade more conservatively.
Overall trading volumes over the past two or three weeks are far less than
the brisk levels seen in April and January, Mr. Hubbard says. That could
indicate less-frenzied buying and selling by investors. And Thursday's
rebound also could have helped more investors avoid margin calls, notes
Michael Anderson, president of Ameritrade Inc., the main brokerage
subsidiary of Ameritrade, Omaha, Neb.
"There have been more calls, but today, a lot of people came out of calls"
because the value of their stocks increased, Mr. Anderson says. Still,
Ameritrade has increased the number of stocks on its
increased-margin-requirement list to 200 from about 150 two months ago.
At Merrill Lynch & Co., the nation's largest securities firm, "margin-call
activity has increased slightly" among Merrill's individual investors, a
spokeswoman says. She adds that two of every 1,000 Merrill margin
clients have been asked for additional funds to cover the calls -- slightly
higher than average -- compared with three of every 1,000 the day the
Dow Jones Industrial Average fell 512.61 points on Aug. 31, 1998.
Some hedge funds, those private investment pools for wealthy individuals
and institutions, haven't been spared. St. Geme Partners, a San Francisco
hedge fund with about $75 million under management, saw its
technology-oriented portfolio drop in value by 26% in July, after a loss of
about 35% in May. That has left the fund down 18% for the year through
July.
Fund manager Peter St. Geme characterizes the recent losses as "a
correction" in the portfolio, and said he intends to maintain a long-bias on
Internet stocks.
The fund's Yahoo! and America Online holdings, which he declined to
quantify, "haven't helped the performance in the short-term," he says, but
have helped the fund over the longer haul return 433% last year, after fees.
The fund lost 8.7% in 1997. Mr. St. Geme said he started accumulating
Yahoo! in February 1998, when it was trading at $18 a share, and
America Online at $25 a share.
"We're always going to be sensitive to short-term movements," he said.
"High-growth situations fluctuate more dramatically. Over the long run,
they tend to dramatically outperform." For the 12 months ending July, he
said, the fund was up 94%. He declined to comment on his August
performance.
Sapphire Investment Fund, a $50 million technology-oriented hedge fund,
trimmed its Internet stock exposure from more than one-third of the
portfolio to the 20% range in early July, said fund manager Shelton Swei.
The fund nevertheless had losses of between 4% and 5% in July, leaving it
with a gain of 39% for the year, he said. Mr. Swei says he intends to
continue holding Internet stocks.
"We're believers in the long-term story, and I believe investors will get
through this," said Mr. Swei, who said Internet stocks helped the fund
return 93% last year. "If I can pick the right stocks, I'll be rewarded."
-- Randall Smith contributed to this article. |
