>Today I heard from my CPA the best explanation/theory behind this rout. She contends the following: In 1999 the daytrading and short-term trading community made great profits in the market, most of which, because it was short term, was realized in 1999. They entered 2000 with considerable income-tax liability.
However, since it is natural to delay tax payments until the last moment, this group reinvested their tax liability...<
This was exactly my position. I do not use margin, and I had not bought any biotech stocks...but I was waiting until the last minute to pay my tax bill. Fortunately I had sold positions about two weeks ago to pay the bill, but it was tempting to see a large amount of cash in my account (all going to the IRS), and not think that I couldn't use that money for a few more days and probably make some money in the process.
I just read another similar view of "what happened last week" posted by the CEO of CMGI on Raging Bull.
Here are a few of his thoughts...the entire message can be found at this URL. ragingbull.com
"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."
Libbyt |
