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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host
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To: Joseph G. who wrote (7774)9/7/1998 3:19:00 PM
From: Wren  Read Replies (1) of 42834
 
Joseph G., you are certainly right about the potential reallocation of investment money to bonds or money markets if the market continues to fall.

I am less certain that I agree with you on the lack of difference in margin purchasing in the 1920s and options, calls, derivatives today.

I am not sure that there is as much risk today to the investor who purchases individual issues compared to the 20s. Isn't there a major difference between purchasing stock on the margin, and the use of options, etc. by individual shareholders? You may lose your entire investment in a call, for example, but you will not have to put up new money as you would have to do with a heavily margined stock. The margin calls in 1929 contributed heavily to the plunge by forcing shareholders to sell, in some cases all the stock they owned, to get cash. This overloaded the market with sell orders.

The action that could overload today's market is probably that of mutual fund managers selling to raise cash for redemptions. But don't lot of funds have provisions requiring a waiting period to redeem in the event the mutual fund receives more redemption requests than it can handle.

Mutual funds that use derivatives, etc. are certainly more risky, and could cause major loss of capital for those shareholders.

What do you think?
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