Soaring margin debt seen bad for Internet stocks
Tuesday May 25, 11:24 am Eastern Time
NEW YORK, May 25 (Reuters) - Soaring margin debt is likely to trigger a debacle in Internet stocks, Charles Biderman, chief executive of TrimTabs.com said Tuesday.
''New online investors are buying heavily on margin and it looks like they're buying Internet stocks,'' Biderman said. TrimTabs.com is a Santa Rosa, Calif.-based firm which collects information on mutual fund flows and other market data. ''When people borrow to buy (stocks) that's a very bad sign for the future.''
Biderman cited figures showing margin debt for customers of New York Stock Exchange (NYSE) member firms at $182 billion at the end of April, up from $156 billion at the end of March and $142 billion at the end of February. He said the nearly 30 percent increase over a two-month span was unprecedented.
When investors buy stocks on margin they put up only 50 percent of the purchase price and borrow the rest from the brokerage firms. To maintain the position, they need 25 percent in cash, although many brokerages require a more conservative 35 percent.
The wild price moves in Internet stocks, which can go up or down tens of dollars a day, have caused brokerages to stop allowing customers to buy some of these volatile stocks on margin or require clients to put up more cash.
''Either the market has to rise dramatically to make those loans good or in any down move there's tremendous selling pressure,'' Biderman said. He said in a decline that takes the market down 10 to 20 percent there would be plenty of stocks that fall 30 or 40 percent and investors who bought those stocks using margin could face forced liquidation in a panic environment.
Biderman speculated that at least some money that used to go into stock mutual funds has been diverted to online trading as unsophisticated investors buy Internet stocks. He said figures compiled by TrimTabs, which includes estimates of mutual fund flows, shows a net $59 billion went into stock funds in the first 20 weeks of
1999, down from $100 billion in the first 20 weeks of 1998.
''You're going to have a major wipeout in Internet stocks,'' Biderman concluded.
|
