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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: James F. Hopkins who wrote (23585)	8/22/1999 8:01:00 PM
From: Kip518	Read Replies (4) \| Respond to of 99985

August 22, 1999 Chopping Down a Limb Before Investors Fall Off By GRETCHEN MORGENSON News from the market stratosphere: Charles Schwab Corp., the nation's largest discount and online brokerage firm, is steadily reducing the number of stocks it allows its customers to buy using borrowed money. More than 1,000 stocks are now off limits for Schwab customers wishing to invest on margin. Expanding the list appears to be a way for Schwab to protect itself against a plunge in prices that might leave it holding the bag if the value of customers' shares falls below the balances in their accounts. One customer says Schwab employees told him the move was related to the firm's concerns about the level of stock prices. Daniel D. Hubbard, director of corporate communications at Schwab, confirmed that the list of such stocks has expanded lately but would not say how quickly or reveal which companies are on it. Like many brokerage firms, Schwab has limited the amount of money its customers can borrow to buy Internet shares, but most of these stocks can still be bought on margin. Most of the banned companies are thinly traded over-the-counter stocks, Hubbard said: "What we are trying to provide to the customer is a sense of the volatile nature of securities markets in general and margin investing." David Eidelman, a money manager at Eidelman, Finger & Harris in St. Louis who is a Schwab customer, says the firm expressed additional concerns when he called after having been notified that securities he had bought on margin could no longer be bought that way. Two Schwab employees, he said, told him that the switch was motivated in part by fears held by the firm's risk committee that the stock market would be increasingly volatile in coming months and that share prices were vulnerable. Schwab told him it was trying to protect itself and its customers. Hubbard denied that Schwab is concerned about the broad market, saying that any action by the firm was a result of liquidity concerns. "Say there's a stock that trades 1,000 shares a day," Hubbard explained. "Say a customer owns that stock on margin and the price goes down. Say the customer doesn't come up with the required cash, and we have to sell the stock. That's going to drive down the price." But Eidelman pointed out that two of his holdings that were scratched from the list -- Travis Boats & Motors Inc. and National City Bancorporation -- trade fairly actively. In recent weeks, Schwab also informed him that he could no longer borrow to buy shares of American Bancorporation (Ohio). All three stocks can still be bought on margin at six other firms Eidelman polled. The fact that some of the stocks Schwab is eliminating from its list of marginable securities are neither excessively volatile nor overpriced glamour issues indicates that the firm may be concerned about more than a few Internet fliers. Schwab is not alone in its concerns over vast numbers of investors trading stocks on borrowed funds. Margin debt at the New York Stock Exchange stands at $176.9 billion, a record that doesn't count investors who have borrowed on credit cards to buy stocks. By reducing the number of stocks that its customers can buy on margin, Schwab is giving up real money. Interest on customers' borrowings is a big percentage of Schwab's net interest revenue, which totaled $475.6 million last year, or 17 percent of all revenues. "I've never seen anything like this," Eidelman said. "I can see why Amazon.com, because of its volatility, is not marginable. Or if trading is halted in a stock. But never to take a nice, solid, stable company and say it's not marginable." www10.nytimes.com