Palm, Colbalt Among "Non-Marginables"
Technology News
Fri, 31 Mar 2000, 11:47pm EST
Palm, Cobalt Among `Non-Marginables' Brokers Consider Too Hot to Handle
By Deborah Stern
Investors Can't Buy Palm, Other Hot Stocks on Credit (Update1)
(Updating to add closing share prices.)
New York, March 31 (Bloomberg) -- Palm Inc. is almost too hot
to handle at online brokerage DLJDirect.
Palm, maker of the top-selling Palm Pilot personal organizer,
went public this month and promptly joined DLJ's list of stocks --
319 and rising -- that the firm thinks are too risky to be
purchased with borrowed money.
If customers want to buy these shares, they must use their
own cash, not money borrowed from DLJDirect, a unit of Donaldson,
Lufkin & Jenrette Inc.
Other brokers have worry lists too. Charles Schwab Corp.
joins DLJDirect in considering Palm, VA Linux Systems Inc. and
Cobalt Group Inc. too risky. DLJ's cash-only list also includes K-
Tel International Inc. and Broadcom Corp. Schwab's list includes
Ariba Inc., which makes software to handle online orders.
Brokers are protecting themselves after a boom in margin
trading, that is, buying on credit, that has accompanied stocks'
decade-long rise. The swelling ranks of ``non-marginables,' as
brokers call these stocks, suggests Wall Street firms see growing
risk in the market for Internet and technology shares.
``You want to buy it, you put up all the money in cash,'
says David Whitmore, a spokesman for Datek Online Holdings Corp.,
an online brokerage that keeps its own list of cash-only stocks.
Brokers have another list of stocks for which investors must
keep more than the typical 35 percent cash as collateral in their
accounts. Datek has some 227 shares on this list. Schwab now
requires customers to keep 70 percent as collateral for Yahoo!
Inc. and 80 percent for Priceline.com Inc.
By some measures, borrowing for stock purchases is running at
its highest level since 1974, a situation Federal Reserve Chairman
Alan Greenspan has warned may prove dangerous for investors and
the firms lending to them. This week's 7.9 percent plunge in the
Nasdaq Composite Index through Thursday underscores the risk.
The amount borrowed from New York Stock Exchange member firms
rose almost 9 percent in February to $265.2 billion. That is the
equivalent of 1.53 percent of the combined market value of every
publicly traded company in America.
Off Limits
Given market swings like the one this week, online brokerages
are cordoning off a growing number of stocks. Two years ago, No. 1
online brokerage Schwab had earmarked just 25 stocks for cash-only
purchases; today, Schwab refuses to lend money to customers buying
``hundreds' of stocks, says spokesman Dan Hubbard, declining to
elaborate.
Online brokerages, whose appeal to individual investors
helped fuel stocks' rally, have reason to rein in margin trading.
If stocks decline, investors may be unable or unwilling to repay
their margin loans. If that were to happen, the brokerages would
be stuck with slumping stocks worth less than their original loan.
``The brokers are saying, `We don't want to have any credit
risk here, so we're going to force our clients to take on that
risk,' said Courtney Smith, president of New York money manager
Courtney Smith & Co.
Executives at online brokerages say they are looking out for
their customers.
``DLJDirect is particularly concerned about margin trading of
volatile and Internet-related stocks,' Chief Executive Blake
Darcy says in a letter to investors posted on the company's web
site. ``In this type of market, the potential for overextending
yourself through these transactions is very high.'
Many executives concede, though, that they want to protect
their own firms, too.
Says Datek's Whitmore: ``A lot of these stocks are trading on
massive expectations.' He points to MicroStrategy Inc., a maker
of data-delivery software whose stock plunged 56 percent this
month after the company said its 1998 and 1999 revenue was less
than it had originally reported.
``Those are moves that firms like ours don't like to be in
the way of,' Whitmore says.
Roller Coaster
Many non-marginables have swung wildly of late. This month,
Cobalt, which provides Internet services to the car industry and
makes DLJ's list, rose 15 percent and then tumbled almost 8
percent in the space of three days.
Palm, spun off by 3Com Corp. at $38 per share, soared as high
as 165 on its first day of trading before closing at 95 1/16. It
closed today at 44 7/8. Back in December, computer-maker VA Linux
soared as much as 967 percent when it began trading; it has since
declined to 60 3/8.
``We want to ensure our customers maintain sufficient equity
to cover the large swings in these securities,' Schwab's Hubbard
says of the stocks on his firm's cash-only list.
The Federal Reserve doesn't let investors buy any low-priced
``penny stocks' on margin. Under other Fed rules, investors must
use their own money for at least half of their initial stock
purchase through a particular firm. Brokerages can, at their
discretion, raise that requirement.
Once investors make their first purchase, brokers require
them to hold collateral in their account, typically the equivalent
of about 35 percent of the value of their holdings. This
``maintenance requirement' serves as a cushion if the investment
goes sour.
Raising the Bar
Schwab keeps a list of higher maintenance requirements for
about 270 stocks. Biotechnology Company Immunex Corp. commands a
50 percent maintenance requirement. E*Trade Group Inc. lists about
500 stocks that carry special margin requirements, including some
that can only be bought for cash. Among them are Medarex Inc., a
biotechnology company that fell as much as 29 percent last Monday.
At TD Waterhouse Group Inc., about 300 stocks carry a 50
percent maintenance requirement. Among them: Books-a-Million Inc.
and DoubleClick Inc.
Investors may thank brokerages for these tougher requirements
if their stock winds up tumbling. But there's reason for
brokerages to be careful too. As Datek's Whitmore puts it: ``We
become potential part-owners of that security.' |
