Another one from the WSJ:
interactive.wsj.com
For Investors, Margin Calls
Follow the Market's Gloom
By GREG IP and RUTH SIMON
Staff Reporters of THE WALL STREET JOURNAL
This hurts.
Investors enriched by technology stocks' romp in the past year are wincing
now as their profits start to melt away.
"I'm not enjoying this at all," says Paula Stringham, a stay-at-home mother
and technology-stock investor in San Antonio. Ms. Stringham usually
watches CNBC-TV throughout the day, but Monday she had to keep
switching it off to avoid seeing her holdings get clobbered. "I'm cleaning the
windows outside so I don't get sick to my stomach; it's just nauseating."
The Nasdaq Composite Index's 7.64% slide Monday brings its pullback
from its record high on March 10 to 16.3%. But it's still up 3.8% for the
year, and that's on top of last year's nearly 86% gain, so most investors are
still sitting on nice profits. That said, the fact that the market seems to be
going down even faster than it went up makes it tough on the nerves.
That goes double for investors who bet heavily on tech stocks with
borrowed money, or buy on margin. Investors generally can borrow as
much as 50% of the value of stocks they own. Once the purchase is
completed, an investor's equity -- the current value of the stock less the
amount of the loan-must be equal to at least 25% of the current market
value of the shares. But some brokerage firms set even stricter standards.
If falling stock prices reduce an investor's equity below the minimum
margin requirement, a broker may require him or her to put up extra cash
or securities, or sell some securities.
At Charles Schwab Corp., margin calls "were running about twice normal
levels" at the end of last week, says spokesman Dan Hubbard. Given
Monday's sharp Nasdaq decline, "it would be a fair assumption that
tomorrow [Tuesday] we will be making a higher number of margin calls,"
he adds.
Margin debt at the nation's brokerage firms soared 48% from September
to February, to a record $265.2 billion, and a lot of it appears to have
been at online-brokerage firms. Regulators have worried that a sharp drop
in stock prices could build on itself as leveraged investors are forced to
meet margin calls.
Indeed, many tech-stock investors who profess faith in their stocks may be
forced to sell anyway to meet margin calls.
David Gleitman, a podiatrist in Brooklyn, N.Y., glances at his hand-held
organizer Monday morning when the Nasdaq was already down 239
points. "Ouch! I'm still ahead for the year, but it's still kind of painful
watching this," he says. About half of Dr. Gleitman's $1.8 million portfolio
is on margin. Even before Monday's selloff, he was already facing a margin
call -- his broker was asking him to produce almost $100,000 to cover the
losses in his account, an amount that he expected would grow by the end
of the day.
"We'll sell some call [options] and see if I can forestall it by another day or
so; if not, we'll just have to sell some positions. We've been in this type of
situation before and we'll get out of it."
Ms. Stringham figures she has just enough in her account to avoid a margin
call. But if Nasdaq keeps going down, she's counting on having some
mutual funds she recently purchased become eligible for margin to give her
a cushion.
Chris Pike, an accountant in Griffin, Ga., says, "I'm about 80% to 85% in
technology right now, and last week I dropped about 12% in my portfolio.
But I'm young -- I'm 28 -- and this is where the future is, so it's where my
money is. But it's a little nerve-racking to see them drop as quickly as they
have. But it's nothing we haven't seen over the last three or four years."
He plans on staying fully invested, he says, but notes that some people are
a bit more strapped for cash. "I did have a client who was planning on
pulling some money out [of stocks] to pay some taxes, and after last
week's pullback he decided to file for an extension and leave his money in
the stocks to try and wait for a recovery."
At Ameritrade Holding Corp., margin calls are up roughly 40% to 50%
over average levels, says Kurt Halvorson, president of the online broker's
clearing division. At Datek Online Holdings Corp., margin calls have "been
high, but not what you wouldn't expect given market conditions," says
Mike Dunn, a Datek spokesman.
Many online companies have in recent months tightened lending standards
for many volatile technology stocks. Mr. Halvorson notes that Ameritrade
now has higher margin requirements for 688 stocks, up from about 250 a
year ago. Schwab's Mr. Hubbard notes that given the market's recent
volatility, margin calls may be above average one day and below average
the next.
The increased call volume hasn't been confined to discount brokers. At
Merrill Lynch & Co., margin calls were "slightly higher" than usual last
week, a spokeswoman says. Merrill said "the vast majority" of its clients
"have equity well in excess of margin requirements."
One of the factors that probably set the stage for the recent tech-stock
selling is the huge supply of new stock issues, both from initial public
offerings and follow-on offerings, that have been hitting the market and are
scheduled to continue. There have been 126 IPOs so far this year,
compared with 69 in the same period last year, and 166 follow-on
offerings, compared with 102 last year. But until now, the sinking Nasdaq
has had no impact on underwriters' and companies' plans to press ahead
and test the markets.
That may now be changing. Nine deals -- three IPOs and six follow-on
offerings -- were supposed to price Monday night, but four of the six
follow-ons and two of the three IPOS were postponed for at least one
night. Earlier Monday, the IPO of Modus Media Inc., which had been
expected this month, was postponed indefinitely, the company said, citing
"market conditions." On March 8, the Westwood, Mass., company
lowered the projected price range of its eight million-share IPO to $11 to
$13 a share from $14 to $16 a share. It provides outsourcing services for
the technology industry.
Last week Lynx Therapeutics, a gene-mapping company, withdrew its
follow-on offering. Said Ed Albini, chief financial officer of Lynx, "It's been
very volatile, and the conditions were unlike any we've seen before. We'd
like to see a little more stability before we move ahead."
Even for investors who aren't forced to sell, the temptation is growing. "It's
a very nerve-racking day," says Michael Epstein, a sales consultant in
Sharon, Mass., who was updating his portfolio on the Internet regularly
Monday. He bought Microsoft Corp. in 1988 at a split-adjusted $1 a
share, and it now makes up 25% of his portfolio. After seeing the news on
the breakdown of mediation efforts between Microsoft and the Justice
Department, he was tempted to sell some. But he was persuaded not to
when he read a bullish comment from a Microsoft analyst.
He finances his holdings partly on margin, but likes to keep that below
30% of his holdings' value to keep margin calls at bay. With the recent
sell-off in prices, that has crept up to 35%. "I think you're going to see a
recovery. If in about a week things stay depressed, I'm probably going to
selectively pare my position in Microsoft."
As for Ms. Stringham, she earned 70% on her trading in 1998 and 11%
last year, and she is just breaking even now. Three weeks ago, she bought
what are known as Cubes -- a tradable unit trust that tracks the
performance of Nasdaq's 100 stocks. About a week ago, with the stock
at $120, she almost decided to sell "short" -- sell more than she had so as
to profit from a price decline. But an investing guide she won for predicting
where the Dow Jones Industrial Average would finish last year advised
against shorting. Now, the stock is at $102.50. "If I sold today," she says,
"it would be at a loss and I don't want to. I wish I'd shorted it."
But she keeps the stocks in her family's IRA separate from her trading. In
the next 25 years, "I think those companies will do fine." she says.
-- Kara Scannell and Suzanne McGee contributed to this article.
Write to Greg Ip at gregory.ip@wsj.com and Ruth Simon at
ruth.simon@wsj.com. |
