Interesting WSJ article on yesterday's trading....
Margin Calls, Bargain Hunting
Give Investors a Wild Ride
By GREG IP and SUSAN PULLIAM
Staff Reporters of THE WALL STREET JOURNAL
For a while Tuesday, the rambunctious market in technology stocks looked as if it had rolled over and died.
At midmorning, a hush fell over the usually raucous day traders at the Manhattan office of a firm called Generic Trading. The Nasdaq Composite Index, loaded with technology stocks, had been driven down about 150 points by waves of selling, on its way to a record intraday loss of nearly 575 points, or 13.6%. The firm's president, Ron Shear, went into an office, shut the door and yelled to another executive, "The game's over!"
But it wasn't over.
In what ranks even in these unusual markets as one of the most astonishing turnarounds Wall Street has seen, the Nasdaq Composite roared back in the afternoon from a drop that, had it held, would have eclipsed its loss in the 1987 crash. Though the index still closed down 74.79 points, or 1.77%, at 4148.89, its sweeping recovery left no doubt that investors' love affair with New Economy stocks, richly valued though many are, wasn't over.
As Nasdaq trading volume ran to a record of 2.8 billion shares, the market's strained messaging system, SelectNet, hiccupped. Traders started seeing a delay between their attempt to trade and confirmation from Nasdaq that the trade had gone through.
Almost as unusual as the action in tech stocks was that of the blue chips. The Dow Jones Industrial Average -- until recently often a beneficiary of the rush of money out of Nasdaq stocks -- was off more than 500 points at one point. Then it, too, shot back, nosing into positive territory before finishing the day down 57.09 points, or 0.5%, at 11164.84.
The remarkable turnaround, sparked by an avalanche of buy orders from bargain-hungry investors, hardly means technology investors are out of the woods. The Nasdaq Composite is down 17.8% from its March 10 high. Still, that takes it down only to where it stood in the first week of February. It is still up 2% for the year to date and about 62% from a year ago. The Dow is down 2.9% for the year to date.
But to veterans -- which nowadays means anyone in the markets more than five years -- Tuesday had the feel of panic and "capitulation" seen closer to bottoms than tops. In the morning, selling was driven by investors trying to book whatever profits remained in their once-sizzling technology and Internet stocks, and by small investors being forced to sell holdings to repay margin loans extended by their brokers.
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Dorine Essey, a retired travel agent in Miami Lakes, Fla., had gotten a margin call last week: Produce $800 to cover losses on her account. Tuesday morning, to meet that call, she sold 500 of her 1,000 shares of Compaq. Yet Ms. Essey, 71 years old, remains fiercely bullish: "If the market goes down, I know it's going to go back up." She just wishes she had the money to buy Microsoft.
The unpleasant job of forcing investors to sell falls to people such as Stan M. Thomas, an executive at Mydiscountbroker.com Inc., an affiliate of Dallas-based Southwest Securities Inc. His branch handled about 50 margin calls Tuesday. It's 10 on a more typical day.
The firm e-mails and phones people with margin calls, and if they don't respond, it sells their stock. Mr. Thomas himself sold positions in seven accounts Tuesday but had trouble reaching everyone. "People are avoiding me because they don't think we'll sell without talking to them," he says. They're wrong: The margin agreement says the firm may sell some or all of a customer's securities without consultation to meet a margin call.
"I'll have calls from a lot of angry people [Wednesday] because they'll feel like they lost control of their accounts," Mr. Thomas says.
Behind Tuesday's dramatic numbers were a host of small dramas across the country, scenes like the one at the Manhattan office of Generic Trading of Philadelphia LLC.
A little after 11, with the selling picking up steam, Mr. Shear phones a trader affiliated with the firm who works from his Long Island home, trading both the firm's money and his own. The trader is down $200,000 on two thinly traded tech stocks.
Mr. Shear wants him to sell. "What am I going to do with all this inventory here?" Mr. Shear demands. One of the stocks is down $5, and Mr. Shear cuts off the trader's attempts to defend it. "I'm not saying it's a bad company, but nobody wants it," he says.
At 11:30, Mr. Shear's partner, Mayer Offman, begins his daily conference call to the firm's 1,000 traders nationwide. "Good morning, everybody. You're going to have the same sloppiness in the market again today," he says. "Until Microsoft stabilizes or a great earnings surprise comes along, you can't have a major rally. You need a cataclysmic event before psychology will change again and cleanse the nervousness out."
By the end of the call, the Nasdaq is down more than 200 points.
"They're going after everything now," a trader says.
"Death to the buyers," Mr. Offman says.
By early afternoon, the Nasdaq Composite's carnage has passed 500 points, on top of the 349 of the day before. Cisco Systems falls $9.9375 to $63 at its low for the day. Microsoft at its low is off $5.9375 to $84.9375. Highflying fiber-optic company JDS Uniphase is down $29.625 to $82, and Yahoo! is off $27.375 to $132.75.
The mood by this time has spread to stocks listed on the New York Stock Exchange, where General Electric is off $11.625 to 147.125 at its low for the day, and Nokia tumbles $23.625 to $182.75.
"Today was an absolutely new experience for a lot of the New Economy investors," says Ciaran O'Kelly, co-head of "listed stock" trading at Salomon Smith Barney. "I don't think many of the young investment managers who are in New Economy or Internet or wireless stocks could ever have anticipated a day like today."
For the first time since the tech sell-off began seven trading days earlier, Mr. O'Kelly is sensing panic among some sellers. Institutions have called asking that Mr. O'Kelly risk his firm's capital to buy stock from them, rather than simply match them with buyers -- given that buyers are nowhere to be found. A lot of "investors just needed to get out of securities and were somewhat indiscriminate about the price," he says.
The Nasdaq hits its low at 1:20 in the afternoon: 3649.11. That leaves it down nearly 28% from its high of last month. The Dow hits its low around the same time. On paper, investors have lost a staggering $1.2 trillion, according to Wilshire Associates.
But then the market turns. The misery of sellers facing margin calls has abated, and investors who felt they had to take profits have done so.
The glitch in SelectNet that the big volume causes leads to delays of as long as a minute in getting confirmation of trades. It is a real problem in a market where prices can move several dollars in seconds. Richard Ketchum, president of the National Association of Securities Dealers, which owns the Nasdaq Stock Market, says the problem stemmed from "rebooting" after the overload of a computer file, and shouldn't recur.
Despite the day's record volume, at the turning point, trading was eerily light on some desks. The turn came, says Mr. O'Kelly, not on a surge of buying, but on an absence of more selling. Then, "the buyers stepped in drive the market higher on lower volume."
Indeed, investors' habit of treating every sell-off as a buying opportunity has not yet been vanquished. At the BMW dealership in Palm Harbor, Fla., where Fred Ratner works, co-workers have been wandering over where he's keeping an eye on CNBC to ask for advice. He tells them, "It's a good buying opportunity for the right stocks." He has put his money where his mouth is, placing an order from his office for shares in Siebel Systems at $96.
This "buy the dips" habit may eventually prove unprofitable, but not Wednesday. Siebel goes on to touch $80 before turning around to close at $97.875, down $8.875.
More important, some of the biggest believers in tech stocks also see a buying opportunity. Mutual-fund company Janus Capital, which manages $310 billion, has ridden a big tech-stock weighting to blazing returns. Tuesday morning, its managers were still sitting on billions of new cash that arrived in February and March.
With stocks falling, some in-house Janus analysts told portfolio manager Blaine Rollins to take advantage of the sell-off. Around noon EDT, he sent his trading desk a handful of new buy orders, adding to his holdings of Mexican phone company Telmex and some semiconductor stocks. He ducked into colleagues' offices to tell them: "If you have a name down 15%, like a Schwab or Sun Microsystems or a B2B e-commerce company ... pick away. Maybe they're weak today, but we're trying to own for the long term." Janus managers put loads of cash to work.
Afternoon is different. After returning to his desk with a roast-beef-on-rye sandwich, Mr. Rollins finds the market rebounding. Between bites, he buys more shares, especially in mid-capitalization companies that are just a small part of his portfolio. "At least they were mid-cap at lunch," he says. |
