Comments from the CEO of CMGI...FYI...
(taken from the Silicon investor thread)
To: RG who wrote (43432)
From: Jim Bishop Sunday, Apr 16, 2000 2:12 PM ET
Reply # of 43478
Here's the CEO of CMGI and his view on what has been happening. He posts on Raging Bull
ragingbull.com
<<To all on the Raging Bull message boards:
I am sharing my perspective here in the hopes that it might help some better understand what has been going on with the
market, in general, and Internet stocks, in particular. Perhaps all of this has been posted. If so, consider it further
affirmation, but I have been too busy to be able to notice. Being a public market CEO, I am not free to comment on what
might happen in the markets, but I am free to share my perspective on what has happened, so here goes. One caveat:
These are my opinions and only my opinions and are offered up solely for consideration and discussion, not as investment
advice.
It is not a simple situation. Involved are many factors, including:
1. the sharp run up in the tech and Internet sectors in the last six weeks of 1999, creating significant tax payments due
April 15, 2000.
2. the amount of stocks purchased on margin, which is partly responsible for the late '99 run up,
3. too many companies going public that were not ready,
4. several unrelated events which occured within a short period of time, in particular:
- Abby Joseph Cohen's comments on her lightening up on stocks,
- predictions by a Goldman analyst that Microsoft would miss their revenue target,
- Safeguard Scientific stating that they are done investing in B2B,
- the CPI hitting .7, and
- the put to call ratio hitting a low on or around March 10, which coincided with the highs of the market. (Admittedly, this last
event may be, in part, what precipitated Ms. Cohen's comments.)
Individually, no one of these factors was enough to cause the crash we have just experienced, but taken together, they
were more than the market could bear.
If I had to attribute the recent sharp selloff to one factor, it would have to be the policy of the SEC allowing clients of
brokerage firms to purchase huge amounts on margin. Many firms have open policies allowing up to 100% on margin.
Depending on your balance sheet, some firms allow almost 200%. This causes sharp run ups in good times and even
sharper declines in bad.
In a way, the Internet is responsible for the volatility in the markets. The Internet has accelerated the number of individual
investors. This coupled with the aggressive margin policies of many of the online trading firms has exacerbated market
directions. It is a new reality of the new economy that the SEC needs to take into consideration in setting margin policies.
This ability to buy such large amounts on margin may not have had as severe an impact in the past, because there were
not as many individual investors with so much money to invest in the past. Also, there had never been so much wealth
created in a short period of time as the last six weeks of 1999. By January 1, 2000, the stage was set for disaster, which
is why we have experienced such extreme volatility this year. It is not the fault of these individuals, for it is human nature to
take full advantage of what rules permit. Sometimes we need to be protected more from our nature and from the realities
created by new phenomena, such as the Internet driving more individual investing.
Case in point: Tremendous tax payments were due, and many that made huge gains in the last six weeks of the year did
so primarily in the tech and Internet sectors. Hoping to further these gains, many left much, if not all, of their money in these
sectors until tax time and many were on heavy margin. Selling to cover taxes helped cause prices to decline, producing
margin calls, producing more selling, and so on. Layer on the unrelated events mentioned above, and it produced not just
a bear market, but a crash.
In my humble opinion, due to the significant increase in individual investors in the market, I believe it is time for the SEC to
review ways to ratchet down the amounts allowable on margin.
Someday, hopefully soon, enough pundits will come out and say that the market is oversold, encouraging institutions to get
back to the business of investing, but until margin rules are altered, expect continued volatility in the markets from time to
time. Certainly, this does not help anyone recover losses, but understanding better what has happened may help prevent
the recurrence of these unfortunate recent events in the market. Until the SEC makes a move to protect us from our nature
when it comes to buying on margin, we will need to rely more on self discipline. Unfortunately, throughout history, when it
comes to investing, self discipline has not been one of our better traits, especially as a collective. For this reason, we
need institutions to help guide our behavior.
If we are in a healthy economy, and for the most part, we are, markets should not crash. This points to one or more faults
with the market system. IMHO, the only fault here is the amount we are allowed to invest on margin.
Respectfully Submitted,
David >> |
