another new era bedtime fable... -g-
APRIL 24, 2000
The Wages of Fun
By Alan Abelson
The perils of witless speculation are a favorite subject for sermons by investment spoilsports. You know the type: the same breed of joyless souls who wag their disapproving finger at having a couple or three pops before you hit the road (or anything on it) and are always getting into your face with petitions to outlaw murder and mayhem on TV (which would make what's left about as exciting as C-Span on a dull night).
Now, we have to 'fess up to a certain involuntary tendency in this regard ourselves. But finding things to worry about and mouthing off come with the territory. More to the point, we're absolutely non-judgmental on speculation. We don't think buying stocks at 100 times earnings or even 100 times revenues, if that's what turns you on, is any more reprehensible than playing Russian roulette. Every man, as Celine insisted, is entitled to his own madness. Besides, without speculative excess, the stuff we'd be forced to write about would be as exciting as, oh, C-Span on a dull night.
None of this means that doing silly things in the stock market can't cause the doer of those things terrible pain. Of course it can. The recent unpleasantness proved that and in spades. What's more, when a market seizes up as this one did, it often exacts costs to companies beyond the trauma of a sharp reduction in their share prices.
A dramatic case in point is Track Data Corp. Even the most casual viewer of CNBC couldn't avoid being assaulted by one of the company's commercials exhorting him (or her) to make profitable use of its services, its online brokerage facility and, not least, MyTrack, its stock-trading system. Baruch Israel Hertz, the firm's founder and guiding genius, is no stranger to those omnipresent TV spots.
As the homey and rather homely saying goes, Mr. Hertz ate his own cooking: He bought and sold stocks, we can only presume, scrupulously following the dictates of his much-advertised system of investing. Indeed, he seemingly was such a true believer in MyTrack that he leveraged mightily in putting it into practice. More specifically, he bought a passel of stocks through four brokerage houses, making liberal use of margin to do so; the stocks purchased, according to the official word, did not include Track Data. But as collateral for those borrowings, he pledged 25 million of his shares in the company.
Alas and alack, his margined holdings went south instead of north; he received a $45 million margin call, and, no doubt regretfully, the four firms issuing the request for more money may be compelled to dump a goodly number of those 25 million shares if Mr. Hertz fails to pony up the $45 million.
Not surprisingly, Track Data's stock went completely off the rails. On Tuesday, as seven million shares changed hands, it lost around a third of its value. At week's end, much the worse for wear, the shares were quoted at $2 and change, down some 80% from their early January high above 12.
The damage inflicted by last week's precipitous drop both to Mr. Hertz and his fellow shareholders was obviously huge. But the company itself faced another "hidden" cost -- namely, the formidable expense it had incurred in the creation of commercials in which Mr. Hertz was prominently featured. For some reason or another, it was felt that the publicity surrounding Mr. Hertz's margin call would not reassure existing Track Data customers, much less attract new ones.
TV spots do not come cheap and, understandably, the company did not find the prospect of ditching those already shot an appealing one. Nor, since it had wound up 1999 some $5 million in the red, was Track Data eager to underwrite a whole bunch of costly new commercials.
And it was at this point that good old American ingenuity -- and expediency -- came into play. The solution hit upon was a kind of ethical cleansing. Employing the technical wiles of their trade, TV artisans elided Mr. Hertz's visage and voice from the tapes. That left the cheery, earnest pitch on the merits of MyTrack and the company's other investment offerings intact and delivered by the remaining shills, a group of shiny-faced folks who had not suffered the ignominy (at least in public) of being dunned with a margin call they couldn't meet.
The cost of doctoring the commercial was not, we're sure, nominal. But it was only a tiny fraction of the expense of producing a new one from scratch.
The moral -- there's always a moral -- is twofold. First, there's nothing wrong with excessive speculation that a bear market can't cure. Second, beware of a company in the stock business whose CEO (a) loves to have his mug in its TV spots and (b) has a thing for leverage.
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