Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : Ask Mohan about the Market -- Ignore unavailable to you. Want to Upgrade?

To: Zeev Hed who wrote (6838)	11/2/1997 2:23:00 PM
From: Joseph G.	Read Replies (2) \| Respond to of 18056

Zeev, the Fed cut discount rate by one step of 1.5% in Oct 29, prior to the crash. It followed through, and cut again in Jan 1930, and again in Feb, and again in Apr, and again in May (to 2.5%), and again in Nov. At that time call rate for brokers' loans was 2%. Discount rate was cut to 0.5% in 32. While 10% margins were legal, very few, mostly rich customers were allowed to borrow that much, more common was 25 and 40%, while most investors and even some speculators did not use margin at all. Total margin borrowing was between 7 and 8.5% of total market cap throughout the 1920's. There were no credit cards then, and most people could not get a mortgage to buy a home. In general, use of credit was much less then than now. refs: M. Friedman and A. Schwartz, Monetary history of the United States, 1867 - 1960; Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, 1914 - 1941. In general, it is believed that the relative monetary tightness in 1928 - Sept 1929 contributed to the onset of the depression, however, the tighness resulted not from restrictive Fed policy (which it was not), but by the fact that money was sucked into the stock bubble, in particular, into the call money market. E. g., comercial paper outstanding decreased nearly 50% in this period, because more attractive interest rates were available in the call market. Likewise, corporatins prefered to issue stock or bonds, rather than borrow at banks or via commercial paper. Since the depression was international, obviously, its causes were not limited to the US. Further, extremely easy money since early 1930, social programs, government spending did not end the depression which lasted into the WWII. Social and government programs started well before FDR came to power. In fact, the Democratic party ticket in 1932 elections was "to stop reckless government spending" and "to curtail massive goverment relieve programs". Democrats were compaining agains Republicans who run up Federal deficit to levels above those during US participation in WWI. The joke was that when FDR was elected, he implemented not the Democratic party ticket, but the Socialists' ticket. And, again, spending and programs did not end the depression, WWII did twelve years later. Joe PS. FDR assumed office in MArch 1933.

To: Zeev Hed who wrote (6838)	11/2/1997 3:56:00 PM
From: Bilow	Read Replies (1) \| Respond to of 18056

About those margin rates... Those who want to take big risks in the stock market can now do so using the futures. The margin rate there is, I believe, 3% Another thing I believe but I seem to be alone in, is that public purchases of options from the market makers is destabilizing to markets. That is, they accentuate market movements. The market for a stock consists of all the orders in the stock that are still active. The most stable sort of order is a limit order. Limit orders tend to stabilize stock prices. A limit order to buy helps prevent the stock price from dropping below the limit. A limit order to sell helps prevent the stock price from rising above the limit. So limit orders are generally positive in terms of stability. If we only had limit orders available, there could never be an order imbalance, though occasionally there would be no trading. Market orders are neutral in terms of stability. (This is not to say that a bunch of market orders to sell will not result in a drop in price, only to say that the ability of the market maker to determine a fair price for the stock is neither helped nor hurt by market orders.) If too many market orders come in on the same side, they can "use up" all the limit orders on the other side. This resulsts in an order imbalance, and a discontinuous stock price change. Stop loss orders are negative in terms of stability. The existence of a stop loss order (which is the epitome of momentum investing, in my opinion) causes more pressure to be placed on a stock that moves in the direction of the order. Stop loss sales are inherent in investing on margin. Stop loss purchases are similarly destabilizing to the up side. Actions on the futures market are immediately hedged into the market, so limit, market, and stop loss orders have the same effect on the market maker as the same orders on the underlying stocks. The options market is more complicated. Assuming that the public is net purchasers of options. (Unlike that hedge trader, Need... who went short SPX puts Monday and got cleaned out) then options orders are (short term) destabilizing to the market. The reason is that the option market maker hedges the option by its delta, and that delta changes positively with positive (for the options holder) movements in the underlying security. (I.e. we all want our options to go deep in the money where the delta is one.) This means that the market maker has to hedge deeper as the option becomes more valuable, and this is anti-stabilizing to the market. I think the huge number of people playing the options games are why our volatility is up, which has, of course, increased the volatility index to the point where options are now extremely expensive. -- Carl