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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Pancho Villa who wrote (7833)	4/25/1998 12:47:00 AM
From: dumbmoney	Read Replies (1) \| Respond to of 18691

Pancho, here's a fund manager (Lighthouse Contrarian Fund) with a short portfolio somewhat similar to yours: lightkeepers.com Just thought you might find it interesting.

To: Pancho Villa who wrote (7833)	4/25/1998 4:38:00 PM
From: Mick Mørmøny	Respond to of 18691

Ay, caramba! Higher commissions for market manipulators would be good for investors. You betcha! Weekend, April 25-26, 1998 Why one Wall Street legend says higher commissions would be good for investors Here, John Gutfreund's prescription to restore balance to the topsy-turvy stock market by Michael Brush Tired of seeing your stocks plunge when they only miss earnings by a penny or two, even though there is no real bad news announced along with the numbers? So is John Gutfreund, who was the chief executive officer of Salomon Brothers for most of the 1980s. He's not fretting about your stocks, per se. But he says the kind of volatility you're experiencing is symptomatic of a couple of problems with today's markets that need to be fixed. First of all, he says, the dealers and specialists who make markets in the stocks you buy and sell are not doing a good enough job maintaining stable prices. You wouldn't expect them to, he says, because they have little incentive to do so. Simply put, keeping a market in stocks these days - buying and selling against short-term market trends to keep the prices from moving too much -- is just not that profitable, compared to the other money-spinning businesses at the big financial institutions who employ the dealers and specialists. "When you run a securities firm or a bank, you tend to put your capital where you think you can get optimal returns," says Gutfreund. "Number one is not market making." Instead, securities firms and banks prefer to use their capital in less risky and more profitable areas like asset management, mergers and acquisitions, merchant banking, and underwriting. These firms keep market makers mainly because this helps them distribute shares in their primary and secondary stock offerings, says Gutfreund. "I am not certain that the obligation of the market makers is to anyone other than themselves," explained Gutfreund in an interview after a recent speech he gave on this topic before the New York Financial Writers Assocaition. "There has to be an obligation to the listed companies and the shareholders to make good markets. These books of business are a public trust." But as things stand now, securities firms deploy little capital to their trading desks, so the market makers have relatively small inventories of stocks compared to the overall trading volumes. This leaves the market maker outgunned -- which brings us to Gutfreund's second reason behind the volatility in the markets: the shift away from individual stock ownership to the huge institutional presence in the markets. Share ownership is often concentrated in the hands of big investment groups like Fidelity and the California state pension system, which end up controlling up to 10% to 20% of the shares in some companies. As a result, the remaining tradeable float is usually pretty small. And it is difficult for these big shareholders to get out of their large positions without moving the price a lot. "Concentrated institutional ownership leads to less liquidity. That is, the true float of transferable shares is usually small. My impression of Nasdaq is that the illusion of liquidity at reasonable prices is limited to a few of the largest capitalization stocks," says Gutfreund, who is now the head of Gutfreund & Company Inc. a New York-based financial consulting firm. But he doesn't think things are much better at the New York Stock Exchange, either. What might be done to correct these problems? Gutfreund has some answers, but they aren't necessarily ones you're going to like: * Higher commissions Because making markets is more risky and less profitable than other businesses at securities houses, the firms that do this should be able to charge higher fees. This would let them build up a cushion to offset losses they sustain while making markets during tough times. "The small firms, which are generally privately owned, are not equipped for the stock market of today," says Gutfreund. "They should be able to charge small service fees or floor brokerage for their services." * National Market Gutfreund thinks there should be a single National Stock Exchange -- with separate sections for smaller and emerging new companies. It should be an open auction system making use of specialists to keep markets -- like at the New York Stock Exchange. This is more transparent than the dealer system in place now on Nasdaq, says Gutfreund. * Better monitoring The specialists making markets in stocks should be monitored better, and taken off the job if they are not doing the task well. The stock exchanges should pay close attention to their financial strength. Beni Mick Mormony