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To: Jim McMannis who wrote (54479)	4/25/1998 1:51:00 PM
From: Howard Bennett	Respond to of 186894

Finally! Someone Speaks the Truth about Market Makers! ====================================================== Subject: One prescription for market volatility Date: Fri, 24 Apr 1998 19:27:50 EST From: MONEY Daily <moneyadm@PATHFINDER.COM> Reply-To: dailymail@LISTSERV.PATHFINDER.COM To: MONEYDAILY@LISTSERV.PATHFINDER.COM ***************************************************** Brought to you by American Century Investments: americancentury.com ***************************************************** For an enhanced HTML version of the Money Daily, visit moneydaily.com. 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.

To: Jim McMannis who wrote (54479)	4/25/1998 1:54:00 PM
From: stock bull	Read Replies (1) \| Respond to of 186894

Jim, I think the market is awaiting the release of the ECI next week. If the ECI fails to meet the Street's estimate, I think we will see a sharp downturn in the markets. The next Fed meeting is May 19th. A key date on the Economic Calendar. Isn't gold still under $300? Last I saw, the index was around 290 - 295. I don't recall any of the Fed members using the price of gold as a key indicator of inflation. I thought the key measures where the ECI, Non-farm payroll, and the direction the GDP is taking. Of course, other factors considered include housing starts, consumer spending, Asian situation, etc. Stock Bull

To: Jim McMannis who wrote (54479)	4/25/1998 5:00:00 PM
From: Barry Grossman	Read Replies (3) \| Respond to of 186894

Re: <<I'm starting to hear some concern about the direction of rates vis a vis the FED, AG in particular, becoming concerned about inflation.>> I hope AG reads this: businessweek.com@@82HN92cAeqGMYgAA/premium/18/b3576164.htm DOES AMERICA HAVE A BUBBLE ECONOMY? NO Does the U.S. have a Japanese-style bubble economy? And should the Federal Reserve burst it with higher interest rates, even at the risk of recession? A growing chorus says yes. Asset inflation, they argue, requires an immediate tightening of monetary policy and a throttling-back of the economy. Just look at the soaring stock market or surging house prices. Even movie tickets and admission prices at Disneyland are going up. Unless the Fed acts, they say, the U.S. economy will overheat and crash, just like Japan's. Certainly, the bubbles are troublesome. It is true that high-priced stock is being used as cheap currency to pay for gigantic mergers that may not make sense. Telecom companies are bootstrapping themselves up with high-multiple equity. Prices are going up for hotel rooms, airline tickets, New York condos, and Silicon Valley houses. We would all be more comfortable if these things weren't happening. But they do not mean that it's Japan redux. Look at the fundamentals. Japan's bubble was built on leverage. Individuals and corporations borrowed enormous sums against their stock market gains to invest in everything--Tokyo real estate, overseas factory capacity, American golf courses, gold, and Picassos. When the Nikkei cracked, the leverage reversed, crushing Japan's economy. That's not happening--yet--in the U.S. There are a lot of stock deals. But total national borrowing is only 8.8% of nominal gross domestic product--low compared with previous decades. New federal borrowing as a percentage of GDP is practically zero, offsetting moderately rising private debt. Consumer borrowing, while high, has slowed sharply since mid-1996. Producer prices are falling, and the consumer price index is up a mere 1.4% from a year ago. There are, as yet, no major imbalances. Japan's bubble was built on the quicksand of ever-expanding manufacturing capacity financed by virtually free capital. Corporate profits were made in stock market speculation, not just in selling products. This is not the case in the U.S. The shift to an information economy is generating a steady stream of enterprise. Innovation is throwing up new companies and new products faster than you can say ''electronic commerce.'' Restructuring and downsizing are an obsession. Productivity is paying for much of the recent real gain in wages. Growth in corporate profits, although under some pressure this quarter, has been great for three years. Most CEOs continue to focus on top-line revenue growth, profits, cutting costs, and shareholder value. But what about rising prices? A good many reflect the amazing growth of wealth at the top. The jump in real estate prices is sharply skewed to very expensive houses. Airfares are up for first class and business, not steerage. Memberships in golf clubs are up, but prices for local gyms are not. Price tags for new and used cars, clothing, and beer have fallen. Personal-computer prices are way down, as are stock-trading commissions and mortgages. The rise in prices for luxury goods is worrisome, but prices for most things that most Americans consume are not rising nearly as much, if at all. Strong economic growth has done wonders for America. It has made many more people rich, and they have largely balanced the federal budget through their capital gains and income taxes. It has raised real wages and tightened the labor markets, providing jobs for college grads as well as high school dropouts. It has even revived the cities--newly minted centers for information technology and innovation. This is not the time for a rate hike that threatens this progress. The fundamentals are sound--and are what the Fed should focus on. First quarter growth was strong but due in large part to unusually warm weather. If the economy doesn't slow in the second half and if profit growth gets weaker, the market will correct itself with no help. The one thing that could threaten the economy is a debt explosion--and the Fed is already exhorting banks to be cautious. That's enough. The U.S. is not Japan. ------------- Barry

To: Jim McMannis who wrote (54479)	4/26/1998 5:57:00 PM
From: MR. PANAMA (I am a PLAYER)	Read Replies (1) \| Respond to of 186894

We are going through the same worries that we had before and look at us now...over 9000...we need some worry to go higher and we will see the bonds fluctuate ....the last set of emloyment data revealed some weakness did it not ??? On friday CNBC has L Kudlow on and he addressed the rate problem perfectly...he is one very perceptive economist and he explained the money supply problem perfectly....it is not inflationary but demand for US dollars is due to the currency crisis overseas that we had... Does the mkt have to pull back here....NO... but would be nice since profits by many have been taken and re entry will re envigorate things.. WRT INTEL and TK the mkt is getting so use to it now that we shall see a dampening out as the Young Boy Screams WOLF.... GRIM has SPOKEN Maybe the SEC will speak louder...