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Stocks: The Thrill Ride Isn't Over
Uncertainty on Wall Street has given rise to the most volatile market in 20 years
BY DANIEL KADLEC
For a few precious hours last Tuesday, you could actually tell truth from fiction. All those fish stories you'd heard in recent months, the ones about friends and office pals with multiple thousands invested in the likes of Qualcomm and JDS Uniphase--were they true? Were real people actually soaring with the highflyers the way you'd dreamed of doing yourself?
Here's your answer: if you saw those folks anywhere near lunchtime and they weren't sweating bullets, forget everything they've ever said. They're not players.
It's that simple. On a day that the dot bombs and other tech dears descended into a panicky free fall, no one with a sizable stake could help fretting that the bubble had burst. At the lows, the decline was in some ways worse than the 1987 crash. Yes. The Crash. Doesn't register? Think. Mom or Dad may have mentioned it.
On that dark day 13 years ago, the NASDAQ, then just a funny series of letters to most people, fell all of 11.4%. But on Tuesday the NASDAQ, now our most closely watched market gauge, was down 13.6% on extraordinary volume and with hours yet to trade. And that was on top of a chilling drop the day before, on top of a steady erosion over the previous few weeks that in all took the index down a stunning 28.9% from the March 10 high to the April 4 low--wiping out an incredible $1.1 trillion of value.
Then everything changed. Or should I say nothing changed? Investors flooded into the market to buy the dip, and the NASDAQ roared back to end the day with only modest losses, then skipped through the rest of the week with little grief. Indeed, tech bellwethers, including Oracle and Intel, finished the week with gains.
Yet something was different. Even if just for a short while, the element of risk, as inseparable from the market as it was invisible during a long run-up, had reimposed itself on investor psychology in a cathartic half a day of pain. "All those people who somehow figure that Wall Street owes them money found out that it doesn't," says Laszlo Birinyi, chief executive of market-research firm Birinyi Associates in Westport, Conn. "The market doesn't work like that."
So just how does it work? Well, news matters. When Alan Greenspan raises interest rates, as he has been doing for nearly a year, interest-paying investments like bonds and even scorned bank certificates of deposit siphon dollars from the stock market--and stocks become less attractive. When the government wins big in a court case that could bust up one of the most valuable companies in the most valuable industry in the world, as happened in the Microsoft trial last week, it breeds uncertainty--and stocks become less attractive. When the market's most credible bull sours on the market, no matter how faintly, as Abby Joseph Cohen at Goldman Sachs did recently, some people are bound to sell.
So let's not pretend the market swoon came out of nowhere. And now that stocks seem somewhat stable, let's not pretend that we're simply back to the races. This is the most volatile stock market in 20 years. The Dow has moved up or down more than 1% on nearly half of all trading days this year--more than double the normal rate, Birinyi reports. In the long run, wide price swings don't hurt a thing, and can actually pad returns for those who dollar-cost average, buying every month or quarter no matter what. But in the short run, volatility spells risk and scares off buyers--some of whom should be plenty scared. Caught in last week's roller coaster were a fast-growing number of speculators buying stocks with borrowed money. Since late last year, margin debt has been rising rapidly, and it hit a record $265.2 billion in February. The tally ignores those who are buying stocks while allowing their credit cards and home-equity lines to go unpaid--in essence charging their investments.
At least in margin accounts you have to put up some dough, usually half, to buy stocks. You also have to pony up whenever the value of your collateral (that's the stock you just bought) falls below a certain threshold. When that happens, as was the case for many last week, you get a margin call. Your broker demands that you write a check to cover your losses--this minute, please--or your stocks will get sold regardless of price. Margin calls played a big role in last Tuesday's debacle. "There was a lot of liquidation," says Ron Shear, president of Carlin Financial Group. "Some very scared people found themselves on ships that weren't coming back."
Shear and others estimate that margin calls were running two to four times as high as normal. When that happens, the impact isn't just on highflyers. A lot of brokers have stringent debt limits, and some even restrict borrowing against volatile tech stocks. To beat the system, investors borrow against their blue chips--AT&T, Disney, GE--to speculate in the likes of drkoop.com and Fogdog. When the margin calls come and the client has no money, blue chips get sold too. That pattern was evident Tuesday, when the Dow dived in delayed synch with the NASDAQ.
But margin calls were only part of the problem. With a run of negative news and long-standing valuation concerns as the backdrop, a lot of pros already had their finger on the panic, er, sell button. Some who had loaded up with the right tech stocks were ahead of the S&P 500 by as much as 20 percentage points. "My God, their year was made in three months," notes John Manley, senior equity strategist at Salomon Smith Barney. "All it took was the least little nudge, and those guys rushed to lock in that outperformance [by selling winners and going to an index weighting]."
This year's astonishing volatility points up the shifting nature of the economy and investors' uncertainty about how things will shake out. Most recognize both the promise of the Internet and the inherent value of old-economy blue-chip companies. They just can't figure out how the two will come together--even though they know that somehow they must. As the betting on Wall Street goes back and forth, the nasdaq and the Dow act like a pair of magnets turned the wrong way. When the nasdaq is up, the Dow is down, and vice versa.
For the past month, the old-economy Dow has been on top, surging 9% while the new-economy NASDAQ has fallen 9%. But things were going the other way in January and February. Where this all leads is anyone's guess. Volatility says nothing about where prices are headed--only that confusion reigns. A lot of market watchers believe that the NASDAQ's low point last week will prove to be a bottom. They cite the quick rebound and the broad strength in blue chips and the general economy, as well as the robust profit reports that are expected in the coming days and weeks.
But even if they're right, the ride will remain bumpy. So close your eyes. Or if you're really squeamish, leave the park for a while.
--With reporting by William Dowell/New York
-- Carl Jenkins (Somewherepress@aol.com), April 10, 2000
This isn't an answer, as there wasn't a question.
But, FWIW, it is just as easy (or hard) to make money in a market like this. Just sell a few puts on the Nasdaq and enjoy the ride.
-- alexander (firstname.lastname@example.org), April 10, 2000.