DJIA: 8410.20 -3.74 (-0.04%) S&P 500: 1038.14 +3.93 (+0.38%) Nasdaq: 1751.76 +23.63 (+1.37%) Value Line ndx 924.40 +2.16 (+0.23%) 30-Year Bond 103 04/32 -13/32 5.90% Yield
Merck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> gained $5 15/16 to $130 5/8, hitting an all-time high of $130 7/8 at one point, after the FDA cleared the company's Singulair once-a-day asthma pill for marketing. The pill is intended for the long-term control of asthma, rather than for the relief of acute asthma symptoms or attacks. The stock has been on a tear recently as investors anticipated the approval of the drug, which has been dubbed a "blockbuster." The company expects a one-month supply of the tablets will retail for between $69 and $72. Singulair will compete directly with other asthma control drugs from Zeneca Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZEN)") else Response.Write("(NYSE: ZEN)") end if %> and Abbott Laboratories <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %>, but its once-a-day requirement makes it unique. In addition, the drug has been cleared for use by children six years of age and older, which expands the market dramatically. Analysts estimate that worldwide annual sales of Singulair could top $1 billion. Merck is also studying whether the drug is effective in controlling allergies.
Tired of hearing about the "technology-laden" Nasdaq and the "tech sector?" Well, you'll get no relief here! The market capitalization weighted Nasdaq Composite consisting of 5445 companies soared 23.63 to an all-time high of 1751.76, boosted by the strength of a number of "weighty" issues. Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, on the cusp of becoming only the second company to have a market capitalization over $200 billion, gained $4 1/16 to $81 5/8 on its first day of trading after splitting its stock. Computer seller Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> continued to rise, gaining $4 5/8 to $130 15/16 on the strength of its latest earnings report and optimistic forecast for 1998. Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, with its share count north of one and a half billion stubs, gained $2 3/8 to $94 3/16 as well. It should be abundantly clear to any investor reading this summary that tracking the movement of indices is of questionable value when seeking excess returns. Without resorting to a postmodern diatribe about the tyranny of "meta-narratives," the Fool advises to focus on company-specific business risk.
QUICK TAKES: Airline stocks gained today as the threat of a U.S. attack
against Iraq faded somewhat and after a Lehman Brothers analyst made some
favorable comments about the sector. Southwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %>
was up $1 3/16 to $28 15/16, Trans World Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %> was
lifted $9/16 to $13 1/16, United Airlines parent UAL Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> added $3 3/4 to $89, Alaska Air Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> increased $3
5/8 to $55 7/8, and AirTran Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAIR)") else Response.Write("(Nasdaq: AAIR)") end if %> advanced $3/8
to $5 7/8... Business information systems and software provider ForSoft
Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORSF)") else Response.Write("(Nasdaq: FORSF)") end if %> gained $1 13/16 to $12 7/16 after BA Robertson Stephens
initiated coverage with a "buy" rating... Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> gained $5 1/4 to $107 3/4 after the communications technology company
introduced a new chip that may lead to smaller cellular phones with more
advanced features. The company also unveiled the initial elements of its
new global wireless network architecture.
Digital wireless communications products maker Qualcomm Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> rose $4 3/4 to $51 3/8 after winning a $240 million contract to provide
its digital Q phone and QCP series of wireless handsets to units of AirTouch
Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATI)") else Response.Write("(NYSE: ATI)") end if %>, MediaOne Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UMG)") else Response.Write("(NYSE: UMG)") end if %>, and PrimeCo
Personal Communications L.P... Internet navigation services company Infoseek
Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> gained $1 19/32 to $15 11/32 after signing an agreement
with Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> to integrate its search engine with
Internet Explorer 4.0 in the United Kingdom... DoubleClick Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DCLK)") else Response.Write("(Nasdaq: DCLK)") end if %> added another $3 1/4 to $30 after selling 3.5 million shares in a highly
anticipated IPO on Friday at a price of $17 per share.
Drug maker Eli Lilly & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> rose $3 3/16 to $64 13/16
after Abbott Laboratories <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %> withdrew its FDA application
for its Serlect schizophrenia medication, which would have competed with
Lilly's Zyprexa drug... America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> climbed $4 7/16
to $123 7/8 after Volpe, Brown Whelan & Co. reiterated its "buy" rating
for the online services provider with a 12-month price target of $150...
At Home Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>, a provider of Internet services over
coaxial cable, gained $4 13/16 to $33 15/16 after Bloomberg News reported
that the company may be in talks with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> regarding
a partnership to provide local telephone service over cable lines... Trusted
Information Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TISX)") else Response.Write("(Nasdaq: TISX)") end if %> rocketed $6 11/16 to $19 5/16 after
agreeing to be acquired by fellow computer security firm Network Associates
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETA)") else Response.Write("(Nasdaq: NETA)") end if %> in a deal valued at about $300 million.
St. Louis-based community bank holding company Magna Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGR)") else Response.Write("(NYSE: MGR)") end if %> rose $10 9/16 to $57 1/2 after agreeing to be acquired by Memphis-based
bank holding company Union Planters Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UPC)") else Response.Write("(NYSE: UPC)") end if %> in a deal valued
at about $2.3 billion, or $61.45 per share of Magna stock. Union Planters
fell $2 1/8 to $61 5/16 on the news... Air pollution control devices maker
Environmental Elements Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EEC)") else Response.Write("(NYSE: EEC)") end if %> cleaned up, rising $13/16
to $5 7/8 after receiving a patent for a product that can eliminate fine
particles from the smokestacks of utilities, pulp and paper manufacturers,
and other industrial companies... British conglomerate Bass PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAS)") else Response.Write("(NYSE: BAS)") end if %> advanced $1 1/8 to $17 1/4 after winning a bidding war for the
Inter-Continental chain of luxury hotels for $2.9 billion, including the
assumption of debt.
Healthcare practice management software developer InfoCure Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: INC)") else Response.Write("(NYSE: INC)") end if %> gained $1 1/2 to $13 3/8 after agreeing to acquire medical office
information systems provider Micro-Designs Software Corp. for a combination
of cash and stock... Manufactured homebuilder Nobility Homes <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOBH)") else Response.Write("(Nasdaq: NOBH)") end if %> jumped $1 to $14 after announcing preliminary Q1 sales results of $10.6
million, a 17% increase from the same period a year ago... Chattem Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHTT)") else Response.Write("(Nasdaq: CHTT)") end if %>, maker of Gold Bond and Icy Hot medical ointments, rose
$1 3/4 to $19 5/8 after agreeing to buy the BAN deodorant brand from
Bristol-Myers Squibb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %> for $165 million in cash, plus assumed
liabilities... Communications giant CBS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBS)") else Response.Write("(NYSE: CBS)") end if %> gained $1
1/2 to $31 after being upgraded by Morgan Stanley to "outperform" from
"neutral."
Canadian document management software firm Open Text Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OTEXF)") else Response.Write("(Nasdaq: OTEXF)") end if %> moved up $3 1/4 to $17 1/8 after a hedge fund manager told
Barron's that he felt the stock was "cheap," especially considering
the company's growth rate and its blue-chip client list, which includes Ford
Motor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> and Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %>... Artesyn Technologies
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPRD)") else Response.Write("(Nasdaq: CPRD)") end if %>, formerly Computer Products Inc., picked up $2 1/8 to
$25 after BT Alex. Brown started coverage of the stock with a "strong buy"
rating... Integrated circuit maker Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %>
added $1 to $20 3/4 after announcing that it has begun shipping two new 16
Mbit, high-density flash devices for networking, telecom, and flash memory
cards... Lowe's Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %> gained $2 3/4 to $59 1/16 after
the home improvement retailer reported Q4 EPS of $0.41, beating the First
Call mean estimate of $0.37.
Equipment lease financing company T&W Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TWFC)") else Response.Write("(Nasdaq: TWFC)") end if %> rose $1 1/4 to $18 3/4 after reporting Q4 EPS of $0.44 on Friday, beating
the First Call mean estimate by a dime... Enterprise software developer
Platinum Software Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSQL)") else Response.Write("(Nasdaq: PSQL)") end if %> gained $2 11/16 to $17
1/2 after Hambrecht & Quist upgraded the stock to "buy" from "hold"...
FirstCity Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FCFC)") else Response.Write("(Nasdaq: FCFC)") end if %> picked up $1 1/4 to $30 3/4
after Piper Jaffray upgraded the mortgage and consumer lender's stock to
"strong buy" from "buy"... Progress Software Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRGS)") else Response.Write("(Nasdaq: PRGS)") end if %>
was lifted $1 29/32 to $24 1/16 after Fahnestock started coverage of the
application development and database software company with a "buy" rating...
PHP Healthcare Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PPH)") else Response.Write("(NYSE: PPH)") end if %> rose $2 1/4 to $14 15/16 as Wasserstein
Perella began coverage of the health management company with a "buy" rating
and set a 12-month price target of $22.
Costco Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %> added $2 3/8 to $48 7/8 after a hedge
fund manager made favorable comments about the volume discount retailer in
the latest edition of Barron's... Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %>
gained $1 1/4 to $21 1/4 after an analyst at Gerard Klauer Mattison expressed
confidence in the company's ability to meet upcoming Q3 earnings expectations
and reiterated his "buy" on the firm.
Quigley Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QGLY)") else Response.Write("(Nasdaq: QGLY)") end if %>, the maker of Cold-Eeze, fell $2 11/16 to $13 5/16 after the company announced that its first quarter revenues will be "significantly lower than consensus" estimates as a result of a mild winter and a cold and flu season that continues to be less severe than expected. The company added that overall 1998 revenues also could be affected, but it hopes to counter the effect by increasing U.S. market penetration and international distribution. Just last week Quigley announced its first overseas distribution deal in Canada (which is but a baby step as far as international expansions go). On a more positive note, Quigley also reported fourth quarter earnings of $0.60 per share versus $0.12 in Q4 1996. Q4 sales of Quigley's cough and cold remedy lozenges jumped more than 600% to $29.2 million from $4.1 million in the year-earlier period.
Oil-related companies were drilled today on news that a potential U.S. attack on Iraq likely has been averted. In commodities trading today, the spot price of April West Texas Intermediate crude dropped more than 5%. Oil drillers Diamond Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DO)") else Response.Write("(NYSE: DO)") end if %> lost $2 3/4 to $42 3/4, Global Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %> declined $1 3/16 to $21 3/4, Rowan Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RDC)") else Response.Write("(NYSE: RDC)") end if %> slid $1 3/16 to $26 11/16, and oilfield equipment company Baker Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %> was dragged down $1 11/16 to $36 1/4. Integrated oil companies didn't miss out on the downside action, either. Royal Dutch Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RD)") else Response.Write("(NYSE: RD)") end if %> was crowned for a $1 5/8 loss to $51 1/16, Mobil Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOB)") else Response.Write("(NYSE: MOB)") end if %> dropped $2 to $70, and Exxon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %> sank $1 13/16 to $62 1/2.
QUICK CUTS: Showa Denko Carbon, a U.S. subsidiary of Japan's Showa
Financing KK, has agreed to pay a $29 million fine for fixing the price of
graphite electrodes used in steel mini-mills. Graphite and carbon electrodes
maker UCAR International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCR)") else Response.Write("(NYSE: UCR)") end if %>, which had been served with a
search warrant in June, fell $5 3/16 to $34 on the news. Carbide/Graphite
Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CGGI)") else Response.Write("(Nasdaq: CGGI)") end if %> also lost $3 to $32 1/2... Forest products company
IP Timberlands <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IPT)") else Response.Write("(NYSE: IPT)") end if %> fell $11/16 to $10 1/4 after announcing
that in accordance with New York Stock Exchange rules and regulations, the
ex-dividend date for the special distribution of $3.35 per Class A Unit and
the fourth quarter regular distribution of $0.50 per Class A Unit will be
Feb. 17.
Lone Star Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSS)") else Response.Write("(NYSE: LSS)") end if %>, the holding company for oilfield
and industrial products manufacturer Lone Star Steel Co., dropped $1 9/16
to $29 1/8 after reporting fourth quarter earnings of $0.49 per share (before
extraordinary gains), compared with $0.38 for the year-earlier period...
Integrated circuit layout and verification software maker Avant! Corp.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVNT)") else Response.Write("(Nasdaq: AVNT)") end if %> sank $1 31/32 to $13 25/32 on news that its chief financial
officer, John Huyett, has resigned... Petco Animal Supplies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PETC)") else Response.Write("(Nasdaq: PETC)") end if %> slid $2 3/8 to $17 1/2 after Morgan Stanley lowered its rating of the
pet food and supplies retailer to "neutral" from "outperform"... SMART
Modular Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMOD)") else Response.Write("(Nasdaq: SMOD)") end if %> continued to fall today, dropping
$1 23/32 to $28 15/32 after the company told analysts Friday that a large
customer has diverted its business due to product delivery problems.
Radio station owner and operator Chancellor Media Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMFM)") else Response.Write("(Nasdaq: AMFM)") end if %>
slumped $1 1/4 to $42 1/8 after announcing it will acquire 11 SFX Broadcasting
Inc. stations in four major markets with a market value of $637.5 million
in a swap with Capstar Broadcasting Corp., which agreed to acquire SFX in
August. Chancellor also said it plans to make a public offering of 16 million
shares of its common stock... Intevac Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IVAC)") else Response.Write("(Nasdaq: IVAC)") end if %>, which supplies
sputtering systems used to manufacture thin-film disks for disk drives, plummeted
$1 1/4 to $8 1/2 after announcing that first and third quarter revenues and
earnings are likely to be less than current estimates... Healthcare software
firm MedPlus Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEDP)") else Response.Write("(Nasdaq: MEDP)") end if %> was off $3/4 to $7 1/4 after announcing
it has signed a five-year contract with Quorum Health Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QHGI)") else Response.Write("(Nasdaq: QHGI)") end if %> that will make MedPlus data management solutions available to more
than 400 managed and affiliated Quorum hospitals across the country.
Bicycle helmet and accessories maker Bell Sports Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BSPT)") else Response.Write("(Nasdaq: BSPT)") end if %>
was knocked down $15/16 to $9 1/16 after announcing that a jury in a product
liability lawsuit in Pennsylvania returned a verdict of about $6.8 million
against the company. The case involved injuries sustained in a 1993 motorcycling
accident in which the motorist wore a helmet manufactured by the company
in 1989. The company sold its motorcycle helmet business in June 1991...
Multimedia graphics card supplier STB Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STBI)") else Response.Write("(Nasdaq: STBI)") end if %> tanked
$1 5/8 to $23 9/16 after reporting first quarter earnings of $0.33 per share,
just ahead of the First Call consensus estimate of $0.32. The company also
announced plans to commence a public offering of up to 3 million shares of
common stock plus up to an additional 450,000 shares to cover over-allotments...
South Africa's De Beers Consolidated Mines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DBRSY)") else Response.Write("(Nasdaq: DBRSY)") end if %> lost $15/16
to $20 5/16 after Merrill Lynch downgraded the diamond production company
to an intermediate-term "neutral" from "accumulate," while keeping a long-term
"accumulate" rating on the stock.
FOOL
ON THE HILL
An Investment Opinion
by Jim Surowiecki
Beware of Margin!
The danger in any bull market is that investors may come to believe that
success is guaranteed. Intoxicated by the sharp increases in the value of
their holdings, people imagine that the market can only go in one direction:
up. Convinced that equities are a surefire vehicle for gains in the short
term (as well as the long), investors put more and more of their money into
the market. In the worst-case scenario, investors start borrowing money to
buy securities, assuming that the rise in the value of their portfolios will
cover the interest costs on their loans. This is the point at which rational
investors have a hard time resisting the thought: "So this is what 1929 was
like."
Analogies between this current bull market and the one that came to a screeching
halt with the Great Crash of 1929 are certainly overblown. The structure
of the U.S. economy is superior to 1929 -- the economy is far more efficient
and diverse and the many regulatory reforms enacted in the wake of the Crash
have made Wall Street a far more transparent and legitimate site for investing
than it was in 1929. But, setting aside the "this time it's different" line
of thought, there is one very troubling similarity between today's trading
and that of the 1920s, and that is that U.S. investors have once again fallen
in love with buying on margin.
According to the New York Stock Exchange, the margin debt outstanding with
brokerage firms that are part of the NYSE rose almost 30% last year, after
rising 27% in 1996 and 25% in 1995. At the same time, as the New York
Times reported on Friday, the rise in margin buying at discount brokerage
firms -- where smaller investors are more likely to congregate -- has risen
even more sharply. At Charles Schwab, for instance, margin loans rose 50%
last year, well above the rate of growth in customer assets.
Investors buy on margin by borrowing from their brokerage firm against the
value of their portfolios. Before the Securities Exchange Act of 1934, investors
only had to put up 10% of the value of the securities they were buying, which
meant that they could buy $20,000 of stock with only $2,000 in hand. Today,
you have to put up 50% of the purchase price. Margin buying -- like any loan
-- allows you to leverage your assets (whether tangible or intangible) and
increase your purchasing power. In an ideal situation, an investor might
buy $20,000 of stock by putting $10,000 down. If the value of the stock rises
to $25,000 (a rise of 25%) and the investor sells, she will have made $5,000
on a $10,000 investment (a 50% profit), minus what she's paid in interest
on the loan.
Sounds wonderful, doesn't it? That illusory dream of turning a small amount
of cash into a large pile is the dream that propels margin buying. Unfortunately,
the dream omits what happens when stock prices begin to fall. Investors have
to keep account equity of at least 25% of assets. (This minimum maintenance
requirement may be higher, depending on the brokerage.) As stock prices fall,
and the value of equity drops below that margin maintenance requirement,
brokerage firms will make a "margin call," asking the customer for a deposit
to increase equity lest the brokerage call in the loan.
If the whole assets/equity discussion is confusing, just remember that the
debt portion of the account stays level or grows during this time. So, if
assets (the value of stocks in the account) decrease in value and the debt
amount stays the same, account equity value decreases. Investors must either
put more cash in their account or sell stock in order to raise the money.
The result, particularly when stock prices drop quickly, can be a vicious
downward spiral in which investors are forced to divest themselves of more
and more of their assets in order to keep enough collateral in their
accounts.
The fact that brokerage firms will lend investors the money to buy stocks
on margin without asking them to fill out a lot of paperwork can make it
seem as if margin debt is somehow less real than, say, a home-equity loan.
This is especially true in a rising market, when margin debt appears to be
magically transmuted into capital gains in the blink of an eye. But buying
on margin is no different, in substance, from taking out any other kind of
loan, and brokerage firms are just as vigilant as banks in making sure those
loans are paid back.
The real problem with buying on margin is not simply that it encourages
speculation and leads people to look for short-term gains; the real problem
is that buying on margin makes it impossible to be a patient investor, because
every downtick in a stock's price is magnified in importance. Successful
investors have to be able to tolerate drops in the value of their portfolio,
and to tolerate them not simply for days or weeks, but for months or even
years.
Buy-and-hold, in that sense, only works if one recognizes that even the best
companies will see their stock prices drop by 25-30% at different moments
in time. But if you're fully leveraged, a large enough drop in a stock's
price essentially forces you to sell off your position, thereby keeping you
from enjoying the eventual rebound. All investing involves a delicate balance
between risk and reward. But while margin buying offers great rewards, it
offers even larger risks.
A familiar saying has it that bear markets are when money finds its way back
to its rightful owners. The dramatic increase in the amount of information
available to individual investors, and the increased transparency with which
U.S. corporations conduct their business, have -- we hope -- improved small
investors' chances for investing intelligently over the long term. But successful
investing depends on a judicious recognition of what kinds of gains one can
expect to reap on an annual basis, and on a careful consideration of the
fact that in the short term there are absolutely no guarantees. The recent
rise in margin investing, which tracks in a disturbing fashion the rise in
the value of the Dow and the S&P, has something of the air of a speculative
bubble about it. In order to avoid bursting that bubble, the best advice
individual investors can take is: Invest what you own, not what you borrow.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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