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We also must remember that a lot of the leverage today is in the financial
structure of many of the 'new paradigm' companies.
In the old days, during an IPO, when 10 million shares were issued, with 5
million sold to the public and the balance held by the original owners,
the cash from the 5 million shares sold went into the company coffers, at
a level commensurate with its market price. If the 'market price' was
thought to be about $100, the IPO was done around $100 (that was the job
of the underwriters, to determine where that market price would be), and
the company would take in $500 million cash to support its value.
Now, the same IPO would be priced at $20, the market price shoots to $100,
but the company only receives $100 million.
So what? This will impact the ability of these companies to survive a
downturn. Once this is widely realised (my belief is that it is not
understood by most investors), confidence will drop, hurting market prices
in some sectors severely.
Just my opinion.
DanG
Mike Higgs wrote:
> Personal debt by itself doesn't mean much. Is 400K in debt a lot
> compared to 190K in 1980? No, it isn't. In fact, it's exactly the
> same after deflating it by the annual CPI numbers. What's more
> relevant is the ratio of debt to income, i.e., the ability to service
> and repay debt. I suspect that this ratio expands and contracts in
> direct relation to the degree of consumer confidence. I don't have
> any of this raw data but I wish I did so that I could see if I'm
> talking out my elbow.
>
> This stock option corporate game is such bs. My sister-in-law just
> received 1000 IBM stock options. Given IBM's price, she was ecstatic
> until she realized that if IBM's stock price dropped below the level
> that it was at the time she received the options, they were worthless.
> Depending on how your AOL friends options work, they may be in for a
> big surprise. And they're nuts to spend a promise of things to come.
>
> Regards,
> Mike
> ---
> Aboard 35' Edel Cat "Moongate" in New Bern, NC - the hurricane capital
> of North America
>
> ----- Original Message -----
> From: Howard Hopkins <hehohop@xxxxxxxxxxx>
> To: <bruceb@xxxxxxxxxxxxx>; <eadamy@xxxxxxxxxx>;
> <realtraders@xxxxxxxxxxxx>
> Sent: Sunday, October 17, 1999 3:25 PM
> Subject: Re: FOMC meeting?
>
> > I've been following your discussion over the past few days.
> >
> > I have a question and I wonder if anyone knows the answer. Although
> margin
> > debt is not at the % of net worth that it was in the late 20's, how
> is
> > personal debt today compared to then? I live in the Wash, DC area
> and have
> > two friends that work for AOL. They make good money, but they
> believe they
> > are paper millionaires (even though they are not... yet)through
> thier stock
> > options. And they spend accordingly to that "inevitable" windfall
> that they
> > are "entitled" to.
> >
> > Many of my thirty-something friends have $400,000 in home, car, and
> credit
> > card debt. Isn't this just as important in evalutating how
> precariously
> > perched this game of cards really is?
> >
> > Thanks for any feedback,
> > Howard
> >
> >
> > >From: "BruceB" <bruceb@xxxxxxxxxxxxx>
> > >To: "Earl Adamy" <eadamy@xxxxxxxxxx>, "RealTraders
> Discussion Group"
> > ><realtraders@xxxxxxxxxxxx>
> > >Subject: Re: FOMC meeting?
> > >Date: Fri, 15 Oct 1999 08:07:38 -0400
> > >
> > >Earl, the point of the info is that investors (speculators) had
> access to
> > >enormous amounts of leverage for the vast majority of time the
> market went
> > >through its meteoric rise in the 1920's, ranging from 3% to 20%
> margin
> > >rates. As the info points out, margin rates didn't hit 20% until
> just a
> > >few
> > >months before the crash (sorry, I said "after" in my previous
> post).
> > >Whether you choose to accept the "conventional" figure of 10% as an
> average
> > >margin rate for that period is up to you.
> > >
> > >Once again, the important point of this whole subject for all
> investors is
> > >that the 1929 market was built on massive leverage. History has
> clearly
> > >shown that leveraged money is the fuel for market crashes (on this
> point
> > >Norman and I agree completely). Our current market, while reaching
> > >valuations comparable to the 20's, doesn't have a fraction of the
> leverage
> > >built into it. No leverage, no crash. It's that simple.
> > >
> > >When the market "corrected" last fall to the tune of 20+%, who was
> it that
> > >sold? It was hedge funds, who were heavily leveraged and had to
> sell to
> > >cover margin calls. The average investor sat on his hands and was
> well
> > >rewarded for his resolve.
> > >
> > >Bruce
> > >
> > >----- Original Message -----
> > >From: Earl Adamy <eadamy@xxxxxxxxxx>
> > >To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxx>
> > >Sent: Friday, October 15, 1999 6:06 AM
> > >Subject: Re: FOMC meeting?
> > >
> > >
> > > > The material Bruce attached was interesting and carried some
> eerie
> > >echoes
> > > > including the Fed's easing of rates in 1927 to help the
> Europeans.
> > >However,
> > > > I didn't find much in the way of specific info regarding call
> rates
> > >except
> > > > for two passages:
> > > >
> > > > a) "The practice of buying a large number of shares of stock
> with a very
> > > > small amount of one's own money (as little as 3% during the
> 1920's) and
> > > > borrowing the rest from the broker."
> > > >
> > > > b) "On Tuesday, March 26, 1929, the trend intensified and the
> rate on
> > >call
> > > > money went to 20 percent."
> > > >
> > > > The first is pretty generic as it applies to an entire decade
> while the
> > > > later is more specific as it applies to the period some months
> before
> > >the
> > > > big one let loose. There is no indication regarding the length
> of the
> > >period
> > > > to which the 20% applies but I see nothing which refutes
> Norman's
> > >statement.
> > > > While I have extensive historical data, one item I do not have
> is call
> > >rates
> > > > back to the 20's ... if anyone has monthly call rates for 1929
> we could
> > >put
> > > > this part of the discussion to be and move on to new material.
> > > >
> > > > Earl
> > > >
> > > > ----- Original Message -----
> > > > From: BruceB <bruceb@xxxxxxxxxxxxx>
> > > > To: <ericrogers@xxxxxxxxxxxxx>; BruceB <bruceb@xxxxxxxxxxxxx>
> > > > Cc: <droex@xxxxxxxxxxxx>; Earl Adamy <eadamy@xxxxxxxxxx>;
> RealTraders
> > > > Discussion Group <realtraders@xxxxxxxxxxxx>
> > > > Sent: Thursday, October 14, 1999 10:05 PM
> > > > Subject: Re: FOMC meeting?
> > > >
> > > >
> > > > > Sorry Norman. After a grand total of 5 minutes of searching
> on the
> > > > > internet, I found enough info to invalidate your opinion.
> Attached is
> > >a
> > > > > text file containing passages from two different sites on the
> web
> > > > discussing
> > > > > the 1929 crash. The first passage makes it clear margin rates
> for
> > > > investors
> > > > > in the twenties got as low as 3%. The second passage makes
> clear that
> > >the
> > > > > broker call rate (referred to as the "Call Market") did not go
> to 20%
> > > > until
> > > > > AFTER the crash was underway.
> > > > >
> > > > > Now, if margin rates got as low as 3% during the twenties, and
> didn't
> > > > reach
> > > > > 20% until after the crash, is it really so hard to believe
> that the
> > >market
> > > > > spiraled upwards at an average margin rate of 10% before
> crashing?
> > > >
> > > >
> > > >
> > > >
> > >
> >
> > ______________________________________________________
> > Get Your Private, Free Email at http://www.hotmail.com
> >
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