14 April 2000
The near-term course of the technology share shake-out is likely to be determined by investors who have used margin lending to buy stocks during the boom.
Margin lending is a classic bull market product but it bites back when shares are falling.
Loans are provided by brokers and banks to investors for the purchase of shares with the funds secured against the shares that are being bought.
The value of the collateral that underwrites the loan therefore moves up and down with the sharemarket. No problem there if the market is rising. But if prices fall heavily say by 20 per cent or more - more collateral can be demanded by the lender and if it is not there within the day, sufficient shares in the portfolio are sold to close the gap.
The word from Wall Street on Wednesday night was that the Nasdaq market's 7.1 per cent slide showed the strongest internal signs so far in this correction of forced margin selling, which raises the real possibility of even greater volatility in coming days.
Australia's technology and Internet stocks have been following Wall street down but this market should not be under the same margin selling pressure. Margin lending has been rising strongly in Australia and jumped by 12 per cent to $5.8 billion in the final three months of 1999 but the vast bulk of the money is sitting in heavyweight, liquid stocks, not speculative counters.
Even so, a continued slide on Wall Street will inevitably spill over into technology and Internet counters here and, so far, the local market's retreat has been less orderly than Wall Street's, and therefore more difficult for investors to negotiate.
Salomon Smith Barney equities strategist Hamish McAlister observes that even though heavyweight stocks including Microsoft and Cisco were pounded during the Nasdaq plunge on Wednesday night, a basic re-ordering of the market away from new, untested stocks towards more established ones continued.
Stocks with a track record attracted greater support than newly listed ones and established media and communications stocks including Viacom, Bell Atlantic and Bell South had posted five day rises when the bell rang on Wednesday.
In Australia there has been some re-weighting towards the banks but longevity or the lack of it counts for nothing among the technology and Internet stocks.
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