Wall Street's Winners and Losers

Double killing for foreigners, double whammy for speculators

The little guy is still highly cautious. Small investors are sitting anxiously on their cash until it becomes clearer that Wall Street's buying panic is more than just a flash. But this has done nothing to stem the three-week-old rally as foreign investors continue to join large U.S. institutions in leaping on the bull.

Last week the surge continued. The Dow Jones industrials rose 24 points on the first three trading days, then dropped 10 points on fears of tight money, but made up all that loss on Friday. The Dow closed at 837, up 24 points for the week -and up 71 points over the previous twelve trading days.

Some money managers are wary about how long the rally can last. Many, including several large insurance companies, have been sellers of stock, and even Citibank has been using the rally to sell and diversify rather than to buy. Still, there has been a bandwagon effect as the majority of institutional investors have rushed in for fear of missing the upturn. Says Paul L. Smith, chief financial officer of California's Security Pacific National Bank: "These fellows are all scared of being left at the starting gate. The minute somebody starts to buy, the others don't want to get left out."

The surge has been fueled by the accelerated foreign buying. One New York banker remarks: "Overseas buying early last week was a wave not to be believed." The main interest is coming from West Germany, where institutions and private investors have been seeking a double killing on low Wall Street prices and the cheap U.S. dollar. Merrill Lynch reports doing good business for private Arab investors from Abu Dhabi and Dubai. Britain's Prudential Assurance Co. has been a buyer in the U.S. market.

Fortunes have been made over the past several weeks, but a few have been lost too. Some of the biggest winners and losers are the traders in options, the riskiest of investments. Options are essentially future "rights" to buy stocks, and investors in them manage to participate fully in the rise, or fall, of a stock without paying the full market price.

For example, an investor might want to acquire 100 shares of IBM. On April 7, before the surge, it would have cost him $240 a share, or $24,000 plus commissions. But he could have bought a three-month option on IBM for $2 a share, or $200 for 100 shares. This would have given him the right to buy those shares at any time over the next three months for $260 a share. So if the price rose much above $260, he would turn a handsome profit. As it happened, IBM closed last week at $266, and option holders did well.

Usually, every $1 rise in the stock price causes about a $1 rise in the value of the options. But that $1 rise is a far larger percentage gain for the options, since they cost much less than shares of stock. Thus profits made on options in recent weeks have been spectacular. Between Friday, April 7, and last Friday's close, IBM options jumped from $2 to $10.50, a 425% increase; General Electric's rose 475%, from 50-c- to $2.87; Kodak's jumped 470%, from $1.25 to $7.12.

But for every buyer of an option, there is also a seller, usually a large institution or professional trader. Those sellers were hurt badly when the equity market boomed. Some traders sold options on stock they did not own, a perilous practice called "naked" option writing that they carried out in anticipation of a market fall. When the market exploded, they suffered hefty losses. Many of the option sellers further fueled the market surge when they rushed to buy the shares in order to be able to deliver them to their options clients. The Chicago Board Options Exchange indicated that professional traders lost more than $10 million in recent weeks and said that at least ten may have been forced out of business.

Gary Helms, research director for Loeb Rhoades, Hornblower & Co., agrees that naked option and ordinary short sale covering boosted the market during the past few weeks. But he argues that it is only one factor: "The rally was one of the broadest based I have ever seen. There is more buying to come from institutions and from abroad." And, he adds, "we are not even counting the small investor, who could further increase the rate of gain when he decides it is finally time to buy." qed

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