Most of the country (or at least most of the news media) spent last week revisiting Vietnam. But the folks on Wall Street had their own 10th anniversary to ponder. Since that fateful May Day in 1975 -- when fixed commissions were abolished -- a competitive melee has sent many venerable brokerage houses fleeing to the arms of wealthy patrons.
Enter American Express (now the parent of Shearson Lehman Brothers), Prudential (as in Prudential-Bache Securities), Sears, Roebuck (which Dean Witter Reynolds is now beholden to), and Equitable Life (father firm of Donaldson, Lufkin & Jenrette Securities).
And enter a new breed -- the discount broker. No frills, no research, no browbeating sales pitch. Just a simple trade at a low price. These scrappy competitors now number 150 and have captured about 20 percent of all individual trades. Moreover, they have managed to skim off the cream of the retail business, the sophisticated, monied individual trader.
Also, as full-service brokerages slashed commission rates (and continue to do so) for trades of 10,000 shares or more, institutions became avid investors and now dominate the market.
Most investors now enjoy lower transaction costs, as well as greater diversity of products and services. But competition among brokerages has put the squeeze on profit margins. And the temptation to cut corners has arisen.
Apparently, that's what happened at E. F. Hutton & Co. Last week Hutton officials talked, and the Justice Department listened, as the firm pleaded guilty to 2,000 counts of fraud and agreed to pay $10 million in fines and restitution. In an elaborate check-float scheme that lasted from mid-1980 to early 1982, the brokerage managed to use bank funds without paying any interest.
A grim day for Hutton's reputation (and earnings). But then, last week was rather grim for the stock market in general. May Day was preceded by three days of selling and was ``celebrated'' with a 16-point drop in the Dow Jones industrial average. The Dow closed the week at 1,247.24, posting a loss of 27.94 points.
If one adheres to the adage that brokerage houses make money even when the market is falling, or if you're rather contrary, and think Hutton's faux pas might cast a pall over the 20-or-so publicly traded brokerage stocks, might this be a buying opportunity?
Only if you're a long-term investor, answers Perrin H. Long, the person who tracks brokerage stocks at Lipper Analytical Services, New York.
``These stocks are proxies for the market,'' Mr. Long explains. ``They have high betas [high volatility relative to the market]. My own opinion is that the equity market will not do much over the next three to four months. So there's not much attraction near term. If the market goes down, these stocks go with it.''
On the other hand, if the market continues to slide, ``you may want to accumulate if you have a two- to three-year horizon,'' he says.
Any potential candidates for a merger or takeover play?
``Over the long term, say three or four years, perhaps E. F. Hutton or Paine, Webber,'' Long speculates. What about Quick & Reilly, the only publicly traded discount broker? Not likely. Says Long: ``Based on my discussions with management, they have no intention of selling to another company.''
The only reason you would buy brokerage stocks short term, says Long, is ``if you expect a Dow of 1,400 by July. Sure, [brokerage firms] make money in down markets, but they make considerably less money.'' A steady upside volume of 110 to 150 million shares a day would do wonders for their earnings, he adds.
Such trading days may not be as far away as Long thinks, according to Richard Yashewski, a technical analyst at Butcher & Singer, Philadelphia. The bearish signals he's seeing in the charts now bode well for a ``strong upside bias through the summer -- probably into the 1,350-to-1,360 area.''
Mr. Yashewski points to his short-term sentiment indicators -- fat premiums on stock index futures, a high ratio of call to put options -- as being too bullish in past weeks for for a good rally to occur. Now, the mood among investors is becoming less sanguine, he says.
Near term, he predicts the market will ``weaken another 20 to 30 points, creating more disbelief. The more oversold and extreme sentiment, the more grief and apprehension that develops, the more potential the next rally has.''
Meanwhile, his signposts on long-term sentiment (public vs. member trades, insider and short sales) are still indicating that the market has not reached its top. And although the Dow broke down through the 1,247 technical support level last week, the broader market averages are not nearly so weak. Chart: Interest rates. *Yields; Source: Bank of Boston.
Percent Prime rate 10.50 Discount rate 8.00 Federal funds 8.13 3-Mo. Treasury bills 7.70 6-Mo. Treasury bills 7.90 7-Yr. Treasury notes 11.10* 30-Yr. Treasury bonds 11.30*