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Small Investors With S&L; Stocks Walk a Tightrope

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A stock that drops to $2 from $20 in 10 months is one of two things: a bankrupt or a super bargain. There’s no in-between.

Institutional investors look at the Southland bank and S&L; stocks that have been ravaged to that extent, and they see bankrupts. But many small investors have taken a shine to the stocks and have been avidly buying them in the slide.

James Alexander of brokerage J. Alexander Securities in Los Angeles says he hasn’t advised buying a single S&L; stock for at least six months. “But I’ve had unsolicited orders from individuals for CalFed and other S&Ls;,” he says. The buyers’ bullish point of view, he says, is “how much risk can there be now?” given the stocks’ plunge.

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At CalFed, parent of California Federal Bank, spokesman James Hurley says the stock certificate transfer updates that the firm has received recently indicate a surge in small buyers accumulating shares. From Oct. 1 to Oct. 23, for example, the firm counted 410 purchases by individuals, for a total of 338,825 shares. By comparison, in the same period last March, there were only 89 individual purchases of CalFed stock, for a total of 36,300 shares.

Those transactions don’t even count the people buying in “street name,” meaning purchases under a brokerage’s name, a common method.

Many of the S&Ls; have long been heavily owned by individuals anyway, because the shares were offered first to depositors when the companies went public. Stock of Glenfed, parent of Glendale Federal Bank, is more than 50% owned by individuals, the firm says.

A lot of those individuals certainly have held their Glenfed shares all year, as the stock has slumped to $5.50 now from $16.25 in January. No doubt, some of those small investors have added to their holdings, believing that the market has been overly pessimistic about Glenfed’s loan problems and about its ability to survive long term.

The danger here is that too many individuals are buying S&L; stocks partly for emotional reasons--because you have your money at the S&L;, and they treat you right; or because the S&L; has had your home mortgage since 1968.

“People see the stock price declines for these (institutions) on Wilshire Boulevard or Sixth Street . . . and they think they must be strong enough” to survive, Alexander says. Investors’ willingness to buy a stock may even directly relate to the size of the institution’s headquarters building, some brokers say: It looks rock solid, so it must be.

Those are nice reasons, but buyers had better understand that the worsening real estate slump means that many more bank and S&L; loans are likely to go bad soon. S&Ls; already short on capital could easily fall into insolvency as losses mount. The plunge in the stocks isn’t an accident. The market sees big trouble ahead.

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Some brokers say that message finally hit home when CalFed, Glenfed and Coast Savings cut the dividends on their stocks in recent weeks. The S&Ls; acknowledged that they must conserve capital for the storm ahead. One veteran broker in Los Angeles said the dividend cuts seemed to change many small investors’ minds about the stocks. “I’ve seen a dramatic slowdown in accumulation of the banks and S&Ls; by individuals just in the last few weeks,” the broker said.

Still, any buyer today can argue this way: If I plunk down $500 for 200 shares at $2.50 each and the S&L; goes belly-up, I’ve lost a small investment. On the other hand, if the stock goes back to $5 sometime in 1991, I’ll double my money.

That’s a logical way to look at the situation. Just make sure you’re truly prepared to see that $2.50 become zero, because it just might.

Mutual Fund Purchases Plunge: Total purchases of stock and bond mutual fund shares fell to $9.99 billion in September, a 26% drop from $13.44 billion in August and the worst monthly decline since May, 1987, the Investment Company Institute reported Tuesday.

Part of that drop reflects a normal investing slowdown in September, as quarterly taxes, tuition and other bills get paid. But fund officials say there was no doubt that investors retreated to size up the stock and bond markets’ continuing slide.

That caution has continued in October as well, many funds say. Michael Hines, marketing vice president at Boston-based Fidelity Investments, says the firm’s stock funds saw mild net outflows in October, while bond funds saw mild net inflows.

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At the same time that new fund purchases are down, so are redemptions. So investors don’t seem to be in a hurry to cash out of the funds, even as the bear market drags on. Total fund industry redemptions fell 23% in September from August, to $7.07 billion.

What’s more, Hines says, Fidelity’s October survey of fund investors shows that only 2% intend to sell some shares over the next three months. In the August survey, 25% of investors said they intended to sell some.

At the Vanguard Group of funds, based in Valley Forge, Pa., spokesman Brian Mattes said stock and bond fund purchases rebounded in October. And the most striking rise was in net cash inflows into tax-exempt municipal bond funds--a sevenfold increase from September, he said. Apparently, more investors looked at the horrendous federal budget process in Washington, realized that income tax rates were going up and figured that the tax-exempt muni yields would soon become an even better tax shelter.

HOW LOW CAN THEY GO? How Southland bank and S&L; stocks have collapsed since the end of 1989:

Closing price: Pct. Stock Dec. 31 Tues. decline CalFed $20 3/8 $2 1/2 -88% UnionFed Financial 17 7/8 2 1/2 -86% HomeFed 31 7/8 4 3/4 -85% Coast Savings 11 3/4 2 3/8 -80% Glenfed 16 1/4 5 1/2 -66% Security Pacific 40 5/8 18 1/4 -55% City National 23 3/4 11 1/2 -52% Citadel Holding 43 3/4 21 7/8 -50% Great Western 17 1/2 8 3/4 -50% Imperial Bancorp 20 10 -50% Downey Savings 17 3/4 10 5/8 -40% Ahmanson 19 11 1/4 -41%

All stocks traded on NYSE except Citadel (American Stock Exchange) and Imperial (over-the-counter).

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