Posts filed under “Credit”

Margin Debt Grows; Risk Grows Too

Over the years, we have repeatedly commented on Margin Debt

Its has been our well considered position that that Margin Debt is a normal part of Bull market expansion. Indeed, in the early and middle parts of any bull cycle, margin contributes to rising stock prices. As we have previously written:

"During healthy bull markets, increases in margin debt is not a bad
thing: It provides fuel for further market gains. Its only when debt
reaches excessive speculative levels that it is potentially problematic.

Our prior looks at Margin Debt saw the debt rise, but not to levels that reflected excessive levels (see NYSE Member Firms’ Client Margin and NASD Firm Margin Levels Spikes to Record Levels as examples). We also noted that NASD margin is relatively small when compared to NYSE margin.

When margin worries first started popping up in the press, we observed the total margin was relatively low, both in real terms and
relative to total market capitalization.

As we noted at the time, "We do not read this uptick in margin as a warning sign for the broader market."

More recently, however, the margin situation is getting more worrisome. This time, the borrowed money situation is more serious. Its not just the total amount of margin, but rather, its percentage as a share of total market cap: Margin lending, as a percentage of stock-market capitalization, is nearing levels last seen in the midst of the Internet bubble:
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Margi_20071019205652

Barron’s adds:

"The Federal Reserve is empowered to set the maximum loan-to-value rate (last changed in 1974 to 50% from 65%) for stock loans, an overlooked policy tool. Kaufman suggests that the Fed use its power more often "as a symbolic gesture" that speculation is overdone. If stocks rise much further, he thinks such a gesture would be warranted.

September’s margin numbers should be out shortly. Steve Levine, a former NYSE margin regulator who now consults, expects a $30 billion drop. "Brokers," he notes, have been "reducing leverage through additional margin calls." But rest assured: Your broker’s not necessarily your friend when it comes to debt…

This will be worth watching in the coming months — especially if this past week’s sell off accelrates, and we begin to see margin calls. THATS where things really get ugly . . . 

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Source:
Margin Debt — and Risk — Is Growing
JACK WILLOUGHBY   
Barron’s, OCTOBER 22, 2007   
http://online.barrons.com/article/SB119284249217965682.html

Category: Credit, Data Analysis, Investing, Markets, Trading

Open Thread: Resilient Markets, Accomodative Fed?

Category: Credit, Economy, Federal Reserve, Inflation, Markets, Psychology, Trading

Thin Trading: Fed Fund Futures and Antique Watches

Yesterday, Traders embraced the release of the FOMC minutes. Indices were flat up until just before the 2:00pm release, and then took off, with the Dow gaining near 1%.

The thinking behind the Fed action was clearly revealed in that release. The emphasis was on the subsequent impact of credit on the entire system. The WSJ reported:

"Federal Reserve officials worried that credit-market
turmoil could reinforce slower growth at a time of "particularly high
uncertainty," leading to their half-point interest-rate cut last month,
minutes from the meeting show.

Without a cut, there was concern that "tightening
credit conditions and an intensifying housing correction would lead to
significant broader weakness in output and employment," the
rate-setting Federal Open Market Committee said. The minutes, released
yesterday, also showed members worried that market turmoil "might
persist for some time or possibly worsen."

They offered no clues about
the direction or timing of the Fed’s next move."

That last sentence is quite intriguing. Understanding whether or not a rate cut is forthcoming impacts yields, stocks prices, etc.

Given the significance of the Fed’s action, one would suppose that the markets which trade the Fed Futures would be, if not prescient, than at least telling about their future price action. One of the more fascinating aspects about this, however, has been the way the Fed Fund Futures have functioned over this time. They have been wildly wrong, forecasting an imminent rate cut since January 2006. I thought it might be instructive to look at why this maybe so, and what it might mean . . .

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Category: Credit, Derivatives, Economy, Federal Reserve, Inflation, Markets

A Robust Segment of the Housing Market

Category: Consumer Spending, Credit, Economy, Real Estate

Saturday Afternoon Chart-Porn

Category: Credit, Data Analysis

NAR on “Temporary” Housing Problems

Category: Credit, Data Analysis, Markets, Real Estate

Fear of a Dollar Collapse, part II

Yesterday, we discussed the potential impact of the ongoing weakening of the US dollar.

Today, we look at a few printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.

This is simply a measure of how much cash the Fed is injecting into the system.

The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:

Mzm_m2_spread

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Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.

This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.

As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?"  I am not sure what is was (and we’ve discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless. 

The manifestations of this free  printing press are many: Any commodity priced in plentiful dollars will cost more. Crude is now $82; and Inflation Fears Send Gold to 27-Year High.

Why? One way to think about it is supply and demand. Print ALOT more dollars and each one is worth a little less. 

Or, consider it this way: Extracting Oil or Gold from the earth ain’t easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car — all for less per gallon than diet Coke or peach Snapple!

For gold, the process is not all that dissimilar.

Just crank up the printing press: Its cheap and easy. But why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value — or instead, we will insist on more of your crappy ittle pieces of green paper.

Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices:  Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.

Its easy to understand why inflation has been called The Cruelest Tax.

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BTW, for those of you without a pricey Bloomberg terminal on their desks, a good source for (free) data of this kind is the Federal Reserve Bank of St. Louis’ publication, Monetary Trends. There are always a solid collection of charts showing money supply, economic conditions, etc. Not to get too wonky on you, but this is simply pornography for econ geeks.

There are a few charts after the jump worth reviewing. For the less visual of you, they show that Money Supply continues to grow at a rapid pace, that bank borrowings are increasing.

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Sources:
Monetary Trends
Federal Reserve Bank of St. Louis’
October 2007
http://research.stlouisfed.org/publications/mt/20071001/mtpub.pdf

Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
MATT CHAMBERS
WSJ, September 20, 2007; Page C1
http://online.wsj.com/article/SB119019169756632291.html

Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
ALLEN SYKORA
WSJ, September 21, 2007; Page C6
http://online.wsj.com/article/SB119028926640733763.html

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Category: Commodities, Credit, Currency, Energy, Federal Reserve, Inflation

After the Mortgage Boom

Category: Credit, Real Estate

I Love the Smell of Repos in the Morning . . .

Category: Credit, Economy, Federal Reserve, Psychology, Real Estate

Open Thread: Markets, Inflation, Growth, Recession

Category: Credit, Economy, Federal Reserve, Fixed Income/Interest Rates, Inflation, Markets, Psychology, Trading