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:
>

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 . . . 

>

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

Quote of the Day: a dude so hip . . .

Category: Financial Press

At least . . .

Category: Markets, Politics

Earnings Drag the Dow Lower

Category: Corporate Management, Earnings, Markets, Trading

Dow Components Performance Since 1987

Category: Investing, Markets, Psychology

October 19, 1987 Intraday Chart

Category: Markets, Psychology, Trading

October 1987

Category: Derivatives, Markets, Psychology, Trading

Global Taxes as a Percentage of GDP

Category: Economy, Taxes and Policy

Real World Consequences of Core Inflation Focus

Category: Federal Reserve, Financial Press, Inflation, Taxes and Policy

Property Worsens: Beginning, Middle or End?

Category: Data Analysis, Economy, Psychology, Real Estate