Posted on 10/25/2007 7:42:43 AM PDT by TigerLikesRooster
Margin Debt -- and Risk -- Is Growing By JACK WILLOUGHBY
EVEN AFTER A RECENT DROP, margin debt remains within spitting distance of the all-time high it hit in July, and 43% higher than it was a year ago. It's become a source of concern to some investors who worry that it makes the stock market more vulnerable to a nasty tumble, particularly if equities' resurgence continues.
"High margin debts show the effect of over-leveraging and mispricing of risk in our financial system," says Scott Schermerhorn, chief investment officer for Choate Advisors, which runs about $2.7 billion. "It indicates that, despite the August runoff, there's still more problems out there. This will take a long time to work through the system."
Margin debt is essentially the loans that banks and brokerages make to investors, using their stock and bond holdings as collateral. Brokers will lend up to 50% of the market value of a security. By borrowing, an investor is able to ramp up his bet on a favorite stock or bond; however, it also raises his risks. If the value of the stock drops, the broker can ask the investor to put up more collateral or cash to back the loan or call the loan.
Economist Henry Kaufman says that the Fed should use its power to limit margin lending more often, "as a symbolic gesture" that speculation is out of hand. Based on historical levels, margin debt makes the market look risky and subject to a sharp downtick right now. It comes to 2.4% of total adjusted-market capitalization -- 3.4 times its 62-year norm of 0.74%. "These are certainly not the kind of numbers you see at the beginning of a bull market," says Ed Clissold, an analyst for Ned Davis Research in Venice, Fla.
(Excerpt) Read more at online.barrons.com ...
Ping!
Key to success in the market ... don’t go out on margin
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Holy Smokes!
I had no idea margin debt had grown so far so fast!
I suspect we have created within our economy a sizeable pool of speculation monsters — they bounce back and forth between equity markets (stocks, real estate) betting with borrowed money.
They are addicted to speculation like a drug addict is addicted to crack cocaine. Or maybe “like a gambler is addicted to games of chance” is a more appropriate metaphor!
Not a good thing IMO...
bttt
Looks to me like we can go higher on margin debt in the near term, at least 0.6 higher. BTW I am very fond of margin - its a good thing.
You want to gamble go to the casinos
But today? No problemo.
In the roaring 20’s you could speculate on stocks with less than 10% down. There were indeed a lot of margin speculators and when the market slid and kept sliding people were quickly in no positive equity positions with their shares. Today the best margin you can get for position trades (more than one-day) is around 50%. Comparisons of the 20’s to today on margin are greatly exaggerated. Further, the market tops reached in 1929 were substantial, creating an extremely over valued market (i.e., Dotcom craze for example). Finally, what people don’t understand about margin is that it is required to short the market. Without margin there is no way you could short a stock. The shorts in every market prevent over valued market speculation. So if you see margin at highs, it does not mean that everyone is long the market, it could mean everyone is short the market. Finally, with margin rates high it could indeed mean that the traders/investors et.al. are uncertain about the market and have used margin to insure their positions. The later explanation is probably more likely given recent market moves (up - down - up - down). Looking at margin alone cannot answer these questions. If you want to focus the picture take a look at long versus short interest - that might tell a better story. Personnally, I think this market is in sector rotation and is headed for 14,500 on the DOW within the next 3 months. Once again - margin is a good thing, if it weren’t it would not be available.
Maybe we can sell the margin debt to China.
The stock market and commodities market have been moving considerably, which means a good guess would pay fairly well and a bad guess would cost. Gains and losses would have been evening out somewhat, but with the markets moving so much the chance that a large move is just around the corner the margin accounts are a gamble and not for investors.
You can’t buy options without margin. My guess is that short selling and puts are pretty high which is a bullish sign.
Now if on the other hand this money is mostly long (betting stocks go up) then it would be very worrisome. Kind of like 1999 and earlly 2000.
As always, thanks for the education. One reason FR is a good read.
You can’t buy options without margin.
You can buy them with just a cash account? I did not know that. Has this been a change in the last 6 years or so?
Ah the imprecision of the English Language!
I’ve purchased many an option without using margin, but I’ve always had a *margin acount*. (which I’ve never intentionally used to borrow with).
You don’t need to borrow money to buy options, but your meaning may be correct - you may need to purchase them from a *margin acount*.
English can really be quite imprecise at times.
And I was a bit impercise in my initial comment myself.
“investor is able to ramp up his bet”
Bet? Wow, bookies....
B.S.! Check out "Portfolio Margining" ... avg. Hedge Fund is leveraged 9x ... some, 40x. Crazy!
Reg. T only applies to the dupes w/Retail Brokerage Accounts. sshhhhhhh, don't let the sheeple know.
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