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Margin Levels Hit New Record

Here's a data point to make you stop and think: As of today, more people have borrowed money from their their brokers to buy stocks than ever before.

That number was reached this past month, with Margin debt hitting an all-time high, passing even the days of the tech/telecom/internet boom.

According to the NYSE, margin totaled $285.61 billion in January, up from $275.38 billion in December and passing the previous peak of $278.53 billion.

Although the previous all time high was set in March 2000 -- just as the Nasdaq Comp Index hit its apex — there were prior highs to the penultimate one. This doesn't mean the top is in or even imminent, but it is a factor well worth watching over the coming weeks.

I haven't figured out yet how to adjust the present high relative to the March 2000 peak for inflation; At the very least, it implies more room for margin debt to increase in order to reach comparable levels to the 2000 margin highs. Add to that the lower costs of borrowing versus 2000 (i.e., lower interets rates) and while this is a worrisome stat, it is not necessarily the bell that gets rung at the top. 

In fact, Marketbeat points out that there has seen a "veritable who’s who of “bad news” indicators come and, for the time being, go" -- all without any major market disclocation:

• The VIX, commonly known as the “fear index,” is hovering around 10, a low point, suggesting a lot of carefree folks out there these days. This level is often a turning point, a calm before the storm, so to speak.

• The Treasury yield curve inverted months ago, suggesting a recession was on the way. It hasn’t happened.

• The Dow industrials, transports and utilities all closed at new highs on the same day last week — something that became a routine occurrence in just two years, 1929 and 1986, both preludes to big market falloffs.

• The current rally is now the third longest since 1900 without a 10% correction.

Fascinating stuff.  None of this stuff matters, until it does. Than it matters a whole lot.

>

Sources:
NYSE

Buying (and Buying) on Margin
David Gaffen
WSJ, February 20, 2007, 3:27 pm
http://blogs.wsj.com/marketbeat/2007/02/20/buying-and-buying-on-margin/

Thursday, February 22, 2007 | 11:32 AM | Permalink | Comments (37) | TrackBack (1)
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Comments

Yes, that's true.

But as Helene Meisler notes,

"margin debt may be at an extreme, but it seems like people are borrowing on margin to buy puts. I have never seen such a consistently high put/call ratio when the market is at its highs -- and certainly not on a day when the market has come back from its lows."

They hate these cans! ("The Jerk")

Posted by: Fred | Feb 22, 2007 11:52:24 AM

..or borrowing on margin to sell short. Margin is just debt, which tells us about a single kind og market leverage. It does not of itself give us any directional information. Also, as an absolute I am underwhelmed by this "record". Chart NYSE margin as percentage of total NYSE capitalization.

Posted by: wcw | Feb 22, 2007 11:57:55 AM

...or better yet, look at the trend in volume in QID (Ultra short QQQ)...it's in a stready incline. Bears are "certain" they are "right".

Posted by: Fred | Feb 22, 2007 12:22:44 PM

I've been hearing both sides ever since this report came out. I would like to see some real statistics on this.

I'm sure there are those who use margin to buy puts but you can't margin puts themselves so this still points to a large margin debt of equities (long or short? who knows?)

The real debt culprit I suspect will be the housing slowdown. The enormous amount of cash tied up in real estate was being liberated (and traded for debt) during the housing boom of the last few years. Any slowdown in real estate will reverberate throughout the economy and unless the Fed loosens things up, there won't be as much cash to buy buy buy...

Posted by: Marc | Feb 22, 2007 12:26:57 PM

I think that the stock market is becoming increasingly dirven by increased margin buying. This means that the rate of increase in margin debt is more signficant than the level though the patterns of both are cause for concern. The rate of increase looks similar to that last seen in 2000. Combined with indication of strong levels of insider selling and weakening institutional demand for stocks (see postings by Marty Chenard on www.bondheads.com) this suggests that the basis of the current increase in the stock market is becoming less sound and more subject to a sharp reversal.

Posted by: Alex Grey | Feb 22, 2007 12:30:17 PM

...and isn't the margin requirement going to change in April, so more can be borrowed?

Posted by: Strasser | Feb 22, 2007 12:30:59 PM

Re: the QIDs

This is such a fad right now. The volume on these guys has been on the increase since they started. I don't think you can infer anything from that.

Posted by: Marc | Feb 22, 2007 12:31:19 PM

as mentioned above, is there any way to separate out margin required for short positions? Can you use the short interest levels to arrive at an approximation?

Posted by: Jay L | Feb 22, 2007 12:42:39 PM

What is left out of the NYSE margin debt cited is the CASH balances in these same accounts.

March 2000: MD, $278B; CASH, $56B; Net Debt, $222B.

Nov 2006 : MD, $285B; CASH, $156B; Net Debt, $129B.

So, looking at Net Debt, the current level is only 58% of what was in March 2000. Damn statistics!!!!

Posted by: Norman | Feb 22, 2007 12:46:18 PM

YAY!!!! Other readers believe that some people use margin debt to short the market as well!!!

I believe because I'm doing it and have to believe that a lot of the so-called "smart" money is too.

Posted by: CDizzle | Feb 22, 2007 1:17:54 PM

I think Norman has a solid point there.While comparing margin debt we shouldn't forget the asset side.And that means at least we are not in the same level of leverage as we were in 2000.I kind of feel that with proliferation of many financial blogs run by smart and well-informed people like Barry retail investors are much more savvy these days about health of economy and asset markets.No wonder put call ratio jumps up like it has these days.So either market has to really go to insane levels to change people's minds or may be that's the way it gonna be going forward.

Posted by: jagmohan swain | Feb 22, 2007 1:21:32 PM

Are these levels high from day traders getting 10:1 or is more from retail investors getting 2:1, 4:1 etc from thier retail account

Posted by: costa | Feb 22, 2007 1:45:06 PM

"The Treasury yield curve inverted months ago, suggesting a recession was on the way. It hasn’t happened"..........yet.

Posted by: Mike M | Feb 22, 2007 1:45:48 PM

This environment doesn't seem anything like 2000 to me.

I don't know a single person who is on margin in the market today. In 2000, almost everyone I knew was regularly tapping into their margin.

Posted by: Michael C. | Feb 22, 2007 2:00:12 PM

Illusion of stock market wealth are distorting the saving and investing behaviour, greed is rampant in China where queues of speculators are reminiscent of the tulip crash.

Posted by: tandem82 | Feb 22, 2007 2:02:00 PM

You can try to spin things however you want, but:

1) Inverted yield curve.
2) High margin utilization.
3) Low VIX.
4) Weak housing market.
5) Peak in credit cycle (subprime meltdown).
6) Weak manufacturing sector.

Are too many flashing red lights to ignore. I may well be wrong, but earning 5% in cash looks pretty good to me right now.

Posted by: Turbo | Feb 22, 2007 2:12:17 PM

The pattern on the sampled markets is simple less purchase of shares and more derivatives 4/5 times higher on the long side since 2001
As for the CAC SMI same comment as hereunder from Bank of New York for the US market:
"This combination of a lack of buying volume and declining momentum, coming at a time when many of these indices are close to significant highs, is a worrying one as this pattern is often seen as a signal that a market is seriously overextended."

Posted by: Philippe | Feb 22, 2007 2:13:57 PM

Classic risk-reward decision here: how much are you willing to risk (a market correction or recession? Major or minor?) vs. how much reward is left in this current bull run? One should NEVER try to time the market ;), but I don't see much upside left to justify risking the downside. Spring and summer vacation seasons are right around the corner, along with $65-70+ oil per barrel and $3/gallon gas. Economies hate expensive energy (current upswing notwithstanding), and it's about to get nasty again.

Posted by: worth | Feb 22, 2007 2:25:57 PM

We don't know who racked up the margin debt. It could have been pattern day traders, who rack up huge margin usage but never commit to a directional play on the overall markets, retail customers who should be faded, or large institutional customers who shouldn't be faded. Without that data, you can't really use margin debt as a sentiment indicator for smart or dumb money.

Part of the margin debt is from short-selling, but we don't know what proportion of the debt is from selling or buying. Without the ability to construct a bull/bear margin debt analysis, the amount of margin debt is not useful as a sentiment indicator.

Interest rates are a lot lower now then they were in 2000, and any rigorous analysis of margin debt should take that into account. Any significant lowering of margin interest would be likely to stimulate traders to take on increased debt, so a couple of hundred basis points worth of lower rates might need to be “adjusted out” of the new peak number.

The dollar value of stocks traded is 40% higher today than in 2000. At the stock market peak, about 30 billion S&P 500 shares a month traded hands. Today, we are averaging about 45 billions S&P 500 shares a month. Even after accounting for (slightly) lower share prices, it would seem that an adjustment for margin debt per dollar value traded is in order.

Just the dollar value and margin interest adjustments would put us about 40% below peak levels on a back-of-the envelope calculation. Even then, without directional and constituent information it is a useless indicator.

Posted by: Bill a.k.a. NO DooDahs! | Feb 22, 2007 3:15:14 PM

New liquidity for markets and economy: according to Tony Crescenzi, "The total amount of commercial paper outstanding has increased at about a 15% pace in February, after a flat January, indicating continued buoyancy in terms of financial liquidity and for growth prospects for the coming weeks"...

Posted by: Strasser | Feb 22, 2007 3:16:10 PM

Strasser - at the risk of picking nits for a pretty noisy series, it looks to me like a lot of the recent CP growth is in financials. That could suggest more about slower growth in low-cost bank deposits, for example, than about non-financial companies financing inventory etc.

Posted by: Estragon | Feb 22, 2007 3:54:29 PM

Barry, are you sure we didn't correct 10% in the S&P and Naz during the May 10th - July meltdown last summer?

I am almost certain we did. The Dow is 30 stocks, big deal.

Posted by: Jdamon | Feb 22, 2007 4:45:40 PM

The SPX touched 1219.29 on June 14 2006 as a low, and was 1326.70 as a high on May 8 2006, which is a decline of –8.1%.

The SPX had its lowest CLOSE on June 13 2006 at 1223.69, and its highest close on May 5 2006 at 1325.76, a decline of –7.7%.

Without noting exact dates and values, the Nasdaq Composite (not the 100 but the composite) went –14.4% from high to low and –13.8% from close to close.

I know you said you didn't care about the Dow, but it was –9.0% and –8.0%.

So technically Barry is correct, it wasn't a TEN PERCENT CORRECTION. What readers should ask themselves is, what is so gosh-darn magic about 10%? Shouldn't we expect smaller corrections to be valid, especially considering the reduced volatility that is so often complained about on this blog?

I mean, if we really are in less volatile times, is an 8% or 9% correction "good enough?"

Posted by: Bill a.k.a. NO DooDahs! | Feb 22, 2007 5:26:16 PM

Hey DooDah Man,

If you were so confident of your bullish posturing, why do you infest every bearish board with your fabu insight?

Are you hoping to dislodge Nussbaum as the biggest jagoff on the Internets?

Posted by: angryinch | Feb 22, 2007 5:38:03 PM

"I haven't figured out yet how to adjust the present high relative to the March 2000 peak for inflation"

Using BLS Inflation Calculator, $278.53B in 2000 is equivalent to $327.40B in 2007.

http://data.bls.gov/cgi-bin/cpicalc.pl

Posted by: V L | Feb 22, 2007 6:00:23 PM

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