NYSE Margin Hits All Time Record
Now we are getting into the uh-oh region:
NYSE Member Firm Margin Levels
(See our prior discussion on what this may or may not mean here)
Bloomberg News has the details:
The amount of money borrowed from brokerages that do business on the New York Stock Exchange to buy stock rose 3.6 percent to a second straight monthly record, reaching $295.9 billion in February. Margin debt, as the borrowing is called, in January broke the prior high set at the peak of the so-called Internet bubble.
Changes in the level of margin debt have mirrored those of U.S. stock indexes. After setting an all-time high of $278.5 billion in March 2000, margin debt dropped to less than half that amount by September 2002. It reached $285.6 billion in January.
UPDATE: March 19, 2007 5:05pm
As I read the NYSE rules on this, I do not believe Shorts are included in this;
-Rule 421. Periodic Reports
http://rules.nyse.com/NYSE/Help/Map/rules-sys427.html
Its borrowed money -- not margin data -- that matters . . .
>
Sources:
NYSE Margin Debt Advances 3.6 Percent to Second Straight Record
Nick Baker
Bloomberg, 2007-03-19 14:39
Margin Levels Hit New Record http://bigpicture.typepad.com/comments/2007/02/margin_records_.html
Monday, March 19, 2007 | 03:17 PM | Permalink
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Comments
Maybe folks are buying to short the market rather than be long the market!
Posted by: Leisa | Mar 19, 2007 3:29:07 PM
How does this relate to market capitalization?
Shouldn't you normalize this in some way?
It could be like a lot of nominal values that hitting a new nominal high does not really mean it is at a dangerous level.
Posted by: spencer | Mar 19, 2007 3:35:26 PM
Not so sure they are short the market but maybe.I must confess I have a hard time being a bull. Not sure what my problem is but I dont buy the cnbc, jumbo cramer hype.
Posted by: Jarrod | Mar 19, 2007 3:38:48 PM
Spencer
No one said to look at it in a vacuum. Get out your little facts book and analyze it any way you want,
If you had 100,000 debt 10 years ago, got rid of it, and now found yourdelf with a hundred thousand debt again today, would you run around telling everyone that, relly, you are much better off this time?
Posted by: Rick Hanley | Mar 19, 2007 3:45:12 PM
Record levels of liquidity => Record levels of borrowing => Greedy behavior => Scandal => tightened credit.
Rinse....Repeat. Republicans do it every time. Nothing new or different this time. Except that the pool is money is much MUCH bigger and has lots more participants.
Posted by: KP | Mar 19, 2007 3:51:02 PM
Barry, I would suggest that you build a chart that divides the margin with the cash side and then
plot that chart in historical time frame.I don't have access to that data but If I had I would surely be interested in finding out.I am not sure if the absolute numbers by itself is all that useful.
Posted by: jagmohan swain | Mar 19, 2007 3:51:04 PM
Maybe folks are buying to short the market rather than be long the market!
Er... it's called "short selling" for a reason. My shorts don't generate margin debt unless they go underwater - which they never do.
Posted by: super-anon | Mar 19, 2007 4:18:26 PM
Margin figures include shorts, so a large margin total could indicate a large retail (dumb money?) short position. I would echo Spencer and jagmohan's points regarding some kind of normalization.
I guess there must be some kind of way of netting out the current short data, cash and margin and normalizing against total market cap.
But what about hedge fund leverage that is not captured at all in the margin data - I am sure it would only add to concerns over leverage (oh, that's right, they are the smart money - my bad!)
Posted by: Eventhorizon | Mar 19, 2007 4:25:15 PM
people use margin to short sell super-anon...that is leisa's point (i believe) and one i have advocated as well.
heck, some of us are using margin to buy puts!!!
Posted by: CDizzle | Mar 19, 2007 4:37:30 PM
people use margin to short sell super-anon...that is leisa's point (i believe) and one i have advocated as well.
Not sure how it works for the purposes of these calculations, but I've sold a number of stocks short without incurring any margin debt unless the positions are underwater. I don't know if other brokerages work differently. And this is entirely different than my leveraged long positions which immediately cause margin debit increases.
Posted by: super-anon | Mar 19, 2007 4:48:40 PM
If the value of the collateral doubles over time, the amount borrowed against it is likely to double as well. Based on the Wilshire, the market has doubled since Fall of 2002.
Posted by: William | Mar 19, 2007 5:03:32 PM
Regarding margin debt to short....There are a bunch of short and 2x short ETF's and by golly their volume has increased. With the advent of these vehicles, one could margin precariously to be short the market in an ETF. The margin requirement for QID is 30%.
It would seem to me, but I don't fully understand all of the mysteries of the market, that the ETF dynamics to the overall market character have to be a bit murky.
Posted by: Leisa | Mar 19, 2007 5:03:34 PM
Regardless as to whether it includes shorts or is normalized to market cap, to me it's another data point suggesting we're closer to a major top (ahead or behind) than we are to an important bottom. As a percent of market cap, I would guess this peak is greater than 2000. Can't imagine what level it goes to if Cody's correct about the marlket toppoing out in the 2008-2009 timeframe!
Posted by: glenn_in_MA | Mar 19, 2007 5:09:40 PM
Theoretically one could use margin to buy QID or SDS or some type of Short ETF, but I agree the argument is fatuous.
Posted by: Grodge | Mar 19, 2007 5:15:09 PM
The statement "Changes in the level of margin debt have mirrored those of U.S. stock indexes" is pretty key. If you run the chart back as far as Bloomberg has the data (01/92) you see it mirroring the indexes and hitting new highs consistantly for over 8 years. Suggestions of normalizing the data are good. Despite set backs in tough periods this chart will go to the sky over the long term. It's not mean reverting. If you look at the trajectory you may gather some usefull info, but you'd better look at a logarithmic graph, which this one is not. Looking at log graph now, looks like a pretty good chart. I don't know if I can post Bloomberg's graphs here, but you might like it as much as that inverse graph you posted about a week ago Barry! Currently in btfo mode...
Posted by: sasso | Mar 19, 2007 5:17:09 PM
With margin debt costing say, 9% - just how much more than 9% do you think you're going to earn owning stocks right now? If it's not 18% then you're engaging in risky behavior of the kind kids display in jumping out of trees time and again. Think 2000, then think Now. Time and again. I'm short, and using the funds generated to buy ultra short funds. Oops, I'm with you!
Posted by: OldVet | Mar 19, 2007 5:17:34 PM
"As a percent of market cap, I would guess this peak is greater than 2000. "
Correction: "...is less than 2000."
Posted by: glenn_in_MA | Mar 19, 2007 5:18:17 PM
Jeebus, you just had to do something to scare me today, huh?
Crap.
Posted by: donna | Mar 19, 2007 5:18:43 PM
you need to check out sentimentrader.com. it addresses this very issue. to sum it up, this stat doesn't mean crap. cash balances are also at record highs making the ratio of cash/margin its lowest in over 10yrs. sorry barry, i agree with alot things you have to say but this stat is not representative of anything in my view.
Posted by: Michael | Mar 19, 2007 5:21:35 PM
This is the 2nd time I have mentioned this -- but I am not suggesting this is a bell ringing -- only that its an Uh-oh.
See this prior mention for more flava: Margin Levels Hit New Record
Posted by: Barry Ritholtz | Mar 19, 2007 5:35:35 PM
the point you are all missing is that stocks are ripe for profit taking so buyer beware also the big money guys know this so we will have a correction and you need to stay out of the way or you can just email me 20% 0f your portfolio
Posted by: howard gold | Mar 19, 2007 6:49:02 PM
I got a HELOC and used the $$ to buy GOOG on margin. I am way more leveraged than you know.All in baby.
Posted by: Sponge Todd Square Pants | Mar 19, 2007 7:06:10 PM
I know what you're saying Barry. Hard to believe we're at the top, though, when the front page story on Yahoo is how to invest in a "bear market."
Posted by: Byno | Mar 19, 2007 8:32:20 PM
For people wanting their own perspective on the data:
NYSE Statistics Archive
Where you can find Margin Debt from January 2000 through February 2007.
An interesting note is that 'Free Credit Cash Accounts' -- where individual investors can borrow as much as 50% of the capital in their account -- begins in 2003. I assume the NYSE began offering the service at that time.
This timing coincides with a bottoming of interest rates. At this turn around point in 2003 both market performance and total margin debt climbed in steady fashion to record highs. The implication is that opening access to credit and cheap credit has played a direct big impact to the market pricing itself (as opposed to just boosting economic activity making the stocks cheap.)
If you would like to pursue the story behind the numbers in more tangible ways, I suggest reading the annual reports of major brokerages.
For instance, Goldman Sachs' Leverage Ratio (total assets divided by total equity) since their becoming public are below.
2006> 23.4x ____ 2005> 25.2x ____ 2004> 21.2x
2003> 18.7x ____ 2002> 18.7x ____ 2001> 17.1x
2000> 17.2x ____ 1999> 24.7x ____ 1998> 34.5x (all #s @ Nov.)
Of course those numbers only reflect a small amount on a segment of a brokerage's huge business. But GS is big and increase from 18.7x to 25.2x during a bull market (at the same time more money is coming in) then the dollar amount leverage is awesome.
In the end I want to point out that while the margin debt is high -- and worrisome because it makes stock pricing sensitive to minimum expectations of strong growth for a block of stocks large enough to overwhelm the markets (technically and mentally) -- that there is a new significant player that wasn't present during the 2000 bubble.
To speculate, I would suggest a combination of larger derivatives markets, accessibility to consumer investors via online discount brokerages, and of course the growth of private equity groups and hedge funds.
Furthermore, older players were probably shifted into riskier investments by the depression of the bond markets caused international capital arbitrage (Yen carry trade, China maintaining its currency at unsustainable low levels, petrodollars, growth by technology transplants into India and Brazil.)
Posted by: J Hudson | Mar 19, 2007 8:50:42 PM
howard gold said the point you are all missing is that stocks are ripe for profit taking so buyer beware also the big money guys know this so we will have a correction and you need to stay out of the way or you can just email me 20% 0f your portfolio
The latest Commitment of Traders data shows commercial traders are the least hedged in several years. They reduced their short position significantly.
So where are you getting your "big money" information?
Posted by: Michael C. | Mar 19, 2007 10:52:31 PM
