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Margin Loans Make a Comeback

Thursday, April 20, 2006 | 11:30 AM

in Investing | Markets | Psychology/Sentiment

Our parade of anecdotal evidence continues. Next up a WSJ article on Margin Loans.

"As borrowing costs increasingly pinch consumers, Wall Street is pushing loans backed by individual investors' brokerage portfolios to fund purchases ranging from vacation homes to new cars.

Such borrowings, often known as margin loans, were used extensively in the dot-com era by investors seeking to bulk up their portfolios with additional securities, but they fell from favor after the market crash. Now, as the stock market climbs back, margin loans are gaining renewed popularity. But brokerage firms say investors are increasingly using securities-based loans as a quicker and cheaper way to pay for a variety of purchases, not just more stocks and bonds."

There is a silver lining:

"Investors don't seem to be borrowing against their securities portfolios as much as they did during the dot-com boom. At Schwab, margin balances today represent 0.81% of total client assets, well below the 2% of client assets the firm saw in 2000. Analysts say the use of margin loans has been rising in line with the broader market's gains, indicating there is little speculative froth to the increased borrowing. In total, margin debt at New York Stock Exchange member companies, as tracked by the exchange, was $222.78 billion in February, the most recent month for which figures are available, up from $173.22 billion at the end of 2003. That compares with a peak of $278.53 billion of margin debt outstanding in March 2000."

This implies we are not quite at the top yet . . .

Source:
Margin Loans Make a Comeback
JANE J. KIM
WSJ, April 20, 2006; Page D1
http://online.wsj.com/article/SB114549908576930767.html