Margin Debt Up 22%

Thursday, January 18, 2007 | 06:08 AM

I've been meaning to get to this for some time: Rising Margin Debt.

As markets have risen, the effect on investors has been to borrow money to buy more shares. 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 a rise, but not to levels that reflected excessive levels (see NYSE Member Firms’ Client Margin and NASD Firm Margin Levels Spikes to Record Levels).

Because it is so much larger than NASD issued margin, NYSE member clients borrowing matters more. While rising, NYSE Margin has not yet hit the levels that raise red flags. However, it is getting increasingly close:

"Such debt is accumulated by investors who trade "on margin" with funds borrowed from their brokers. As tracked by the New York Stock Exchange, margin debt rose to $270.52 billion in November from $221.66 billion at the end of 2005, the first time in more than six years that margin debt has topped $270 billion. December numbers will be available later this month.

That 22% increase left margin debt not far from the record of $278.53 billion, reached in March 2000 as the Nasdaq Composite Index was setting a record high. Last year's rise in margin debt occurred against a bullish backdrop for stocks, with widely followed market indexes notching double-digit percentage gains.

Market analysts track margin-debt activity as an indication of investors' appetite for speculative trading.

A potential pitfall for those trading on margin is a sharp decline in stock prices, which can expose investors to margin calls, requiring them to post additional collateral or see their brokers sell their securities. Some market watchers consider high levels of margin debt worrisome because a wave of margin calls triggered by a sharp market decline could exacerbate the selling pressure on stocks."

We will revisit this in the coming months as margin debt levels approach prior record highs . . .


Hungry Investors Boost Margin Debt
January 2, 2007; Page R15

Thursday, January 18, 2007 | 06:08 AM | Permalink | Comments (15) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Margin Debt Grows; Risk Grows Too from The Big Picture
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 risin... [Read More]

Tracked on Oct 20, 2007 9:26:19 AM


Since the margin debt high in March 2000, there has been a tremendous increase in the use of electronic futures by hedge funds and the average investor.

I am not sure of the aggregated levels of margin out there in the futures markets, but on average the forward e-mini S&P 500 contract trades around $800 Billion worth of dollar volume per day, whereas in March of 2000 it was only $50B/day.

The 'normal' margin for this contract is around 10%. Thus, 90% of this $800B that is flinging around each day is borrowed.

With the flourishing of the electronic futures contract, may other commodities, such as Oil are now an easy vehicle to trade by the average retail investor/trader.

Thus, Barry, as you like to look under the hood of the economic is another area where the published numbers do not give either accurate enough, or sufficient data, to understand the whole story.


Posted by: carl | Jan 18, 2007 7:51:22 AM

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