Margin Loans Make a Comeback

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 . . .


Margin Loans Make a Comeback
WSJ, April 20, 2006; Page D1

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What's been said:

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  1. Aditya Kumar Singh commented on Apr 20

    hello sir,

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  2. Emmanuel commented on Apr 20

    The trigger to bring speculation over the top could come as early as next week, with economists predicting that Q1 GDP will be at (gasp!) +5.0%. What sayeth thee, Mr. Ritholtz?

  3. D. commented on Apr 20

    Why use a margin account when you can tap into your house? They’ve probably used their HELOCs to buy a few securities!

  4. GRL commented on Apr 20

    After having gone through the tech bubble and bust, I woudn’t touch margin with a ten foot pole.

  5. Kevin P commented on Apr 20

    How the hell can margin all of sudden be popular? Have you seen the rates they are charging now? I used margin *HEAVILY* in 2003 when margin was cheap. I believe total margin balances peaked in late 2003 after the bubble just because money well, was cheap.

  6. Harper Capital commented on Apr 23

    Most Margin Rates are too high, IMO. Its a safe investment for the broker – he can blow you out anytime he wants too- and yet you are paying junk bond rates w/most outfits? My fav broker -Barrons top pic- has libor + 1.5 and under. Nice. My other broker is darn near 10%. Who is stupid enough to pay that?

    Also, HELOC are crazy- high right now. You have to really need the cash to tap those. Now in 2003 I arb’ed the HELOC at 5% and bought junk funds with a 12% yield. Nice ride and closed everything out when the fed started raising rates. Also used the divs to pay down my debt when recv’d. Nice LT cap gain at the end for my trouble…..Opportunities are out there, but harder to find right now….Harper Capital

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