We mentioned earlier the recent rise in Margin. Have a look at the following chart:
NYSE Member Firm Margin Levels
Sources: Bloomberg, RR&A
The raw numbers are not what actually matter — and adjusting for inflation isn’t significant.
The reason Margin matters is that it is potentially revealing of extreme sentiment and/or speculation (margin clerks can do major damage in a downturn).
There are a few ratios I would like to identify and convert to oscialltors relative to Margin:
Total Margin / Total Market Cap
NYSE Margin / Account Assets
Margin / Trading Volume
Total Margin / Market Volatility
The idea would be to test these versus historical tops and bottoms . . .
I agree with your suggestion to look at changes. From a casual observation it looks like the pattern of margin debt growth and decline is simmilar to the 1999 late-cycle bull market. Notice the drop in margin debt during the market decline March – June 2006. This suggests that the market decline was potentially driven by a winding-up of margin debt. This decline appears to have been larger than other declines in margin debt since the current bull market began in 2002. Moreover, this drop in margin debt appears to have approached the drop that occurred in the wake of the 1998 Asian crisis. Interestingly also, the increase in margin debt since July 2006 has been probably the most rapid of this bull market and looks similar in rate of increase (almost vertiginous) to the increase in late 1999. So the character of the two markets looks similar on first inspection. My guess is that having entered a late cycle explosive growth period, margin debt will continue to rise rapidly to a peak, which given the current rate of increase would not be far off. I would add that give that P/E ratios are still substantially lower than they were in 1999 there is scope for quite a large increase in margin debt. The extent to which stock market averages rise depends strongly on insider selling. To the extent that insiders have been selling heavily into this rally, the gains in the indexes have been more muted. Put another way the rapid growth in margin debt is another sign of the disconnect between corporate insiders and the general stock buying public. The key turning point will be when this reaches an exteme which might be seen in flat index averages combined with rapid margin debt growth – which may not be far off.
Jason Goepfert at Sentimentrader.com is your man for this type of analysis.
“The reason Margin matters is that it is potentially revealing of extreme sentiment and/or speculation (margin clerks can do major damage in a downturn).”
Yes, but that only looks at half the story. Margin clerks did some “major damage” to Amaranth, as well. Misplaced leveraged speculation on the short side can be just as “damaging”. I beleive we have record leverage on the short side, which balances out the “long” leverage levels….to a degree. Again, I’d say the prevailing efferct will be more volatility.
My take is that there is so much cash + margin in this market that we may be at the top of the range for the next 3-5 years.
It would take extremely unusual circumstances for the market to make any more substantial gains considering how much money is already in the markets.
However, two things come to mind. That the top could take weeks/months to play out since we are looking at a 8 year chart. And that the market, of course, can stay irrational for as long as it so chooses.
Fred said “I believe we have record leverage on the short side…”
Where do you get this?
If you look at Rydex bearish funds, for example, they are at the lows of their range.
Hedge funds do not use Rydex funds for short exposure…that is a picture of the “joe sixpack” bear view. HF’s short (and margin) directly through their prime brokers.
So while it is interesting to see margin at a “high”, it doesn’t (to me) suggest undo speculation — only on the long side. Margin is used in many structured derivitive strategies….trying to eek out some alpha from inneficient markets.
This graph is meaningless as it is in absolute dollars which doesn’t take the size of the overall market into account.
I can come up with graphs that go straight up all day long, but it doesn’t mean they are relevant.
This sounds like it belongs in Ripley’s Believe It Or Not, but Eric Fry of Rude Awakening is reporting that: “The laborers of five major Wall Street firms will receive a much greater share of their companies’ 2006 profits than the owners of these five firms.” ……. “Thanks to tens of billions of dollars of year-end bonuses, the laborers of five major Wall Street firms will receive twice the renumeration of the “capitalists” who own these firms-i.e. the shareholders. In other words, employee compensation at Goldman Sachs, Merrill Lynch, Bear Stearns, Lehman Bros. and Morgan Stanley totaled $60 billion in 2006- double the year’s earnings of the five firms. Almost half of this compensation arrives in the form of year-end bonuses…and the largest bonuses arrive in the bank accounts of a few privileged employees.”
Like all bubbles, Barry, it’ll be way too late for people to get out when it cracks.
By the way, I just finished reading “Ponzi’s Scheme” — about the wonderful Charles Ponzi himself. Very very good book. Investors were defending him even after he was arrested. People absolutely couldn’t believe he was a crook.
Most posts I see are already buying this dip. Buy the dip. Buy the dip. I don’t know when anyone sells anymore. They’re always buying. It’s a bull market, you know. And housing is now very much back on track, according to the news.
The only other person I know who is bearish right now is Cramer who said to sell tech last night.
It’s just you and Cramer now.
“Most posts I see are already buying this dip. Buy the dip. Buy the dip. I don’t know when anyone sells anymore. They’re always buying. It’s a bull market, you know. And housing is now very much back on track, according to the news”
This is true no one ever says TAKE PROFITS or sell. Im young and just start following markets. What do all these guys on tv(karmer, cnbc, etc) say when the market is getting crushed?
Back up the truck!??? LOL and good observation Costa! When the garbage truck backs up just avoid getting crushed by it…sometimes they call it “profit-taking” when the selling is just getting started…
I suspect there might be a result contained in the proposed ratios that might be the equivalent of the old ratio of stock orders that were less than round lots. The idea was to measure “little guy” participation.
A while ago I suggested that people take a look at mvl. Much to my chargrin I was shaken out of the stock by rather extreme downward volatility only to then have the company bought out and now trades at what would have been a nice profit. All in about a week and one half. Nothing like being right and wrong at the same time.
Bless me father for I have sinned……
Be well.
1) Cramer said to sell tech…then said to buy AAPL/CSCO/GOOG/HPQ and one other I can’t recall. Interesting how he sells “there’s always a bull market somewhere” but tells his viewers to buy stocks in a (to be) down sector.
2) YO…Barry…some people use margin debt to SHORT stocks like AAPL just for the sake of being contrarian (and a toppy looking chart)
Come again. Did Cramer say sell? Comes as a shock to me.
I’ve paid no attention to him since the dotcom era. Maybe he’s not as unbalanced as I thought.
It’s hard to tell when this party ends, but Barry has certainly given us all fair warning.
thanks lurker. Ive been following the markets since 2003, so never experience a bear market and always thought it be interesting to see the media reacts to it. Just about every article is bullish.
Fred said “Hedge funds do not use Rydex funds for short exposure…that is a picture of the “joe sixpack” bear view. HF’s short (and margin) directly through their prime brokers.
So while it is interesting to see margin at a “high”, it doesn’t (to me) suggest undo speculation — only on the long side. Margin is used in many structured derivitive strategies….trying to eek out some alpha from inneficient markets.
I understand that. My point or question is what do you have as evidence that the record leverage is on the short side?
Teddy
So that makes investment banks just like the movies or sports, where the people with the talent are the ones who get paid.
Credit bubble is leaking while rotation in equity land continues. The commodity bulls rotated into tech and now moving to banks-can you say hot money? Margin debt, mortgage debt and the boom in credit default swaps fueled the asset bubble but the smart money is now leaving the party.
Per Sentimentrader…the Public Short Ratio is currently at ~ .60. Earlier in ’06 it got to ~ .64. The only onther higher reading was after 9/11.
To be fair, even though these numbers are NEAR a record, they do not appear to be at an extreme, within the bands on the chart.
So short interest IS near a record, but isn’t in itself a buy signal, just as a near record margin level is not a sell signal. I hope this helps.
Record short interest means this rally still has plenty of fuel to go up. As it drops a bit, the frightened shorts cover, keeping it going up or staying in a range. It will only drop when all the shorts are frustrated beyond their staying power, or when they are completely driven out or converted into long positions.
Macro Man, so, it’s 2 for you, 1 for them; 2 for….; nah 3 for you, none for them….
Teddy…Chavez is looking for a few good men. Give him a call. :o)
Apply the Yo-Yo Rule to Tech Now
01/18/2007 9:03 AM
Jim Cramer: “Tech’s to be sold, not bought, right here. It can be traded. Not owned. Not until the dog days of August.”
http://jimcramer.rmblogs.thestreet.com/entry.aspx?
q=4ecb83bd-e578-4be2-8a30-98ba00863f64
Fred, your unconditional love for Wall Street and the Chinese is laudatory, but don’t ever, ever bite the hand that feeds you. Immanuel Kant and Ayn Rand would question your motives.
Man, all you guys are really smart. Truly, no joke.
So whom amongst this fine crowd is telling us you are borrowing on margin to go long this old bull while Cramer is telling Cramericans (and the Fast Money guys too) to sell tech and accumulate cash and a buy list for after a correction?
The smart margin has to be short. The retail margin might be increasing but when has that ever been a leading indicator for anything but the approaching cliff? Margin increases can’t be good except in a beginning bull, not after a year like last with no real correction. C’mon you guys, even my brother earned over 20% in one of those Lehman five choice retirement accounts last year. The pendulum MUST react to gravity at some point. Ever have the idea you could get on the swing set and go all the way around? I think you just crack your head on the top bar on the way down. Cramer selling and betting on a slowing econ has to be a sign from God.
The media (from CNBC to AP to WSJ) has been clearly projecting lately that they (“journalists”) are heavily leveraged and invested in stocks. No matter what I read lately, everything has a spin and ridiculous distortion of facts. They have probably loaded up on over hyped stocks like AAPL and GOOG, and now desperately trying to hype them up higher. I guess you cannot blame them because this is what they were taught in school, and nobody teaches them about how to evaluate stocks. One poor thing was almost crying today on CNBC: “AAPL had a blowout earnings but it is down 5% today. Why?!?”. (I have a clue for this poor thing from CNBC: maybe because the “blowout earnings” were already priced in the stock two months ago and the stock has been way ahead of itself lately secondary to the constant media hype)
Funny how shorts get “scared” out of the market (BTW, it’s either bulls taking profits or bears shorting anew that are selling those covered bought shares) but panic sellers should hold on…because it’s only a temorary dip.
ZERO…SUM…GAME…
“I’ve been following the markets since 2003, so never experience a bear market and always thought it be interesting to see the media reacts to it.”
Costa,
In April of 2000 after the NASDAQ plunged 25% in 4 days Jim Cramer had to say this:
http://www.thestreet.com/funds/smarter/920711.html
As far as all other media, they had suddenly transformed from market cheerleaders into market funeral directors.
CNBC Senior Market Cheerleader turned Funeral Director Maria Bartiromo essentially called Abby Joseph Cohen from Goldman a “genius” for her call a few weeks earlier to lower her equity allocation by 5%, to 65%.
In 2000, 65% long going into the crash was considered to be a “genius”.
What should she have called those who were short and loaded up with UltraShort OTC ProFund USPIX?
Addendum:
The fund (USPIX) was up 80% during those 4 days.
I really believe it is different this time.
Nothing can stop the market with China, India, Russia, Brazil etc.
Gains in the stock market are due to a war economy with military war contractors and private construction comapanies reaping in billions of dollars in profit. The war is paid for by ordinary taxpayers and the blood and limb of a fraction of a percent of those young men and women who bear the burden Bush’s War.
But how much longer can the American people accept this and what happens when our collective conscience and world opinion force us to leave Iraq?
February 21: New came out today that margin debt on the NYSE reached 285 billion, a new record surpassing the 2000 high. It looks like margin debt is continuing its almost parabolic rise. To the extent that this is a principal force that is driving the stock market higher (according to Marty Chenard institutional buying has been stagnating) it suggests the market may be less firmly based and more vulnerable to a sharp reversal.