Margin Debt Up 22%

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

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What's been said:

Discussions found on the web:
  1. carl commented on Jan 18

    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 data…here is another area where the published numbers do not give either accurate enough, or sufficient data, to understand the whole story.


  2. Robert commented on Jan 18

    You mention that increases in margin during a “healthy bull market” is not a bad thing. However, I think this depends largely on the stage of the bull market. In the early stages, prices are rising from depressed levels, so there is little room or reason for price falls. Certainly not wide-spread price falls and not substantial price falls. Thus, margin calls are relatively few and those that exist can largely be met.

    Near the top of a bull market, this is reversed. Individual stocks can fall a long ways, producing margin calls that more than a few investors are unable to meet. Furthermore, as the market turns at the top, a large number of stocks can fall substantially and together. This makes the pain not only intense, but wide-spread.

    For these reasons, high margin levels are most dangerous after a long bull market. Unfortunately, it is after a long bull market that they are typically at their highest levels, as an increasing number of people are attracted by the rising prices.

  3. Craig commented on Jan 18

    Another perhaps unthought of angle….

    Most brokerage accounts require shorting in a margin account. So, more margin can also indicate more short interest or more investors/traders setting up to short a bull market.

    Even more possible downward pressure than simple margin buying.

  4. Macro Man commented on Jan 18

    Craig raises an important point. Margin debt can just as easily reflect shorts as longs, and anecdotal evidence certainly suggested a broadening of the short base in H2 last year- one of the reasons the rally was so durable.

    I think I am more upbeat that just about anyone who posts here, and I haven’t used my p.a. margin account for anything but shorting this decade.

  5. Philippe commented on Jan 18

    Adding to these margin debts and futures trading around 250 billions dollars of borrowed money by corporations to purchase their own shares.
    Adding to these numbers the leverage buy out shares collaterals against loans and paid at a premium of around 20% above market prices.
    Here are very strong assumptions for a stronger economic expansion in 2007.
    The good news are, that all these debts are repayable (through debts or banks provisions) except the bonuses.
    Few banks have vested interest in pumping the markets.

  6. Mickey commented on Jan 18

    IS there a graph of margin levels over 2000-2006 period so we can see margin levels at points of market correction such as in May 2005 for example?

  7. Lauriston commented on Jan 18

    If I was a broker/market maker etc., I would look at the margin levels of my clients (which represents the market at large), and go the other way i.e. buy the market if my clients are shorting on margin. This way I can squeeze them depending on how much pain they can take, thus keeping the rally going even further. Mmmmhh I wonder if this is an original idea of mine?

  8. Fred commented on Jan 18

    Carl has his arms firmly around this “anomaly”. Hedge funds have exploded in popularity, and with that popularity comes more leverage (margin). This is especially true in Long / Short funds, Market Neutral, Merger Arbitrage, Commodity, Structured Derivitives, and Global Macro funds. Amaranth is the latest example of this two edged sword. It would be more useful to see (if in fact it is even broken out) what the RETAIL margin levels are, as opposed to Prime Brokerage.

  9. GRL commented on Jan 18

    Just out of curiosity, what is the *inflation-adjusted* level of margin debt?

    When talking about just about everything, we adjust for inflation. Why not this, too?

  10. Bubbles commented on Jan 18

    I have a question about margin debt and shorting maybe someone could answer.

    I’m net long though barely, none of my longs are leveraged. I have 2 accounts; 1 is a cash account which I’m long the other is margin which I only use to short. The short account has plenty of cash covering the short positions in full (currently by an excess of 25%).

    I’ve read the comments above about margin being used by the Shorts so maybe these figures are not as bearish as they appear. However I’d like to know how my position would be reflected in these figures?

    Even though I’m using margin, my short account is not borrowing any money, I’m borrowing the stock and I have plenty of cash in the account covering these shorts.

    I’m sure there are many other accounts like mine, so does anyone know how accounts like mine would be factored into these “Margin Debt” calculations?

  11. Fred commented on Jan 18

    Margin = borrowing….stocks or “buying power”. Short leverage is the same as long leverage.

    The net of Barry’s findings (imho) is that we should expect more volatility. Going long vols certainly makes sense in this regard….as a matter of fact many HF’s are doing so — ON MARGIN! lol

    One reason vols are so cheaps is the massive option selling…dividend capturing strategies, coupled with an option writing strategy. There were billions raised in closed end funds for this strategy over the past year.

  12. blam commented on Jan 19

    “If I was a broker/market maker etc., I would look at the margin levels of my clients, and go the other way,…. I can squeeze them”

    Since the fox is watching the hen house…. If I also ran mutual funds, I could use mutual fund money to drive short term prices up or down to squeeze my customer accounts.

  13. Alex Grey commented on Apr 12

    As I mentioned earlier it looks like margin debt is in a vertical ascent having risen to 321 billion in February 2007. This is one indicator that suggests the market is in for a substantial change in pattern Obviously margin debt cannot continue to increase at this rate (almost a vertical ascent) for many more months. So it is likely that something will change its path. Either:
    1) Margin debt will stabilise at high levels, something I am not sure there is a precedent for, and even then the stock market will be less likely to rise as it is the increase in margin debt that is pushing the market up ; or
    2) Margin debt will start falling which would signal a major decline in the stock market similar to 2000.

    Take your pick

  14. Keith Shepard commented on Jul 14

    From WSJ: (July 07)

    ‘Margin Debt’ Hits Record $353 Billion on NYSE

    July 12, 2007 – Investors are borrowing record sums of money to finance trades on the New York Stock Exchange, according to data due out from the Big Board today.

    NYSE officials attribute the trend to recent regulatory changes effectively allowing both small and big investors to take on more leverage, or borrowed money, from their brokers. So-called margin debt, a broad measure of leverage, jumped 11% to $353 billion at NYSE in May, up from nearly $318 billion in April.

  15. The Big Picture commented on Oct 20

    Margin Debt Grows; Risk Grows Too

    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…

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