Here’s a data point to make you stop and think: As of today, more people have borrowed money from their their brokers to buy stocks than ever before.
That number was reached this past month, with Margin debt hitting an all-time high, passing even the days of the tech/telecom/internet boom.
According to the NYSE, margin totaled $285.61 billion in January, up from $275.38 billion in December and passing the previous peak of $278.53 billion.
Although the previous all time high was set in March 2000 — just as the Nasdaq Comp Index hit its apex — there were prior highs to the penultimate one. This doesn’t mean the top is in or even imminent, but it is a factor well worth watching over the coming weeks.
I haven’t figured out yet how to adjust the present high relative to the March 2000 peak for inflation; At the very least, it implies more room for margin debt to increase in order to reach comparable levels to the 2000 margin highs. Add to that the lower costs of borrowing versus 2000 (i.e., lower
interets rates) and while this is a worrisome stat, it is not
necessarily the bell that gets rung at the top.
In fact, Marketbeat points out that there has seen a "veritable who’s who of “bad news” indicators come and, for the time being, go" — all without any major market disclocation:
• The VIX, commonly known as the “fear index,” is hovering around 10, a low point, suggesting a lot of carefree folks out there these days. This level is often a turning point, a calm before the storm, so to speak.
• The Treasury yield curve inverted months ago, suggesting a recession was on the way. It hasn’t happened.
• The Dow industrials, transports and utilities all closed at new highs on the same day last week — something that became a routine occurrence in just two years, 1929 and 1986, both preludes to big market falloffs.
• The current rally is now the third longest since 1900 without a 10% correction.
Fascinating stuff. None of this stuff matters, until it does. Than it matters a whole lot.
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Sources:
NYSE
Buying (and Buying) on Margin
David Gaffen
WSJ, February 20, 2007, 3:27 pm
http://blogs.wsj.com/marketbeat/2007/02/20/buying-and-buying-on-margin/
Yes, that’s true.
But as Helene Meisler notes,
“margin debt may be at an extreme, but it seems like people are borrowing on margin to buy puts. I have never seen such a consistently high put/call ratio when the market is at its highs — and certainly not on a day when the market has come back from its lows.”
They hate these cans! (“The Jerk”)
..or borrowing on margin to sell short. Margin is just debt, which tells us about a single kind og market leverage. It does not of itself give us any directional information. Also, as an absolute I am underwhelmed by this “record”. Chart NYSE margin as percentage of total NYSE capitalization.
…or better yet, look at the trend in volume in QID (Ultra short QQQ)…it’s in a stready incline. Bears are “certain” they are “right”.
I’ve been hearing both sides ever since this report came out. I would like to see some real statistics on this.
I’m sure there are those who use margin to buy puts but you can’t margin puts themselves so this still points to a large margin debt of equities (long or short? who knows?)
The real debt culprit I suspect will be the housing slowdown. The enormous amount of cash tied up in real estate was being liberated (and traded for debt) during the housing boom of the last few years. Any slowdown in real estate will reverberate throughout the economy and unless the Fed loosens things up, there won’t be as much cash to buy buy buy…
I think that the stock market is becoming increasingly dirven by increased margin buying. This means that the rate of increase in margin debt is more signficant than the level though the patterns of both are cause for concern. The rate of increase looks similar to that last seen in 2000. Combined with indication of strong levels of insider selling and weakening institutional demand for stocks (see postings by Marty Chenard on http://www.bondheads.com) this suggests that the basis of the current increase in the stock market is becoming less sound and more subject to a sharp reversal.
…and isn’t the margin requirement going to change in April, so more can be borrowed?
Re: the QIDs
This is such a fad right now. The volume on these guys has been on the increase since they started. I don’t think you can infer anything from that.
as mentioned above, is there any way to separate out margin required for short positions? Can you use the short interest levels to arrive at an approximation?
What is left out of the NYSE margin debt cited is the CASH balances in these same accounts.
March 2000: MD, $278B; CASH, $56B; Net Debt, $222B.
Nov 2006 : MD, $285B; CASH, $156B; Net Debt, $129B.
So, looking at Net Debt, the current level is only 58% of what was in March 2000. Damn statistics!!!!
YAY!!!! Other readers believe that some people use margin debt to short the market as well!!!
I believe because I’m doing it and have to believe that a lot of the so-called “smart” money is too.
I think Norman has a solid point there.While comparing margin debt we shouldn’t forget the asset side.And that means at least we are not in the same level of leverage as we were in 2000.I kind of feel that with proliferation of many financial blogs run by smart and well-informed people like Barry retail investors are much more savvy these days about health of economy and asset markets.No wonder put call ratio jumps up like it has these days.So either market has to really go to insane levels to change people’s minds or may be that’s the way it gonna be going forward.
Are these levels high from day traders getting 10:1 or is more from retail investors getting 2:1, 4:1 etc from thier retail account
“The Treasury yield curve inverted months ago, suggesting a recession was on the way. It hasn’t happened”……….yet.
This environment doesn’t seem anything like 2000 to me.
I don’t know a single person who is on margin in the market today. In 2000, almost everyone I knew was regularly tapping into their margin.
Illusion of stock market wealth are distorting the saving and investing behaviour, greed is rampant in China where queues of speculators are reminiscent of the tulip crash.
You can try to spin things however you want, but:
1) Inverted yield curve.
2) High margin utilization.
3) Low VIX.
4) Weak housing market.
5) Peak in credit cycle (subprime meltdown).
6) Weak manufacturing sector.
Are too many flashing red lights to ignore. I may well be wrong, but earning 5% in cash looks pretty good to me right now.
The pattern on the sampled markets is simple less purchase of shares and more derivatives 4/5 times higher on the long side since 2001
As for the CAC SMI same comment as hereunder from Bank of New York for the US market:
“This combination of a lack of buying volume and declining momentum, coming at a time when many of these indices are close to significant highs, is a worrying one as this pattern is often seen as a signal that a market is seriously overextended.”
Classic risk-reward decision here: how much are you willing to risk (a market correction or recession? Major or minor?) vs. how much reward is left in this current bull run? One should NEVER try to time the market ;), but I don’t see much upside left to justify risking the downside. Spring and summer vacation seasons are right around the corner, along with $65-70+ oil per barrel and $3/gallon gas. Economies hate expensive energy (current upswing notwithstanding), and it’s about to get nasty again.
We don’t know who racked up the margin debt. It could have been pattern day traders, who rack up huge margin usage but never commit to a directional play on the overall markets, retail customers who should be faded, or large institutional customers who shouldn’t be faded. Without that data, you can’t really use margin debt as a sentiment indicator for smart or dumb money.
Part of the margin debt is from short-selling, but we don’t know what proportion of the debt is from selling or buying. Without the ability to construct a bull/bear margin debt analysis, the amount of margin debt is not useful as a sentiment indicator.
Interest rates are a lot lower now then they were in 2000, and any rigorous analysis of margin debt should take that into account. Any significant lowering of margin interest would be likely to stimulate traders to take on increased debt, so a couple of hundred basis points worth of lower rates might need to be “adjusted out” of the new peak number.
The dollar value of stocks traded is 40% higher today than in 2000. At the stock market peak, about 30 billion S&P 500 shares a month traded hands. Today, we are averaging about 45 billions S&P 500 shares a month. Even after accounting for (slightly) lower share prices, it would seem that an adjustment for margin debt per dollar value traded is in order.
Just the dollar value and margin interest adjustments would put us about 40% below peak levels on a back-of-the envelope calculation. Even then, without directional and constituent information it is a useless indicator.
New liquidity for markets and economy: according to Tony Crescenzi, “The total amount of commercial paper outstanding has increased at about a 15% pace in February, after a flat January, indicating continued buoyancy in terms of financial liquidity and for growth prospects for the coming weeks”…
Strasser – at the risk of picking nits for a pretty noisy series, it looks to me like a lot of the recent CP growth is in financials. That could suggest more about slower growth in low-cost bank deposits, for example, than about non-financial companies financing inventory etc.
Barry, are you sure we didn’t correct 10% in the S&P and Naz during the May 10th – July meltdown last summer?
I am almost certain we did. The Dow is 30 stocks, big deal.
The SPX touched 1219.29 on June 14 2006 as a low, and was 1326.70 as a high on May 8 2006, which is a decline of –8.1%.
The SPX had its lowest CLOSE on June 13 2006 at 1223.69, and its highest close on May 5 2006 at 1325.76, a decline of –7.7%.
Without noting exact dates and values, the Nasdaq Composite (not the 100 but the composite) went –14.4% from high to low and –13.8% from close to close.
I know you said you didn’t care about the Dow, but it was –9.0% and –8.0%.
So technically Barry is correct, it wasn’t a TEN PERCENT CORRECTION. What readers should ask themselves is, what is so gosh-darn magic about 10%? Shouldn’t we expect smaller corrections to be valid, especially considering the reduced volatility that is so often complained about on this blog?
I mean, if we really are in less volatile times, is an 8% or 9% correction “good enough?”
Hey DooDah Man,
If you were so confident of your bullish posturing, why do you infest every bearish board with your fabu insight?
Are you hoping to dislodge Nussbaum as the biggest jagoff on the Internets?
“I haven’t figured out yet how to adjust the present high relative to the March 2000 peak for inflation”
Using BLS Inflation Calculator, $278.53B in 2000 is equivalent to $327.40B in 2007.
http://data.bls.gov/cgi-bin/cpicalc.pl
Angryinch, based upon your post, I think you have no need to fear competition from Bill in the race for the “biggest jagoff.”
Angryinch
Huge jagoff troll
Now kids, please play nice . . .
Something is different this time and it is the length of the yield curve inversion. According to: http://www.ny.frb.org:80/research/current_issues/ci12-5/ci12-5.html
quote: “Consider, for example, that all six NBER recessions since 1968 have been preceded by at least three negative monthly average observations in the twelve months before the start of the recession. Moreover, when inversion on a monthly average basis is used as an indicator, there have been no false signals over this period.”
This constant inversion began in July 2006 and has now run uninterrupted for 7 straight months. If the above is accurate, the U.S. economy should enter recession between July and October.
this market just wont drop. every sell down is bought by the end of the day. they seem to come to the rescue in the early afternoons. every gap down off the opening is brought back to close the gap. who are these people that have this insatiable demand for equities day in and day out? is it truly the liquidity bubble that drives this demand?
I’m cool with that Bill guy…he provides relevant 411 and his “flavor” is fine.
Angry Inch is humorous but potentially ill-intended.
Picturing Capt. Barry in a ref’s shirt is humorous and also potentially ill-intended but is intended to be good-natured.
Cramer says there is always a bull market somewhere…so to shall there be a bear market somewhere.
I was captivated by Barry’s Nas/Housing Index chart comparison the other day and invested some time looking at the components of yon index and determining the one (to start out with, at least) that I wanted to short/put. Short term returns have been satisfying.
Fun stuff and I really think I’d approach it the same way if I was “playing for fun” as opposed to earlier retirement. Most of us are fairly bright and think ourselves witty but let’s do be respectful of each other’s opinions…unless it’s some guy who defends journalists by saying that having a “basic lack of information” is somehow materially different than being “lazy” or “stupid.”
Only $258 Billion? Aren’t margin accounts secured by stocks or cash? By way of comparison, over $1T ARMs reset this year, and those loans are secured by an illiquid real estate market that has already corrected by 10% in some locales with more to come. WAMU and CSC can’t margin call their 100% interest-only-option-arm loans until it’s too late.
Angryinch,
I’d short WAMU solely on the basis that they funded Nausabaums little monopoly play in Phoenix. SORRY BARRY, BUT I COULDN’T HELP MYSELF.
As a summary of my readings
Margin debts are high but in lesser amount when compared to 2001 and it is difficult to distribute them between put and calls.
Shares volume purchases are lower than in the first half 2006 and yet indexes (CAC, SMI, DAX, SP, DOW) are much higher than in previous years.
Total net purchase of derivatives on the long side are standing now at a level and volume five times higher than in 2000/2001.
The easier assumpton is that operators on the long side of these indexes do not have to provide margin for trading, explaining why the total cash margin is not reflecting the total volume of derivatives.
Are banks and speculative funds obliged to bring margin for their transactions?
How are the blanket bonds issued by large trading accounts in favour of brokers accounted for in the cash margin?
Barry,
With complacency and the stock market at an all time high and no recent correction as you so rightly point out, now would be a good time to get back into real estate. Pay is much better as a contrarian than a sheep.
I personally think the “inch” is the reason why he’s “angry.” He should take it out on God or genetics, though, not the rest of us.
Posted this in wrong place earlier, sorry– A much more balanced view from Barry’s post, IMHO [and from the NYT of all sources]
The New York Times
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February 24, 2007
Off the Charts
A Mountain of Margin Debt May Not Be Cause for Concern
By FLOYD NORRIS
American investors are now deeper in debt — at least in their margin accounts — than ever before. And that is starting to arouse concern of excessive speculation.
“We wonder how much of the current rally reflects an economy that is ‘just right’ versus a buoyant market tenuously supported by maximum debt and minimal worries,” wrote Joseph Quinlan, the chief market strategist of Bank of America, in a note to investors this week.
Mr. Quinlan pointed out that margin debt at brokerage firms reached $285.6 billion at the end of last month, breaking the record of $278.5 billion that had been set as the market peaked in March 2000.
Margin debt reflects borrowing in brokerage accounts. In the United States, investors can buy stock with as little as 50 percent down, borrowing the rest from the brokerage firm. It is a strategy that magnifies profits if share prices rise, and that can do the same to losses if the reverse happens.
In the aftermath of the stock market slide that began in the spring of 2000, investors showed a sharply reduced appetite for the risk that came with such borrowing. By the time the market hit bottom in the fall of 2002, the amount of outstanding margin debt had fallen by more than half. Now it is back.
But today’s level of margin debt is probably not an indication that speculation has returned to the old levels. For one thing, the market is a lot larger now. The second chart shows that margin debt remains well below 2000 levels when expressed as a percentage of the combined market capitalization of the two largest United States markets, the New York Stock Exchange and Nasdaq.
Moreover, the recent growth in margin debt has been much more gradual than it was in 2000. In early 2000, margin debt had nearly doubled from a year earlier. Now it is up about a quarter from a year ago.
There is another statistic on margin accounts that provides some reassurance — the amount of money that such accounts could borrow if they wished to do so. High levels of borrowing capacity show that accounts would not be forced to sell if prices began to fall, and they indicate that speculation is not as intense as it could be.
The third chart seems to indicate a fundamental shift in that regard. Margin account holders could, if they wished, increase their borrowing by 35 percent. That is down from a peak of 44 percent, but double the low point reached in early 2000.
There are, of course, a myriad of other ways to take on leverage. Derivative securities like options and futures have built-in leverage, as do hedge funds. Many investors can borrow against their homes, and more sophisticated ones can take on low-interest-rate debt in Japanese yen, a maneuver known as the carry trade. It is impossible to know just how much leverage is being used.
But the rise in margin debt — a form of leverage that is among the easiest to arrange — does show that investors now are far more confident and willing to borrow than they were just a few years ago.
Here’s an inflation calculator, for what it’s worth. http://data.bls.gov/cgi-bin/cpicalc.pl
leaving 278.53 in 2000 = 327.40 in 2007
Margin Debt and Sentiment
Margin debt tracked by the New York Stock Exchange has hit a new record high. Traditionally, this is viewed as a sentiment indicator reflecting extreme bullishness. The interpretation is bearish and contrarian. It is a risky thing for stocks if