Margin Debt Grows; Risk Grows Too

http://www.cross-currents.net/charts.

htmnaked capitalism Companies That Make Buybacks Lag the Market.htm

These two captioned threads may supplement the above graphic

Most US stock indexes went above the July highs. But european indexes(FTSE,DAX) weren’t able to go above their prior highs in the recent rally. DAX was really struggling around the 8000 area. I think the european markets are starting to weaken.
What will happen to Euro !!!!

Thats only if the rate cuts actually act as a catalyst toward equities infalation in the short term. A drop in the cost of capital for the banking system does not necessarily equate to a willingless to lend to speculators to drive the market forward as Barry is seeming to point out in this thread. We could actually end up as has been discussed many times is an environment were many asset classes including equities correct here while consummables end up bearing the brunt of the inflation. So far up until this point with regard to equities this has been a bad bet, I believe the tide is receding. So much for prognostication. But with the Big Banks and Treasury in collusion to create a super fund (M-LEC) to sell themselves worthless paper at fictional prices so as to avoid the “Real Market” pricing effects of defaults things really aren’t looking all that positive and investors are not all that naive

Barry,

you are always too bearish. I wouldn’t worry about it. the economy is fine.

~~~

BR: NOTHING TO SEE HERE FOLKS, MOVE ALONG . . .

I would suspect if anything the Fed would lower margin requirements in order to soften the blow of falling equities.

There has been recent precedent. The waiver of the 23A regulation for some major banks was in essence a lowering of what constitutes margin requirements for SIVs.

It is quite obvious from reading the papers by Bernanke, but even more so Mishkin, that these two governors believe the central bank can solve any problem with enough early intervention, and any sense of “moral hazard” is secondary to the avoiding a shock to the broader economy.

I have to wonder how truly reflective of total leverage the NYSE margin stats are anyway.

Until recently, it would have made all kinds of sense for a high net worth person to max out a jumbo mortgage on the McMansion, put the proceeds in a hedge fund, the fund to short (borrow) yen for USD, then use available margin to buy stocks. Add on some short puts, and Bob’s your uncle. Works until it doesn’t. The margin in this case might only be a fraction of the total gearing, and until recently the returns would have kept everyone fat and happy.

The prime brokers may start asking inconvenient questions about how much of the funds’ “cash” on account is actually debt. If it’s as levered as I suspect it is, margin calls might only be the start of a much nastier cascade.

I found this credit card tidbit interesting. Kinda fits in here.

http://www.creditcards.com/statistics/Credit-Card-Industry-Facts-and-Personal-Debt-Statistics-20062007.php

Stormrunner,

The super fund certainly seems to be nothing but a holding organization for losses – to prevent the banks involved from having to mark-to-market real values.
This looks to me like Enron with the aid and blessing of the Treasury department.

As for margin requirements, my comment was simply that if they were changed, the track record of this Fed is to add more risk/liquidity rather than less, and thus a lowering of margin would be in keeping with their pattern.

Whether or not margins change really depends on how much crisis is perceived by the Fed – deflation is their “Great Satan”. How much systemic risk the Fed allows will be dependent on their view of that risk. I am of the opinion that they if they did change margin requirements, it would be to lower them in order to prevent a “fire sale” of equities.

You can almost hear them now: “To ensure a more orderly process of asset liquidations, the Fed has today altered…yada, yada, yada.”

estragon – ha! Yes, Im hearing same things in credit card and auto payment defaults. Obviously the credit markets are in distress, and I have a feeling we’ll get a few surprises down the road. Perhaps a big corporate failure too.

stormrunner – its a great question. I certainly am not educated enough to answer. This stuff is so misunderstood, and the complexity of these vehicles are crazy! Im not sure the investors even fully understand them. What IS understood is the ramifications if holdings MUST be sold at these levels, even for those that don’t have to sell but see the markdowns of their holdings as face value reveals itself.

Its really nutz! makes one think why H Paulson was elected in first place, from GS. I have a hard time believing what we are going through now is fresh news, and not a concern that came about years ago. If this bailout of sorts doesn’t happen, there will be plenty of rattling on the street. Roubini questions its effectiveness even if it does happen.

I wish I understood more about:

1. these cdo’s
2. these complex siv’s
3. who holds what
4. who must sell what to meet debt requirements

there seems to be a lack of transparency here that is right in the middle of the fire.

IMO, the market has almost nothing to do with valuation but is dominated by traders pushing it above and below the 200 DMA. Falling interest rates increase the value of equity cash flow, giving the 200 DMA an upwards bias, even if the decline in rates may presage declining earnings growth.

My personal momentum model suggests that the hedgefunds and wall street gangster banks are likely to move the market back up over the next two months, ending the year at or near a record during the last week of December. If a cyclical decline is in the cards, IMO, it will start in earnest after the first of the year. A downside volatility pattern has replaced a five year old upside pattern.

Then again, maybe not.

pmorrisonfl,

I’ll have a go at it, though I assert no special expertise.

There’s obviously an indirect connection between off balance sheet debt and the current account deficit. In order to finance the deficit, there has to be a financing inflow. As the CA deficit grows, more debt has to be produced to finance it. To the extent the Iraq war increases the CA deficit and requires increased treasury debt to be bought offshore, there is also an indirect connection there.

What’s far less clear, notwithstanding the obvious arithmetic correlations, is whether there’s also causality and if so, which way it runs. Some would say US overspending on imports requires matching capital inflows. Others would say mercantilist trade policies give rise to “excess” offshore savings, and the CA deficit is a consequence of that “glut” being put to work in the US. Most likely, there’s an element of truth to both arguments, and each requires the other to perpetuate the CA deficit.

In other words, I think you can climb off the ledge. As you said, ordinary fear and greed can quite adequately explain the events of the last few years. No malice is required.

Estragon,

Thanks You confirm my more generous thoughts, while connecting the dots. I think I’ll still wonder whether Greenspan engineered the low rates for so long in sympathy with the administration’s budget goals, but I’ll do my muttering in private.

Rickrude,

I am certain the Fed is on your side; however, isn’t there some fundamental flaw in being placed into this position concerning inflation – regardless of the outcome, it is a losing bet.

Some of the increase is hedge funds, but that doesn’t change the conclusion, because they aren’t all that much brighter than individual investors, who were most of the bubble in 2000.

SFAS 157 has to do with establishing a ‘fair value’ framework; it does not result in a strict mark-to-market accounting but does require at least somewhat more disclosure.

It’s consequences, particularly in conjunction with SFAS 159, are not at all so strict as most media have portrayed.