"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

10 January 2007

Margin Debt is now back to bubble levels

, according to Minyanville. The Wall Street Journal recently ran a story on the high levels of margin debt at firms tracked by the New York Stock Exchange. With a big month-to-month jump, debt rose to $270 billion, which is a level eclipsed only by March 2000 - the height of bubble-mania in U.S. equities. Scary stuff, but unfortunately the Journal didn’t drill down one more layer, which changes the picture considerably.

The NYSE doesn’t just track the liabilities sitting in brokerage accounts (margin debt), but that’s all that ever gets reported. Unbeknownst to most, the NYSE also tracks assets called free credits. This is money available for customers to withdraw, which is accumulated when customers deposit funds or sell stocks. The chart above shows the comparison in these figures between now and the bubble years.

Hungry Investors Boost Margin Debt
January 2, 2007; Page R15

A rising stock market encouraged investors to go into debt to trade stocks, leading to an increase in the level of so-called margin debt in 2006. 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.

Of Course, Collateralized Debt Issuance is Soaring
Collateralised debt issuance jumps
Financial Times, By Gillian Tett and Paul J Davies in London,January 11 2007 22:14
The issuance of securities linked to debt portfolio funds, known as collateralised debt obligations, swelled dramatically last year – a trend that could be helping to prolong the easy conditions in credit markets. Some estimates of activity in this notoriously opaque sector suggest that more than $2,500bn of were issued last year. That was six times higher than in 2004, according to the Bank for International Settlements.


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