Tag Archives: Margin Debt

Massive Stock Market Leverage Unwinds amid Brutal Bloodletting, by Wolf Richter

Posted on May 14, 2022 | Leave a comment

Losing borrowed money in the stock market is guaranteed to amplify your pain. From Wolf Richter at wolfstreet.com:

Margin debt started dropping a month before the Nasdaq went south, and it’s still dropping.

The total amount of leverage in the stock market is unknown and takes many forms. The only form that is tracked and reported on a monthly basis is margin debt. The other forms, such as Securities Based Lending (SBL) and hedge funds leveraged at the institutional level are not tracked. Not even banks and brokers that fund this leverage know how much total leverage their client has from all brokers combined, which became clear when the family office Archegos imploded in March 2021 and wiped out billions of dollars in capital at the prime brokers that had provided the leverage.

But margin debt – the tip of the iceberg and indicator of the direction of the overall stock market leverage – dropped by $27 billion in April from March, to $773 billion, according to Finra, which gets this data from its member brokers. Margin debt peaked in October last year at $936 billion and started falling in November. Over those six months, it has dropped by $163 billion, or by 17%. But leverage is still massive, and the unwind has a long way to go:

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Posted in Banking, Debt, Financial markets

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Misdiagnosing The Risk Of Margin Debt, by Lance Roberts

Posted on December 4, 2018 | Leave a comment

Margin debt helps keep stock markets afloat. From Lance Roberts at realinvestmentadvice.com:

This past week, Mark Hulbert wrote an article discussing the recent drop in margin debt. To wit:

“Plunging margin debt may not doom the bull market after all, reports to the contrary notwithstanding.

Margin debt is the total amount investors borrow to purchase stocks, which historically has risen during bull markets and fallen during bear markets. This total fell more than 6% in October, according to a report last week from FINRA. We won’t know the November total until later in December, though I wouldn’t be surprised if it falls even further.

A number of the bearish advisers I monitor are basing their pessimism at least in part on this plunge in margin. It’s easy to see why: October’s sharp drop brought margin debt below its 12-month moving average. (See accompanying chart.)”

“According to research conducted in the 1970s by Norman Fosback, then the president of the Institute for Econometric Research, there is an 85% probability that a bull market is in progress when margin debt is above its 12-month moving average, in contrast to just a 41% probability when it’s below.

Why, then, do I suggest not becoming overly pessimistic? For several reasons:

1) The margin debt indicator issues many false signals
2) There is insufficient data
3) Margin debt is a strong coincident indicator.”

I disagree with Mark on several points.

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Posted in Banking, Business, Capitalism, Debt, Economy, Financial markets

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How the Asset Bubble Could End – Part 2, by Pater Tenebrarum

Posted on December 21, 2017 | Leave a comment

The second in Pater Tenebrarum’s series on the all-everything bubble. From Tenebrarum at acting-man.com:

Part 1

Contradictory Signals

Special antennae that help traders catch upcoming opportunities. Available from the same outfit that sells the soup-cooling spoon (Acme Inc).

There is just one more positioning indicator we want to mention: after surging by around $126 billion since March of 2016, NYSE margin debt has reached a new all time high of more than $561 billion. The important point about this is that margin debt normally peaks well before the market does. Based on this indicator, one should not expect major upheaval anytime soon. There are exceptions to the rule though – see the caption below the chart.

A new all-time high in NYSE margin debt: this is in line with the other indicators shown here, and normally margin debt tends to peak before the market does. This is generally true – but not always.  We found two major market peaks – namely the 1937 and 1973 tops – when margin debt peaked after the market had topped out. In 1937 it happened just one month after the top, in 1973 it happened 8 months after the top. Note also that at the 1937 market peak, there was no warning from the NYSE advance-decline line either – it topped almost concurrently with prices – click to enlarge.

Since we discussed bubble blow-offs earlier this year (see: Speculative Blow-Offs in Stock Markets, Part 1 and Part 2), we have pointed out several times that an unusual number of diverging signals could be observed this year. And many signals we would normally expect to have appeared on the horizon by now are simply not in sight yet.

Consider for instance this chart from Moody’s, which we showed in one of our articles on credit spreads. It depicts debt as a percentage of internal company funds compared to actual and expected default rates. It is logical that these tend to be highly correlated, and yet, they are suddenly diverging rather noticeably.

Similarly, current market valuations and sentiment/positioning data are at such rare extremes that we would normally expect to see a number of “confirming signals” elsewhere by now – but that is not the case.

 

To continue reading: How the Asset Bubble Could End – Part 2

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Posted in Collapse, Debt, Economics, Economy

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Doom Index Says Beware! by Bill Bonner

Posted on April 6, 2017 | Leave a comment

There are flashing economic red lights out there, indicating that full speed ahead may not be the best investment strategy right now. From Bill Bonner and bonnerandpartners.com:

GUALFIN, ARGENTINA — We have not had any word from our attorney in the city of Salta, but we assume the case was dropped.

Grand theft auto was the charge (catch up in full here).

But the alleged wrongdoer, your editor, claimed his actions were motivated by stupidity, not criminality.

Our ranch foreman Sergio came and switched the trucks.

With the cops off our trail, we turn back to the financial markets…

Doom Index

A dear reader helpfully suggested that we put together a “Doom Index” – with indicators of an approaching bust.

Our research team in Delray Beach, Florida, is working on it.

In the meantime, one doom indicator we highlighted earlier this week is the flow of credit.

This is an economy that depends on bank lending. If it slows, so does the economy. And credit growth is falling at a rate not seen since 2008.

Another indicator that will surely be a part of our Doom Index is the level of margin debt.

When an investor buys stocks on margin, he borrows the bulk of the purchase price from his broker.

Because he only puts up a portion of the total amount – the margin – he stands to gain more if the market goes up. But if the market goes down, he gets a “margin call.”

He has to put up his shares as collateral for his loan. His broker can now sell these shares (without notifying him) if he doesn’t meet his margin requirements.

“Markets make opinions,” say the old-timers. When stocks are near an all-time high, investors imagine they will only go higher.

But when they go down, all of a sudden they ask themselves why they ever bought them.

Squeezed and panicked, the margin buyer is forced to sell. And the higher the margin debt, the greater the number of shares that must be liquidated, sending the whole market down even further.

Today’s level of margin debt was last seen near the dot-com peak in 1999.

To continue reading: Doom Index Says Beware!

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Posted in Business, Economy, Foreign Policy

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