Margin Debt Down 37.6%; Is The End of Selling Near?

Margin debt at NYSE member companies fell 37.6% for the year through November, down to $201.48 billion (see WSJ article). There is no doubt that some of this reduction came from forced margin call selling over the last few months. While rampant speculation may not reenter the markets anytime some, the reduction of speculative investments, along with past hedge and mutual fund redemption selling, is helping to clear out the excess in the market, allowing it to find a bottom and begin building a base.

January is often used as a bellwether for things to come in the markets, and the market action on the first trading day was encouraging - yet one day does not make a market. Nonetheless, January will certainly continue to generate interest as the confluence of a new year, a new president, a new congress, a new stimulus bill, and an unfolding credit crisis continue to intertwine in what will continue to generate some interesting times, not to mention opportunities in the market.

Comments

[prudentinve...:]

A sustainable recovery will only happen when we have a convincing and sustainable improvement in economic fundamentals. Increased government spending, increased borrowing, increased deficits and increased taxes are not the ingredients for improved fundamentals.

Jan 04 11:04 AM

[notsosmart:]

does increased unemployment enter this equation?or do the dumb-dumbs keep spending?

Jan 04 11:39 AM

[Rob Viglione:]

Decreasing margin debt is a consequence of overall deleveraging. This is a requirement to bring markets closer to reality, reflecting overall economic shedding of excess capacity. With so much government stimulus flooding markets, it is not yet clear we have reached anything near equilibrium conditions. 38% decline in margin may just be one leg of a broader slide.

Jan 04 02:10 PM

[mkreisel:]

The market turns long before the employment does.

If you were waiting for better job numbers, you would have missed all the great bottoms in 1932/33, 1939, 1957, 1970, 1974, 1982, 1990, 2003.

I vividly remember how difficult it was to get a job in June 2003, when S&P 500 had already run up from 800 to about 1000.

I also remember how lousy job numbers undid Bush I in 1992 when S&P had gained 50% and Nasdaq had doubled from their 1990 lows.

Jan 04 02:53 PM

[Bruce Pile:]

Down 37%? Well, that's nice. But you have to look at that in context. You can do this if you study a historical debt chart comparing the stock market and margin debt and see how the wind-up and wind-down cycles play out. I drew such a chart two years ago, updated it, and borrowed another. They are posted at The Oil Drum. You can view them by putting these addresses in your URL

www.theoildrum.com/nod...
www.theoildrum.com/nod...

As these charts plainly show, the up and down trips for debt are far more than 37%. The 2002 debt decline was about 55% all told and it took over two years.
That means at 37% just since October, we are only about half delevered with maybe the sharpest declines ahead a year or more out. The mid 2002 selling was more intense than the earlier phases.

But here's the thing about comparing these two market debt cycles. The 2002 event was just market debt playing out a cycle. The rest of Debt World was doing just fine and dandy. In fact, credit was free and easy and the housing boom was just getting started. Now we have a market debt cycle unwind, but it is in conjunction with all the rest of Debt World in a gargantuan unwind as well. So you might suspect the down cycle might be a little more extensive this time around, being reinforced with every other kind of debt. But even if it follows the previous, less toxic cycle, we still have a ways to go on the downside of market debt and the market itself as the charts clearly show.

This would agree with the Bernstein survey of fund managers that found that most think we are only about half way through the delevering process (Barron's 12/15).

Jan 04 06:23 PM

[happysoul77777:]

The end of the selling will never be near. The market is structurally broken! STRUCTURALLY UNSOUND AND BROKEN! The sellers can still naked-short and pile on thanks to the repeal of the uptick rule.

Jan 12 05:46 PM