Margin Debt Hits New Record

Here's a data point to make you stop and think: As of today, more people have borrowed money from 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, the 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 interest 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 dislocation:

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. Then it matters a whole lot.

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/

Comments

[Bob Misko:]

It is impossible to quantify the sestemic risk to the financial community: funny money loans, a mountain of derivitives, margin buying, global markets, and floating currencies (to mention a few).
The key question is will the financial community collapse under its own weight, or will the dynamics of capitalism keep holding it up. My vote is with Joseph Schumpeter and capitalism. Sometimes we simply must hang on durng some bumpy rides. ( VIX as you suggest.)

2007 Feb 27 01:02 PM

[Mr Mister:]

"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."

To account for inflation, you will need to convert the nominal dollars into real dollars. Divide Mar 2000 dollars with Mar 2000 CPI and Feb 2007 dollars with Feb 2007 CPI.

That would be $162 billion in Mar 2000 versus $140 billion in Feb 2007. We are $40 billion to the Mar 2000 record. I'm sure the Fed will not disapoint and print their way to a new record.

2007 Mar 21 12:48 PM