Monday, December 03, 2007

Danger At The Margin / Contrary Investor On Margin Debt

I assume there will be more margin calls down the road....

Man muß kein Hellseher sein um zu erahnen das es demnächst eine Menge Margin Calls geben wird.........

Danger at the margin FT Alphaville is also concerned. In their latest Market Observations The "Other" Credit Market report for December they take an detailed look at the “other” credit market. Their first point is that historically margin debt has been a coincident, not a leading, indicator of a stock market peak

The latest spike in margin debt has corresponded with a big run in equity markets from summer 2006 to summer 2007, they note. It looks unsustainable.

But it’s not just the nominal debt balances that are pointing to trouble. looks also at the year on year rate of change in NYSE margin debt.

That growth rate has only spiked over 60 per cent on five occasions in the last fifty years - and one of those, in January 1993, was thanks to a change in methodology made late in the previous year.

The latest two growth peaks are showing in the next chart, below right.
NYSE margin debt passed the 60 per cent year on year growth mark in December 1999, and peaked in March 2000

In 2007, the rate of change level was breached in June. “The history of margin debt relative to equity market price movement over the last half-century is suggesting to us we’re at a high risk juncture right here,” says Contrary Investor.
Looking back through the corridors of history, the report adds that, excluding the anomalous 1993 spike, the S&P finished both nine and 12 months lower after all of the three other 60 per cent plus occurrences.

We’re living peak number five. The NYSE’s margin data seems to hold a warning from multiple viewpoints.

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Anonymous Anonymous said...

Hi jmf,

I have suspected for some time that the run-up in U.S. equities was fueled by borrowed money. The question is, where are they borrowing? Isn't there a credit crunch? The fact is, they don't make margin calls, they don't even count the money. The whole thing is a shakedown.

6:09 AM  
Blogger jmf said...

Moin Edgar,

but the experts on CNBC are saying on a daily basis there "is money on the sidelines"....... :-)

Compared to this must read piece
CDS: Phantom Menace
from Hellasious / Sudden Debt the margin issue for the S&P looks "tiny"....

6:17 AM  

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