Thursday, April 2, 2009

Margin Debt, Again

Just one chart today- on margin debt once again (click to enlarge).

Data: NYSE

As of 2/2009 margin debt is down 55% from the top reached in mid-2007. More importantly, in my view, is the whipsaw speed with which the plunge occurred: from an annual rise of +67% to a drop of -48% in just 20 months. That's unprecedented in at least 50 year and shows how fast greed turned into fear.

What does it mean? As always, there are two interpretations:

a)The Titanic is sinking and people are wise to abandon it en masse before it drags them into a watery grave or,
b)The only ones remaining on board are experienced seamen who will manage to save the boat and profit handsomely from the salvage.

As always, everyone has to make up his/her own mind: Should I Stay Or Should I Go?


  1. Indeed, but the markets have also tanked by a similar proportion. So the leverage in listed markets is not down much (leverage being defined here as margin debt / market cap). My guess: that leverage is still pretty close to the maximum permitted by the clearinghouses' statutes. So the appetite for leverage would still be high in that case.

  2. Hell,
    Ok. I get the message. First you just hinted it, but in your latest post's you are very clear.

    It saved me a lot of money to pull out in may 2007 after found your blog.

    Technically the market is improving too. And, in Livermore's words; don't argue with the tape.


  3. Another interesting observation is the AMPLITUDE of the phenomena, and the crescendo, the shorter time frame for each crisis...
    Care to comment ?

  4. Hell,
    Could you give a short comment about your post from 31/12 2006 (Reading The Tea Leaves). In that post you did a forecast of DJIA: ~5,100-6,100 and S&P 500: ~580-700.

    S&P 500 closed at 1418 2006. It then advanced another 11+ percent to peak at 1576 in October 2007.

    Early March this year S&P 500 reached 2006 and have thereby been fairly deep into the range of your forecast.

    I assume from your latest posts that you consider your targets met? You estimated a drop of 50-60 percent from the level the S&P 500 were at the time.

    In March it was almost 58 percent down from it's peak of 1576.

    Would very much appreciate if you comment.

  5. About stock market targets:Met.

    But I'm not sure at all we're going to embark on a new seminal bull market. A very significant bounce, quite obviously, yes. Particularly for the worst-hit financials that benefit from a reversal of the CDS correlation and hedge trades.

    After this, I don't know yet.


  6. Hell,
    Many thanks for your reply.

    BTW, sorry for the type in my first comment ("Early March this year S&P 500 reached 2006" should of course be "Early March this year S&P 500 reached 667").

  7. Hell, how would you compare your views with Hussman?

    Based on my reading of his analysis, we may be at the completely neutral level right now.

  8. IMHO, the stock market may get to around 9K and then roll over back to 4K on the next leg down. The shorts are getting slaughtered - this is all very common in bear markets. Violent upside moves, 30, 40% or more.

    What future economic conditions could the stock market be discounting that would allow for the formation of a base and the start of a new bull market? Aside from some major energy technology developments (of which Hell has commented on from time to time), I'm not seeing many positive developments going forward - just negative ones.

    This is GD2, and will likely be followed by WW3. Eventually there will be a new beginning and a new bull market, but it will be 20 years from now.

  9. Hello from Saskatchewan, Canada. We are still enjoying tremendous growth here with stable housing prices, employment and continuing growth. I hear so much about how bad it is in the world, U.S. and parts of Canada. Am I delusional in saying we are immune to other peoples problems or are we the lucky ones on the Titanic's lifeboats :\

  10. But What do I Know?April 3, 2009 at 4:37 PM

    My impression on the increase in margin debt is that much of it comes (came?) from executives and insiders with lots of stock who can't sell in a meaningful way. Their helpful broker calls them and tells them that they can realize some of that money now for toys (or to diversify, for those who think themselves prudent). After all, when you have $1,000,000 worth of stock which is just sitting there it's not doing you much good, just like all of that lazy equity in your home :>) This is what happened to Aubrey McClendon, after all.

    The point is that the margin debt is not taken on by speculators to gamble with, but is merely a way for insiders to "cash out." I'm not sure what kind of sentiment reading this gives vis-a-vis twenty or thirty years ago--I assume that most margin was taken out by speculators then, but I'd love to get some data on this.

    Also, since margin debt is tremendously profitable for the brokers, doesn't this hurt their business. . .

    Great blog and I always enjoy your insights.