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Margin Debt Snaps Back

Nothing speaks to investors' increased appetite for risk like the recent rise in margin debt.

Online brokers Schwab (SCH), E*Trade (ET) and Ameritrade (AMTD - Get Report) all reported that margin loans shot up in the fourth quarter and were significantly higher over the course of 2003. The question now is: What does this mean for stocks?

When investors buy "on margin," they are borrowing money from their brokers to purchase securities, using shares they own as collateral. When margin debt starts to grow quickly -- as it has been recently -- some analysts become uncomfortable because it can be a sign that investors are getting too optimistic about the market and are taking on too much risk.

In the most recent quarter, Ameritrade and E*Trade saw margin debt jump more than 20% while margin balances at Schwab increased by 13%. The trend has apparently continued into this year, with Ameritrade reporting a $300 million increase in margin debt so far in January.

"Online brokers' margin debt is growing dramatically, [which] says there's no fear in the market," said Charles Biderman, president of Trim Tabs. "Enthusiasm is bubbling up."

On Friday, the New York Stock Exchange is expected to release margin data for December, and Biderman expects it to show that investors took on more debt. The latest available statistics for November show that margin loans at NYSE member firms hit $172.1 billion, up from $162.7 billion in October and well above the $134.4 billion level recorded at the end of 2002.

Biderman worries that the market could be in for a repeat of 2000, when margin debt hit extreme levels. As the market started to crumble that year, brokers demanded that investors repay the money they had borrowed, which prompted a wave of selling.

Still, other analysts are less concerned. After all, an increase in margin debt indicates that the market is receiving a heavy dose of liquidity, which can bode well for stocks over the near term.
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