The loser who said you've got to have money to make money clearly never heard of margin.
The latest figures on margin debt are in, and they're smoking. Borrowing by clients of
New York Stock Exchange
member firms grew by 8.9% in February to a record $265.2 billion. That's an impressive 1.53% of total market capitalization, also a record.
Now, nothing in those figures is particularly surprising. Margin debt has been skyrocketing for months, and already stood at unprecedented levels last month. But the latest confirmation of the general trend is doing little to comfort market observers who've already used most of their best superlative adjectives to describe the stock market's escalating risk.
"It means that there's a lot of leverage building in an already frothy stock market," Steve Roach, chief economist at
Morgan Stanley Dean Witter
, simply puts it.
Can the market dodge the margin bullet? 'Miracles are possible. You can get touched by an angel, I don't know.' -- Charles Biderman, TrimTabs.com publisher
Margin, very simply, allows a customer to borrow from a broker to buy stock. A buyer can borrow up to 50% of a stock's price to buy a certain number of shares. (That is, if you're buying $2000 worth of shares, you put up at least $1000 and borrow the rest.)
Just a cursory glance at the stock market's major indices will tell you where most of the froth is. During the first two months this year, as margin debt increased 16%, or $36.7 billion, the tech-slathered
Nasdaq Composite Index
advanced 15.4%. Meanwhile, the
, which the
prefers to use as a gauge of overall market strength, fell 2.2% in that same period.
Leverage, then, is clearly one of a number of positive liquidity factors helping tech outperform the rest of the market. What bothers some is the implication of that thesis: Without the aid of debt, which margin calls could shrink dramatically in the event of a sharp decline in stocks, the Wilshire would look a lot worse than flat. As
publisher Charles Biderman noted yesterday in a bulletin to clients: "Without the $83 billion gain in margin debt since October, the bull market would be toast by now."
Another Sign of Excess?
Sources: New York Stock Exchange; Baseline.
In the meantime, the data suggest that margin debt continues to pump up technology stocks and fuel the
wealth effect. But although the Fed is responsible for setting minimum requirements, Chairman
has indicated that he does not support altering the 50% requirement, in place since 1974. The Fed has said it believes a margin tightening would penalize individual investors, who don't have access to as many borrowing vehicles as institutions.
"I think they're just being stubborn," says Roach of the Fed. "The reasons for keeping margin requirements unaltered for 26 years have changed. It was
John Maynard Keynes who said 'When circumstances change, I change my mind. What do you do?' That's the question of the hour."
Next week, a subcommittee of the
House Banking Committee will hold hearings on margin requirements.
Perhaps the matter will just work itself out, right? "Miracles are possible," Biderman says. "You can get touched by an angel, I don't know. Yeah, anything is possible."