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Strategies & Market Trends : MDA - Market Direction Analysis
SPY 665.67-0.9%4:00 PM EST
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To: Don Green who wrote (31211)10/23/1999 8:23:00 PM
From: Matthew L. Jones  Read Replies (2) of 99985
 
Let me offer this perspective to margin debt increase. Suppose the average investor has a cash and a margin account. Let's say he had $25,000 in June and subsequently bought $25,000 in stocks. Let's even say that he bought all the value stocks that the wise and wonderful stock brokers say he should have in his fully diversified portfolio. And let's even say that like a "smart investor" he bought the dip modestly when his stock dipped a little. Let's say that he "borrowed" and additional $5,000 to pick up a few bargains.

Now let's say its 4 months later and his great "value" stocks have taken a 30% beating (if he's lucky). Let's further assume he is being a good boy or girl and he is "buying and holding". His portfolio net equity which started at $25,000 has been reduced to $16,000. That means that his margin debt as a percentage of his equity is now 31.25% as opposed to the modest 20.00% where he started.

It is quite conceivable to me that this phenomenon would skew margin debt as a percentage of total portfolio net equities to the upside, when in fact additional margin borrowing had theoretically not been increased. The probable case is a little of both, however, the steady decline in most stock prices over the past 20 months has no doubt given the appearance of an unreasonable increase in margin debt. Just a thought to consider. Matt
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