Market Comments - "In Hock for Stocks"
Quoting from "U.S. News & World Report"
"Of particular concern has been the growth in the use of borrowed money by individuals to buy stocks. Until last week (margin), was at its highest level -$265.0 billion - since the government began regulating margin in 1934. And it was accelerating fast - up 45% in the past four months, the BIGGEST four-month jump in HISTORY. That's double the amount of debt just 16 months ago. Before last week, margin debt accounted for a record 2.8% of gross domestic product, three times the previous record set in September 1987, just prior to the market meltdown, and roughly 16% of total consumer credit, the HIGHEST ever. In addition, anecdotal evidence suggests that investors have been borrowing freely from other sources too.
"I have heard stories of investors using home equity lines or cash advances on their credit cards at particularly high interest rates in order to finance stock purchases," says Securities and Exchange Commisioner, Paul Carey.
The article included a NOT so timely CAUTIONARY note:
"Unlucky-investor scenario"
A typical brokerage may insist on a 33% equity position from the investor. The problem is that the investor's liability grows increasingly painful as the stock price falls. (example) Say an investor opens and account with $2000. And he wants buy $3000. of a company?s stock (100 shares @ $30. a share Say it falls 50% from $30. to $15. The investment is now $1500, and the equity position is $500. (33% of $1500). An further drop would prompt a "margin call" to the investor to replenish his account".
Comment: Not a pleasant scenario. I have never used "margin" or borrowed to buy stock. What is going in today's markets is WHY!
Good luck,
SargeK
Note: Market "Curbs" is one of the tools (currently in effect) that mitigates against a market meltdown. FWIW
While the market may stage a partial comeback today, the trend in the NASDAQ is clearly down and having already lost over 20% in the recent decline, the index is clearly in a BEAR MARKET. |
