US stock margin buying seen cooling after selloff
By Eric Wahlgren
NEW YORK, April 17 (Reuters) - Goodbye risk, hello
restraint.
Buying on margin, or borrowing money to buy stocks, surged
to a record level in March. But analysts see margin buying easing up after last week's devastating stock selloff forced many
investors to dump shares at a loss to pay back loans from their brokers.
About 2 percent of all stocks are bought on margin. According to the New York Stock Exchange, margin debt swelled to $278.53
billion last month, surpassing the previous high of $265.21 billion in February, as a growing number of Americans sought to get into
what was then still a go-go equities market.
``Certainly this correction, or crash, has put a major dent in the appetite for margin,' said Thomas Galvin, chief investment officer
at Donaldson, Lufkin and Jenrette. ``It has wrung out some of the excesses.'
The Nasdaq composite index (^IXIC - news), home of sky's-the-limit stocks such as Qualcomm Inc. (NasdaqNM:QCOM - news)
and Emulex Corp. (NasdaqNM:EMLX - news), dropped 25 precent from its all-time high last week.
A Deutsche Banc Alex. Brown research note said margin debt extended by NYSE member firms has averaged monthly gains
over the past five months of $19 billion, which is a record pace.
``Odds are April will see a sharp drop in margin credit as a result of margin calls triggered by the tech wreck,' the note said.
MARGIN DEBT SEEN AS A ``MAJOR REASON' FOR STOCK DROP
Margin buying enables investors to, in effect, double their gains when their stocks go up, because they only need to put up half the
cash and can borrow the rest. But when shares drop, losses are magnified.
A margin call occurs when a broker demands that a margin-borrower pay back debt, usually when assets in the investor's account
fall below a certain minimum level.
When the borrower must sell stock to answer the margin call, the added selling pressure in the market exacerbates a market
decline.
``Margin selling and margin debt has been a major reason for this latest drop,' said Barry Hyman, market strategist for
Ehrenkrantz, King Nussbaum Inc. ``The more stocks dropped, the greater the illiquidity situation where money had to be raised to
keep positions afloat.'
Under the current rules, investors can buy stocks with as little as 50 percent of the purchase price in cash. The brokerage puts up
the rest of the money in the form of a margin loan, for which it charges the investor interest.
``No one is quite sure how much margin selling actually played a part in the recent downturn,' said John Puchalla, an economist at
Moody's Investors Service Inc. ``Some of the volatility we have seen in recent weeks is due to margin debt.'
NASD SEEKS CHANGES IN MARGIN-DEBT LEVELS
The National Association of Securities Dealers, the owner of the Nasdaq Stock Market, is seeking to tighten current margin
requirements.
The NASD and the NYSE only control the maintenance margin-debt level, or the amount of assets that an investor must retain in
an ongoing margin account.
Federal Reserve Chairman Alan Greenspan has said changes in margin requirements would have little impact on markets because
large investors have alternative sources of financing.
``I think we will see less margin credit as players have been forced out,' Hyman said. ``The drop is the downside of margin credit.
But when the market rises, there is an upside.' |
