Letter to Editor (in Barrons) re: NASDAQ margin debt
Monday, October 6, 2003
Mailbag
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What Does Everybody Know?
To the Editor:
While we are big fans of Alan Abelson, we disagree with him on one portion of his Sept. 22 column. He posted a chart showing NASD margin debt alongside the Nasdaq Composite Index. In this chart, margin debt is higher than it was at the peak of the bubble and Abelson concludes that bullish speculation in NASDAQ stocks is worse now than it was in 1999. Our analysis of the underlying data led us to a different conclusion.
Abelson's chart depicts the Debit column, which represents margin for the purchase of securities. The Credit column on the NASD website shows the cash that results from both short positions and cash for potential future long positions.
In March of 2000, Debits (borrowing) stood at $21.4 bil vs. Credits (cash and cash balances derived from shorting) at $17.5 bil. Currently Debits have risen to $26 billion, but Credits have grown markedly faster to $32.5 bil. So is the rise in margin debt a sign that the Nasdaq is poised to drop another 85% like it did the last time margin debt was this high? Or is the more important statistic the fact that cash and shorting have increased at an even faster pace, representing rising bearishness towards the recent rally?
If market participants are as uniformly bullish as Abelson concludes, you would expect to see short interest declining as the stock market rallied. Looking at the QQQs, short interest has increased from 192 million shares sold short at the March 2003 bottom to a whopping 303 million shares sold short as of the September 2003 reporting date. This hardly appears to be a sign of extreme bullishness. The put/call ratio on the QQQs is currently 2.02, which means there are 2 puts for every 1 call. This ratio is higher than it has been 97% of the time over the last year, which suggests that bearishness in the option market for tech stocks is actually higher now than it has been at almost any time in the last year.
Anecdotally, almost no one we speak to seems to believe in the long-term sustainability of this rally. The consensus appears to be that we're in a cyclical rally within a secular bear market and that now is a great time to short tech stocks, which everyone knows are overvalued.
John Muresianu
Patrick Buchanan
Ted Maloney
Lyceum Capital
Concord, Mass.
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