I think even Alan Abelson is lurking in MythLand, His Barron's piece today spends alot of time talking about the increased margin activity that we were talking about during the week. -ng- .....
127.0.0.1:3456/SI/~wsapi/investor/reply?s=subject17047+margin+debt&sreply=9776314
The NYSE recently reported a record surge in margin debt for April. This accompanied the record highs in the indexes. Margin rose $25.5 billion to $181.94
billion and is now more than 2% of GDP. I'd love to add on a portion of home equity........... (436 more chars)
Subject: The Naked Truth - Big Kahuna a Myth
Reply #43223, Date: May 26 1999 3:07PM
127.0.0.1:3456/SI/~wsapi/investor/reply?s=subject17047+margin+debt&sreply=9776484
with bond closed it looks like we're going to rocket up. those margin debt charts were ufb. ........
............. 127.0.0.1:3456/SI/~wsapi/investor/reply?s=subject17047+margin+debt&sreply=9800695
More debt info from a friend: With US household debt exceeding mortgage debt for the first time ever near the beginning of 1998, and US household
stock ownership achieving the highest percentage ever of household net worth, I think that.....
Some of Abelson's thoughts on the matter
~~ We were particularly taken with the "misconception," No. 4, as it happens,
concerning buying stock on margin. Schwab gently informs the dear investor
that, hard as it is to believe, markets can be "volatile" -- a nice way of saying
stocks can go down -- and in those circumstances, "investors who put up an
initial margin payment may find themselves required to provide additional cash
if the stock falls."
Okay, got that? Well, apparently, not everybody does. For, as Schwab
ruefully reports, "some investors have been shocked to find out that if they
don't meet the margin call, the brokerage firm has the right to sell their
securities -- without notification and potentially at a substantial loss."
Put us down as shocked, too. Not, let us hasten to add, that some investors
haven't the foggiest notion of how margin works, but shocked that those very
same investors have been buying stocks on margin via the good offices of an
online broker. Or doesn't the old brokerage injunction about knowing your
customer encompass knowing what your customer knows?
As the chart illustrates, like everything else about Wall Street in the gilded
'Nineties, margin debt has reached gargantuan proportions. In fact, it was only
in early 1997 that the total passed $100 billion for the first time. And as that
astute market observer, Steve Puetz, notes, when speculation was in full
flower in 1987, margin debt weighed in at just $44 billion.
Several things inspired that somewhat alarming headline on the chart. One is
that in recent months, the use of margin has been rising almost exponentially;
April's was easily the largest monthly increase ever. Given where the action
has been in the market, it's a fair inference that a lot of that debt is being taken
on by the cyberspace cowboys.
And just as the stocks they've been riding -- Internets and the ilk -- go up
with the speed of sound, they go down with the speed of light. The past week
or so has provided vivid illustration of that melancholy truth.
Hot-to-trot, blissfully ignorant investors buying wildly speculative stocks on
credit rather neatly defines "an accident waiting to happen." What could
trigger the accident is a string of unbroken down days. What could make it
worse is that a number of online brokerage firms, as well as their customers,
have never been caught in an avalanche of margin calls.
Once upon a time, when Federal Reserve chairmen were made of sterner
stuff, they used margin requirements to curb irrational exuberance in Wall
Street without inflicting undue damage on the real economy. Between the end
of World War II and January 1974, margin was boosted 10 times (and
lowered nine). However, since the great bear market of 1974, no Fed
chairman has ever screwed up enough courage to raise margins, a craven
tradition stalwartly upheld by Mr. Greenspan.
But then, Fed chairmen in the olden days did not number among their solemn
obligations, as does the present occupant of that powerful post, the need to
be Wall Street's, the economy's and, indeed, the world's, best friend. ~~ |
