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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Mike M2 who wrote (64438)	7/12/1999 2:25:00 PM
From: John Pitera	Respond to of 132070

The following is from Liquidity Trin Tabs --Margin Debt (the free, delayed 2 week June 28, 1999 old copy) at: trimtabs.com [Margin debt at all NYSE member firms (which includes almost all margin debt secured by NASDAQ stocks) rose $5.1 billion, or 2.9%, in May to $177.9 billion despite a 2.2% drop in the market cap of all stocks trading in the US and a 33% peak to trough decline of internet stock indices. We had guessed early in June that May margin debt would plunge due to the huge 50% drops of many internet favorites. Obviously we were wrong.] Margin Debt Soars 26.2% Year To Date Vs. Market Gain of 6.8% Margin debt as a % of the Trim Tabs Market Cap rose to 1.20% at the end of May -- the highest level since 1987 -- just 15% below the 1.38% peak at the end of September 1987. Officially, we are now worried about the audacity and lack of fear of individuals in leveraging up their equity holdings to rates not seen since 1987. There could be two other reasons why margin loans rose in May that have nothing to do with the stock market. One: individuals are substituting margin debt for more expensive credit cards. Two: Less mortgage refinancings as interest rates rise. Still, the more individuals borrow against stocks means there's more "greed" than "fear" in the market. The end result: a bigger and more explosive downside move -- when it happens. What's interesting to us is to notice that between January and September 1987, stocks rose by 21.4% and margin debt grew even faster at 26.7%. On the other hand, between October 1 and year end, 1987 stocks fell 17.5% and margin debt plunged 27.6%. Indeed, margin debt did not top the September 1987 peak of $44.2 billion until 1992, even though stocks by then had climbed over 150% from the October 1987 high. In other words, individuals got burnt bad in 1987 and were not greedy enough to borrow more than $44.2 billion until stocks had topped the 1987 peak by over 150%. This bull market started at the end of 1994 with the Trim Tabs index at $5.3 trillion and margin debt equal to 1.14% of the market cap. Between 1994 and the end of 1998 the Trim Tabs Index soared 159%. Over that same time span, margin debt rose by a smaller 130%. Last year, even though the market cap rose 19.9%, margin debt rose only 11.7%. Why? Investors got scared by the big declines in August and September. Up until this year, margin debt growing less than the market was a very bullish indicator. Now it is different. Margin debt up by 26.2% so far this year while stocks are only up by 6.8% has us worried. It is not just that soaring margin debt as a % of the market cap is a contrary indicator. Margin debt tends to congregate in those stocks having the biggest % gains. When those stocks break to 35% below where the margin debt was incurred, a margin call results. Margin selling typically begets margin selling causing declines to be steeper than otherwise. That's why last year's hedge fund induced margin calls created such deep quick drops. While we are worried, we do not think that excess margin debt will be enough to end the bull market -- by itself. Note: Although Biderman was alarmed by the move up in margin rates, he was recommending a bullish stance ahead of the FOMC meeting. He's still keeping an eye out for the liquidity drain caused by a full IPO calendar in August. He notes that acquisitions continue to pull more supply (of stock) out of the market, however.