<On Margin ....Debt>........!!....".Visa, MasterCard, Amex Welcome On Wall St"
By Pierre Belec Oct 23 10:20am ET
NEW YORK (Reuters) - Get ready for anything as the stock market cruises into the year's
final quarter.
Investors continue to display a lack of fear and the ``buy on credit' mania -- the margin debt
-- has zoomed to a new high. In fact, an additional $3 billion was added to Wall Street's
charge account last month as investors borrowed more money to trade stocks.
This week stocks came roaring back, posting their first three-day winning streak in two
months as bruised investors regained their cool after the market looked like it was headed
over a cliff a week earlier on inflation jitters.
Lately, it has become a way of life on the Street to expect the market to get hammered and
claw back.
But the Federal Reserve has provided some insight into what is behind the market's
incredible ability to recover. It's margin borrowing -- or old fashion loans -- to trade stocks.
The Fed reported this week that margin debt jumped to a record $179.3 billion in
September, up from $176.4 billion in August, breaking the old high of $178.4 billion just
reached in July.
The bottom line: Investors still have a lot of audacity and they have no fear of buying stocks,
despite the red flags flying over Wall Street. The tremendous buildup in September's margin
debt came as the market recovered in the weeks following a head-spinning drop of 1,000
points in the Dow. The slide happened after the blue-chip index set a record high of
11,326.04 on Aug. 25.
``Again, it was the old buy-on-dip game and borrow against your margin accounts to trade
stocks that caused the jump in margin debt,' said Raymond DeVoe Jr., market strategist for
Legg Mason Wood Walker.
Is trading on margins risky?
You bet. Ever speed down the highway with your eyes closed and your hands off the
steering wheel?
``They have essentially doubled their bets, bought on the dips and used up much of their
available ammunition,' DeVoe said.
If the market makes a sharp U-turn to the downside, dreaded 'margin calls' go out to the
customers and the brokerage houses can sell their margined stocks without notice --
usually at a loss. It can have a domino effect on the entire stock market.
``It was only in early 1997 that margin debt passed the $100 billion mark, and prior to the
October 1987 crash, in another highly speculative market, total margin debt was only
around $44 billion,' DeVoe said.
For more than 20 years the Fed has kept the basic margin requirement at 50 percent. In
other words, margined traders have had to cough up 50 percent of their own money before
getting the other 50 percent tranche.
The brokerage houses have the last say in setting margins for their customers.
The Fed has been in charge of margins since after the 1929 market crash. Prior to that,
margins were strictly determined by the brokerage houses. In some outrageous cases, they
would allow customers to borrow up to 95 percent of the stocks' values.
Fed Chairman Alan Greenspan, who has been trying to deflate the stock market for the last
3 years, can lobby to raise margins but there is no guarantee that a hike would skim some
of the speculation from the market.
``The margins were raised to 100 percent in the late 1940s, when the market looked
dangerous,' DeVoe said. ``Stocks went up further because Wall Street's attitude back then
was that the Fed could not do anything more to dissuade the market.'
Experts say the market is as dangerous as it has ever been. They warn: Don't get fooled by
the market's latest recovery.
``What we're seeing is an initial correction in a bear market,' DeVoe said. ``Investors should
be aware of the danger of a bear market, which is: at first there's a very strong, emotional
recovery before the bears take over.'
Don Hays, investment strategist for First Union Capitals Markets, said that for the past 4
years, market corrections have been short-lived, running between two weeks and two
months. But this time, Wall Street could be facing something more serious.
``We expect the next 10 weeks to be fraught with extreme uncertainty, with the S&P 500
never able to regain its bullish footing,' he said.
Stocks are locked in the claws of a bear market, and not just a short-term correction, he
says. Hays' bet: Wall Street could see a waterfall drop in stocks sometime before the end of
this year.
``To me, it's an indisputable fact, even though it has been loosely camouflaged by those
who refuse to see anything but the action of only 20 or 30 stocks,' he said.
Indeed, much of the market's strength since this summer has been driven by gains in a
handful of stocks that are components of the Dow and S&P indexes.
``The S&P has now erased the action of the last nine months and that is the good news,'
Hays said. ``The bad news, of course, comes from looking at the other 5,000 stocks instead
of those 20 or 30 that are carrying the Dow, the S&P and especially the Nasdaq composite.'
Nothing has changed since the Labor Department reported earlier this month that the
Producer Price Index took its biggest leap in 9 years in September with a jump of 1.1
percent -- which triggered a headlong drop in stocks.
The PPI's inflation has not as yet spilled over into the Consumer Price Index, with the
September numbers up just 0.4 percent. But just you wait, 'Enry 'Iggins.
Economists say it's only a matter of time before the producers pass on their higher costs to
consumers.
Down the road, Wall Street will suddenly wake to see the effect of September's PPI impact
on consumers. Perhaps, the headlines will read ``Wall Street takes a tumble, Part II.'
Investors will also have to contend with the scary noises from the man who wishes to
become the nation's chief investment strategist: Fed Chairman Greenspan.
No one in this country's history has tried so hard to deflate a bull market. This month,
comments by Greenspan that investors should not under-estimate the risk of owning
stocks played a big role in knocking the Dow briefly below the 10,000 level.
For the last 2 years, Greenspan has viewed the stock market as an overblown speculative
bubble that's just waiting to burst.
``The fact is that Greenspan really can't do much else to deflate the market bubble than to try
to talk it down,' DeVoe said.
``Sure, there may be risk in today's stock valuation but I have never heard of a successful
soft landing in the stock market,' he said.
The central bank rushed late last year to cut interest rates three times in part to keep the
U.S. economy from being slammed by the economic crises abroad.
``The cuts were really made to bail out U.S. banks, which were being hurt by problems
overseas,' DeVoe said. ``But the rate cuts were interpreted by Wall Street as a signal that
the party was still on and Greenspan was not going to take away the punch bowl.'
The rapid-fire rate reductions sent the Dow through the roof, lifting the world's most closely
watched stock gauge to the 10,000 level by April .
Comments please......tim |
