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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: GROUND ZERO™ who wrote (74654)	2/26/2007 11:19:59 AM
From: Qualified Opinion	Respond to of 94695

Investor borrowing hits record levels By Joe Bel Bruno, AP Business Writer \| February 23, 2007 NEW YORK --Investors are borrowing at a record pace to sink into the stock market, and the trend is raising concerns on Wall Street about what might happen if a major correction occurs. The amount of margin debt, which is how brokers define this kind of borrowing, hit a record $285.6 billion in January on the New York Stock Exchange. Such a robust appetite, amid a backdrop of complacent market conditions, could leave investors badly exposed if major indexes are snagged by a market decline. Some could find themselves forced to sell stock or other assets to meet what's known as a margin call -- when a broker in effect calls in the loan. Bulls and bears can continue to debate the direction the markets will take in 2007. But, one fact remains: The last time margin debt hit this level was at the height of the dot-com boom in March 2000, just ahead of a two-year decline. "I don't think this is saying you should suddenly run into your bomb shelter," said Hugh Moore, a partner with Guerite Advisors. "Nevertheless, I think it is saying there is exuberance out there, a feeling from investors that 'I don't want to miss the bus.'" That usually signals "the bus has already left," Moore said. The way cash accounts work is that investors pay their brokers full price whenever they want to buy shares. However, those with margin accounts get to borrow against their holdings -- and usually have to front only half the cash needed to buy stocks. And there is a direct correlation with market highs and the amount of money investors are clamoring to borrow. The March 2000 peak for margin debt, at $278.5 billion, matched market highs on the Dow Jones industrials, Nasdaq composite, and Standard & Poor's 500 index early that year. Margin debt dropped to less than half its peak between March 2000 and October 2002, mirroring a plunge in stocks. The four-year bull market has pushed the Dow to record levels and the S&P to six-year highs. In 2006 alone, margin debt increased 24.2 percent while the Dow picked up 16.3 percent. Investor borrowings rose 3.7 percent in January, while the Dow posted a 1.3 percent gain for the month. On the plus side, bulls on Wall Street say the economy, strong corporate earnings and a vigilant Federal Reserve could create a perfect storm for stocks. The markets might continue to trend higher throughout the year, and even lurch forward if the Fed decides to cut rates. But, even those expecting stocks to move higher are cautious about investors borrowing too much. There can be major consequences should these positions turn out to be wrong-way bets. "Debt is only a problem on the way on the down," said Alexander Paris, an economist and market analyst for Chicago-based Barrington Research. "There's a lot of margin debt out there, and with the S&P shooting for its ninth-straight month up, you haven't had this kind of run since 1926. It's a warning flag." He points out another correction like the one seen last spring, which knocked indexes down by about 8 percent, could magnify losses for investors. It also has a "wealth effect," he said, "as a decline in your portfolio effects your spending." A major correction would trigger brokerages to demand customers deposit money or other securities in their accounts to cover the amount lost from what was borrowed. These demands, known as margin calls, means positions that don't have sufficient funds would be closed out by the broker regardless of the price -- and that could exacerbate selling. During turbulent times, like in April 2000 when the Nasdaq plunged 13.6 percent in just one session, the amount of margin calls soared by two to four times as high as normal. Making matters worse is a spillover that can occur throughout the entire economy, analyst said. Retail investors, many asked to write checks on demand to cover their borrowings, could turn to asset sales to stay whole. This kind of selling could hurt other markets, or even increase things like home refinancings. "There's an investment lesson here, and its we're getting late in the economic cycle and late in the bull market," Moore said. "Now is not the time to go out and start leveraging, but start harvesting some of the gains and put a majority into cash investments." Link: boston.com