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Margin Debt, Cash and Bull Market Peaks


Debt is high, but so is cash, leaving a neutral long-term picture.


The Wall Street Journal recently ran a story on the high levels of margin debt at firms tracked by the New York Stock Exchange.

With a big month-to-month jump, debt rose to $270 billion, which is a level eclipsed only by March 2000 - the height of bubble-mania in U.S. equities.

Scary stuff, but unfortunately the Journal didn't drill down one more layer, which changes the picture considerably.

The NYSE doesn't just track the liabilities sitting in brokerage accounts (margin debt), but that's all that ever gets reported. Unbeknownst to most, the NYSE also tracks assets called free credits. This is money available for customers to withdraw, which is accumulated when customers deposit funds or sell stocks.

The chart below shows the comparison in these figures between now and the bubble years.

We can see that while margin debt is indeed hitting levels that look bubblicious, free credits are hitting new all-time highs. Let me say that another way…cash available to withdraw from brokerage accounts has never been higher than it is now.
By subtracting the assets from the liabilities and coming with up a simple "net worth" sitting in these accounts, we see that currently investors have a negative balance of around $25 billion. That isn't great – it was positive $40 billion as the bear market was ending – but it's a far cry from the bubble years of being $100 billion in the hole.
I'm not particularly positive on the chances for equities to sustain gains when looking out over the next 1 – 3 months or so, just because so few are hedging the likelihood of a correction, but I see few signs of speculative bull-market excess.
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No positions in stocks mentioned.

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