At the Margin
In September, I posted an article about margin debt held at NASD-designated clearing firms. What prompted the article was a chart making its way around the Street showing an explosion in margin debt, similar to what was seen at the height of the bubble. My point at the time was that it was a misleadingly bearish interpretation of incomplete data.
Margin accounts can be thought of as a balance sheet. There are two sides to the account - there are liabilities (margin debt), and there are assets (free credit balances). Looking only at margin balances would be akin to going to a lender to ask for a loan and having them say "I'm sorry, Ms. Minyan, but we show that you have $200,000 in debt. That is beyond our guidelines so we refuse your loan." Unfortunately, what they're overlooking is that you also own a home that is valued at $500,000! Your assets are more than enough to cover the debt, and in fact you would be in pretty good shape. In order to get a better handle on margin balances, we need to look at both sides of the ledger.
The most recent statistics available, for the month of December, show that margin balances at NASD firms declined to $8.2 Billion from $26 Billion in July. At the same time, free credit balances didn't decline nearly as much. The net result is that the "net worth" or "available cash" for these customers has actually increased from where it was last summer. In fact, these balance sheets are the in their best condition in seven years. The following chart shows the cash available to these customers. Frankly, I would prefer to see this figure decline, as that would show that customers are taking on more risk and are putting money to work. But as we can see, there is a healthy amount of cash available for customers to do with as they please - and if they decide to buy stock, it could prove to be a nice source of support for the market.
On the NYSE, the situation isn't quite so sunny. While the net worth of those customers improved by around $4 Billion in December, it is still as negative as it was in 2001. However, it is way off from the worst levels seen at the top of the bubble. As of December, the net worth of the customers was -$80 Billion, which compares to the worst level of -$214 Billion in March 2000.
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