On the Margin
Free cash? Sounds good to me!
One of the measures I've discussed here previously is the "net worth" of customers at NYSE and NASD-designated clearing firms. This goes beyond the headline number of margin debt that is widely reported, and in my opinion is a more useful look at the health of customer accounts.
Briefly, margin debt is money borrowed from a brokerage firm by a customer, and is usually used to purchase more securities. The customers may do whatever they wish with the funds, even take them out and go on a nice vacation, but most use these loans to buy more stock and hopefully profit as they rise. As with most loans, margin debt is a liability and firms charge their customers interest on outstanding balances. But margin debt isn't the end-all, be-all. Customers also sell stocks and leave cash in their accounts, most often earning interest on these cash balances. These assets are called free cash balances in brokerage firm lingo, and they are on the other side of the ledger from margin debt.
For the month ended March 31st, margin debt at NYSE firms declined by about $650 million while free cash rose by nearly $2.9 billion. When we subtract total liabilities from total assets, we end up with a positive $1.5 billion in cash for these customers. A positive number is very rare - prior to the readings we saw the past few years, we would have to go back to 1951 to see such a thing.
A positive number itself is not necessarily a good thing - just look at the chart below. What we generally want to see is a gradual increase in both cash and margin debt. When the growth in margin debt far outweighs the growth in cash assets, however, like in the years leading up to 2000, then we have trouble. I don't think the most recent numbers tell us a whole lot - perhaps the most important take-away is that as of last month, margin debt is NOT something bears should point to in attempting to bolster their case, as there is a lot of firepower left in client accounts to buy more stock.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter