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No Margin Bubble


Where are the bean counters when ya need 'em?


In a Buzz & Banter post earlier, I pointed out what I think is a misleading statistic regarding margin debt levels. This is an important point, and it merits further discussion.

Margin debt, which is money borrowed against existing stock positions by customers at brokerage firms, is at very high levels. When margin debt is high, it suggests that investors are very enthusiastic about potential future returns and are leveraging themselves aggressively. Debt isn't quite at the levels seen in 2000, but it's close and getting closer very month.

Bears have been pointing to this figure as a reason to expect prices to decline - after all, if we're seeing the same type of speculation that we saw near the peak of the bubble, then by golly it bodes ill for our future now too.

But they're missing a key ingredient. Margin debt reflects only one side of the brokerage account. Just like a balance sheet has assets and liabilities, brokerage accounts have cash and margin debt. Taking the difference between the two gives us a better idea of how customers are actually positioned. After all, don't you think it'd be misleading to only look at the $18 billion in cash at GM and conclude the company is healthy? We have to look at both sides of the ledger.

The chart below shows total cash at NYSE and NASD firms minus total debt. I think the chart speaks for itself regarding our current situation compared to 1999 or 2000 - there is no comparison. By the way, the positive "net worth" in these customer accounts is the first time we've seen this phenomenon since 1950.

We are not in a margin debt bubble.

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No positions in stocks mentioned.

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