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Available Cash


$27 that a lot?

I noted in Buzz & Banter earlier that margin debt at NASD and NYSE firms had declined for the second month in a row through June. This is not necessarily a positive development - normally we want to see increasing margin debt as it is a sign that investors are willing to take on risk. Of course, since margin debt is an obligation that one must pay back, when it becomes extreme, it can become a problem.

The chart below shows what I call "available cash", which is simply assets minus liabilities at these brokerage firms. The assets are cash balances in cash and margin accounts, while the liability is margin debt.

In 2000, we can see clearly that investors had an extreme negative net worth - margin debt greatly exceeded cash balances on hand. In late 2001, however, this figure actually became positive as investors pared down (or were sold out of) their margin debt and cash balances grew. This is significant because it is the first time in 50 years we have seen positive balances. The figure peaked in September 2002 and declined steadily during the 2003 rally, but recently has been climbing again.

What would be best for the market now is to see this figure decline once again. As of June, investors had about $27 Billion in available cash according to these figures, which can be used any way they wish. If many of them decided to put that money at risk in the stock market, it would be a leg of support that should help push prices higher.
No positions in stocks mentioned.

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