I have received quite a few emails over the past week worried about a chart posted by Alan Abelson in Barron's the week before last. The chart showed margin debt in customers' accounts at NASD-designated clearing firms, and certainly provided a compelling (if not outright shocking) exclamation point to the sentence that the free-wheeling bubble days were back.
The chart is unequivocal - margin debt did, indeed, more than triple from May through July, and is now higher than it was even during the bubble. Unfortunately, we were not given a picture of the other side of the ledger - free credit balances.
A margin balance is debt owed by the customer to the firm. You can generate a margin balance by buying stock, using other stock as collateral, or by just having money wired out of your account to pay for a vacation or what have you. Like any other collateralized loan, you pay interest on your debit balance, and if your collateral - the other stocks in your account - fall so much that the firm feels its loan is threatened, they may "call" the loan from you (a.k.a. the dreaded margin call). You can either sell some stocks to satisfy the firm's equity requirements, or you can send them more cash. This margin balance is a liability.
On the other hand, if you sell some stock or just have extra cash in your account, you may have a free credit balance. This is essentially cash available to you after everything is paid for and all margin requirements are satisfied. Often, firms do not pay interest on this free credit balance, so it is "dead money". Savvy traders usually do not carry free credit balances, since it is just sitting there and not working for them. It is an asset.
If we come up with a "net worth" or "available cash" for the customers at these very same NASD clearing firms, we get quite a different picture than the one everyone is so worried about, and it is presented below. This chart is simply customers' free credit balances (their assets) minus margin debt (their liabilities). While during the bubble days, their available cash was a negative $4 Billion, it went as high as positive $12 Billion in April and is still a positive $6 Billion, even after being cut in half between April and July. The quick rise in margin debt (at NASD firms, anyway) is quite startling, but it needs to be viewed objectively. In that vein, it looks like even though speculation is back in full force, it is being done from a more healthy base.
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