Marginally alarming
The WSJ reported today that margin debt, that is money borrowed from brokers to invest, rose 22% through the first 11 months of 2006 to just over $270 billion. At first glance I thought "so what", it's been a good market year and confidence should be higher. But what I read next was startling. The current level is "not far from the record of $278 billion reached in March 2000".
In 2000 as the Nasdaq declined, almost every market day at around 3pm uncertainty loomed, or one could say chaos. Investors who were pushed to the edge by their margin debt, and potential margin calls, would indiscrimately sell to salvage what they could. It was ugly, especially since the selling was of course not confined to the battered tech sector. Margin debt pressure meant selling anything still breathing, whether a Nasdaq high p/e name, an S&P 500 counter cyclical, or a mid-cap industrial. Nothing was safe.
So this news is troubling in several ways:
---It's a reminder of what happened at these levels in the not too distant past
---It was, to me, a complete surprise. This does not feel like '98/'99 when everyone you met almost anywhere, by their account, was doing exceptionally well in the stock market and was full of confidence about a new era. Yet there is the current number in the WSJ.
---With consumer debt at generally high levels among the broad "middle class" demographic segment, is it possible that there is risk here that is not fully appreciated? Who is using this margin debt and for what purpose, reasoned investment or speculation? And the concern is, has their been enough of a build up to create panicked downturns in the equity and consumer credit markets when the inevitable cyclical valuation and risk driven volatility occurs?
These are reasonable questions but the positive approach suggests that the dynamics of 2000 are not in place now. There is not one sector of the market that has had lottery winning performance. The market p/e is not out of line with past periods, and even if the e comes down in a slowing economy the valuation impacts are likely to be gradual. But, nevertheless, the comparison of margin debt today to the Nasdaq peak in 2000 is worth a little reflection.
Do I really want to own Capital One or E-Trade right now? Is this one of the facts that the bond market sees and equity focused folks don't see? I think I'll choose a video for tonight and think about it.
In 2000 as the Nasdaq declined, almost every market day at around 3pm uncertainty loomed, or one could say chaos. Investors who were pushed to the edge by their margin debt, and potential margin calls, would indiscrimately sell to salvage what they could. It was ugly, especially since the selling was of course not confined to the battered tech sector. Margin debt pressure meant selling anything still breathing, whether a Nasdaq high p/e name, an S&P 500 counter cyclical, or a mid-cap industrial. Nothing was safe.
So this news is troubling in several ways:
---It's a reminder of what happened at these levels in the not too distant past
---It was, to me, a complete surprise. This does not feel like '98/'99 when everyone you met almost anywhere, by their account, was doing exceptionally well in the stock market and was full of confidence about a new era. Yet there is the current number in the WSJ.
---With consumer debt at generally high levels among the broad "middle class" demographic segment, is it possible that there is risk here that is not fully appreciated? Who is using this margin debt and for what purpose, reasoned investment or speculation? And the concern is, has their been enough of a build up to create panicked downturns in the equity and consumer credit markets when the inevitable cyclical valuation and risk driven volatility occurs?
These are reasonable questions but the positive approach suggests that the dynamics of 2000 are not in place now. There is not one sector of the market that has had lottery winning performance. The market p/e is not out of line with past periods, and even if the e comes down in a slowing economy the valuation impacts are likely to be gradual. But, nevertheless, the comparison of margin debt today to the Nasdaq peak in 2000 is worth a little reflection.
Do I really want to own Capital One or E-Trade right now? Is this one of the facts that the bond market sees and equity focused folks don't see? I think I'll choose a video for tonight and think about it.
posted by John Borden at 2:46 PM
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