Tags: margin | debt | Russia | Ukraine

FT: Margin Debt Hits All-Time High, May Be a Casino Wager on Stocks

By John Morgan   |   Monday, 03 Mar 2014 11:43 AM

Investors are borrowing a record amount of money to plow into stocks, and the result is a “high stakes gamble” that could trigger a steep correction in equities, the Financial Times said in an analysis.

Margin debt has been spiraling upward in recent months. New York Stock Exchange figures show it stands at $451 billion on the NYSE alone, a jump of more than 20 percent in the past year and above the previous high of $381 billion in 2007.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

“Peaks in the use of borrowed money have in the past been a precursor to big bear markets and viewed as a warning sign,” the Times said.

Excessive margin debt can actually aggravate stock market declines, as investors are forced to quickly sell off their borrowed shares when stocks take a deep fall, thus magnifying the effects of a downtrend.

“We are beginning to see signs of froth; it’s a yellow flag of caution and the market can move higher from here,” said Kate Warne, investment strategist at Edward Jones. “It’s not the time to move to the sidelines, you frequently get good returns in the final stages of a bull run.”

Steven Boyd, principal at Halyard Asset Management, told the Times he would be more concerned if valuations for the S&P approached a forward earnings multiple of 20 times, rather than the current 17 times.

Since the U.S. stock market hit the most recent bottom in March 2009, the S&P, including the reinvestment of dividends, has ascended more than 200 percent.

Doug Short, vice president of research at Advisor Perspectives, noted there was a confluence of margin debt and market peaks in two most recent highs in the U.S. stock market.

Short noted margin debt peaked in March 2000, the same month that the S&P 500 hit an all-time daily high before the “dot-com” boom ended abruptly, and again in July 2007, three months before the market peak that preceded the 2008 economic meltdown.

Management Today said margin debt has lately been growing faster than the real value of the S&P 500.

Management Today concluded “the surge in debt above the S&P’s rise is something any one with even the faintest interest in stock markets should keep an eye on, especially if the standoff between the West and Russia over Ukraine turns nasty.”

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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