Margin Debt Avalanche

Discussion in 'Trading' started by Eminence Front, Sep 16, 2003.

  1. Saw this in another thread:
    this little gem from fleck tonight.
    Reflecting on the recent news, I have been struck by the prominence of manialike psychology and behavior. That folks have chosen to live in a time warp seems particularly clear from the report that margin debt at NASD-member firms climbed to $27.977 billion as of this past July. To put that number in perspective, it was only $21.403 billion in March 2000, and about $6.481 billion at the beginning of 2003.

    Wondering if people think this is primarily because the players who remain in the trading game, the vast majority of the joe-blow-retail-players that is, got used to trading size with their fat accounts in the pig days of the bubble, but now find themselves with far less money, after 3 years of losses, and needing to trade even more size, due to lower prices, lower volatility, and their lower capital (ground they have to make up mentality)...therefore they are Margined to the Max....this a viable theory or is there probably a lot more behind it?
  2. Pabst


    Actually the dollar amount seems quite, quite small. As a pct. of market cap...well 20 billion ain't what it used to be.
  3. swimmus


    And I do not see anyone participating actively in the market- meaning - the average dude is not there. Just an observation from the real world.
  4. IBM's mkt cap is 154bil

    the # is meaningless and (this is pure speculation) probably has more to do with large players using different strategies than they otherwise would for 2 reasons off the top of my head--

    1) interest rates are near all time lows
    2) mkt volatility is extremely low
  5. Thanks for the perspective on the number...basically you're saying its just something a talking head threw out there because it sounds "alarming" or "interesting" but really its chump change that more probably indicates some smarter folks using lower rates to leverage certain plays with more margin...

    If i've missed the points, apologies, otherwise, thanks much!
  6. exactly...

    in other words,

    it's a put on!

  7. Come on join our party, Trade to Kill!
  8. Gotta say I disagree to an extent with some of the comments about margin debt.

    I think this is an important number. It's true, it's a small number compared to IBM's market value. But it's a large number as a potential number of supply.

    And in case you're wondering...margin debt always represents potential supply. This is a segment of the market which will cut and run if the market gets into a meaningful correct, or of course will become distressed sellers at the bottom. These are the aggressive stock traders...and a high number here shows what will someday be just ONE of the areas of supply as the market starts down.

    Having said this, the fact that it's high doesn't mean the market has to come down. What I believe is more important is to watch the trend of margin debt relative to what the market is doing. Expanding margin debt with rising stock prices seems healthy to me. But there is a limit. And whatever that limit is, it will certainly be a small percentage of the market value of IBM. This is a more important number for intermeidate trends than short term trends.

  9. Why would you say that? There are probably 100 million Joe Schmos in America. An estimated 90% of them are too stupid to ever get into a situation where they would have money to open a brokerage account. That leaves an order of 10 million retail brokerage accounts. 30 billion dollars would translate to an average of $30,000 per such account.