Margin debt not high enough for bear market

Discussion in 'Wall St. News' started by a529612, Apr 13, 2007.

  1. all the pundits will till you things sunny till its not
  2. Bingo!
  3. It's the matter of timeframe. His claim is that the margin debt has not fallen below the 12 month average, which is the indicator he is using. That typically gives a signal about 6 months behind the exact turning point.

    Very useful if you think that a two year bear market (ala 2000-2002) is coming. Aren't we always fighting the previous war?
  4. S2007S


    interesting.....just posted this the other day:


    Registered: Aug 2006
    Posts: 2988

    04-11-07 11:37 PM

    NASD sounds alarm on margin buying
    By Aaron Siegel
    April 11, 2007
    NASD has issued a warning to investors about the dangers of margin buying, as the amount of debt U.S. investors took on rose to a record $321.2 billion in February.

    The figure topped the previous record of $299.9 billion in March 2000, at the peak of the last bull market, according to Reuters.

    Margin debt has more than doubled from $141.3 billion in January 2003, three months after the bear market bottomed out.

    The self-regulatory organization’s latest investor alert comes as many American homeowners are unable to keep up with their mortgage payments. Delinquencies hit 4.95% in the fourth quarter, compared with 4.67% during the third quarter, according to the National Delinquency Survey released by Mortgage Bankers Association released last month.

    "We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities," said Mary L. Schapiro NASD chairman and chief executive, in a statement.

    "By updating our alert on this topic, we hope to remind investors not to underestimate the risks involved."
  5. S2007S


    Mad Money Is Piling Into Margin Accounts
    Liz Moyer, 04.11.07, 6:00 AM ET

    By This Author
    Liz Moyer

    Yet one more sign that the equity markets might be overheating: Margin debt in investor brokerage accounts has reached an all-time high of $321 billion, enough to prompt a warning from securities regulators on the risks of investing with borrowed money.

    The NASD issued another margin-call warning to the public Tuesday, the first time since 2003. Margin accounts allow investors to borrow from their brokers to buy securities; if trades go south, investors get a "margin call" from their brokers asking to pony up additional capital.

    Margin borrowing reached a peak in February despite the market swoon late that month. (March data are not yet available.) The previous record was $299 billion, set in March 2000, the very height of the Internet bubble.

    The warning comes as Wall Street's two top cops--NASD and NYSE Group's (nyse: NYX - news - people ) regulation arm--get set to merge and form one regulator to oversee brokerage firm examinations and compliance. It also comes amid a return to active trading by aggressive retail investors.

    While the Nasdaq is nowhere near its record high of 5,132 set on March 10, 2000 (it closed at 2,477 on Tuesday), the Dow Jones industrial average hit a record 12,845 in intra-day trading in February. The Dow closed on Tuesday just 272 points shy of that. (Elsewhere, however, there are signs of strain. The once indomitable housing market has seen delinquencies on mortgage payments creep higher and subprime mortgage lenders fold because of consumer defaults.)

    John Gannon, senior vice president for investor education at NASD, said in an interview Tuesday that NASD was concerned that investors did not fully understand the rules for investing in margin accounts. The regulator was flooded with complaints after margin calls began hitting investors in 2000.

    "We're trying to be proactive and avoid some of these same issues" this time, Gannon said. Brokerage firms are not required to make sure investors understand margin rules, though NASD provides member firms with statement stuffers to give to retail customers.

    NASD's warning Tuesday reminds investors that brokerages can force the sale of any securities in an account to satisfy a margin call--without contacting the investor first. (In the case of a particularly volatile stock, such liquidations can happen within minutes.) Firms can also change their margin rules at any time without notice, and investors are not entitled to an extension of time to meet a margin call.

    Investors often don't even know they have a margin account, even though many brokerage firms automatically put investors into margin accounts when they sign up. The incentives are plenty: Not only do brokerages reap interest charges and transaction fees, they also profit by lending shares held in margin accounts to other traders. To avoid getting sucked dry, investors must ask to be put into cash accounts.

    For those who do want to trade on margin, the initial requirement is a deposit of $2,000 or 100% of the purchase price of the security, whichever is less. Day traders have to deposit $25,000 to start out, and they are subject to other special rules.

    After this, federal regulations say, investors can borrow up to 50% of the total purchase price of a stock to start out. This is "initial margin." Beyond this, NASD and NYSE have additional "maintenance margin requirements" mandating that equity in the account cannot fall below 25% of the current market value of the securities, or else a margin call will be triggered.

    These are the minimum requirements. NASD said brokerage firms may impose additional requirements on customers.

    "Margin accounts require work," NASD warned on Tuesday. "Monitor the price of the securities in your margin account on a daily basis. If you see that the securities in your account are declining in value, you may want to consider depositing additional cash or securities to attempt to avoid a margin call."
  6. Margin debt is so 1929 :-D

    Maybe the real question is: are credit card and mortgage debt levels high enough for a bear market