Is There a Potential Problem Looming? Margin Debt and Margin Calls!

The Belkon Report called the 2000 market top, now they have published a report an institutional newsletter on asset allocation and they are warning about the levels of margin debt in the NYSE.

Margin debt is the loans in which banks and investment brokerages make to investors using their stock and bond holdings as collateral. In November 2016, the outstanding margins neared its all-time high of $507 Billion and have hovered close to that level since. Is it something that is hanging over the market and the market is addicted to debt?

There is precedent for a high level of margin debt foreshadowing a market collapse. It peaked in March 2000, congruent with the market’s March 24 decline of 49%. It also peaked in July 2007, a few months before the market topped off in October. Another coincidence?

The percentage rise in margin debt over the latest bull market is 193%, the exact same increase from 2002 to 2007, when the financial crash began and the S&P fell over 57%.

The problem with the margin debt is it causes a cascading effect. As the market falls, investors receive margin calls on their loans and have to sell stocks to cover their shortfall and maintain their margin-debt minimum.

Yardini Research was contacted and asked about the current margin debt. They said “as long as the market is going up, margin debt tends to go up as well”. And margin debt can exacerbate a bear market. The Yardini Report said they are not aware of any time when margin debt triggered a bear market.

Is that a relief or a warning sign? Are you asking yourself the same question I am?

So what happened in 2000 and 2007? No trigger?

 Is this a trend they are ignoring, or just a coincidence?

Notes and commentary on an article in Barron’s February 2017.