Tags: investor | margin | debt | bubble

Investor Margin Debt Soars: Signs of a Bubble?

Monday, 13 May 2013 09:24 AM

By Dan Weil

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Individual investors' borrowings against their stock — margin debt — is soaring, and some worry it may be the sign of a bubble for stocks.

As of March 31, investors had $379.5 billion of margin debt at New York Stock Exchange member firms, according to the Exchange.

That's up 18 percent from a year earlier and nearly matches the $381.4 billion record of margin debt for July 2007, according to The Wall Street Journal.

Editor's Note:
 
Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Jumping stock values and near-record-low interest rates are fueling the trend, The Journal noted.

But the worry is that a drop in stock prices could force margin borrowers to sell off their stocks, creating a cascade of selling.

"When the air comes out of the bubble, the situation gets exacerbated on the way down." Cullen Roche, founder of Orcam Financial Group, a research and consulting firm, told The Journal,

"As the market surges we inevitably see a sort of Ponzi effect in the market where more confidence breeds more credit and the bidding up of prices. It works until it doesn’t and when it doesn’t the air sure comes out fast," Roche wrote on his Pragmatic Capitalism blog.

"My guess is we’ve actually already surpassed the all-time high though we won’t officially know until April data is released," he stated.

"Fun times knowing we live in a world that is built on such a fragile foundation."

Bruce McCain, chief investment strategist at Cleveland's Key Private Bank, sees signs of irrational exuberance.

"You have to feel really good about the market to be borrowing to buy more shares at these levels," he told The Journal. "It's probably a sign of excessively positive sentiment right now."

Stephen Suttmeier, chief technical equity strategist at Bank of America Merrill Lynch, says the jump in margin debt represents strong optimism for stocks and as such, "the implication is contrarian bearish," he wrote in a commentary obtained by Business Insider.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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