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Margin Debt Falls for Second Straight Month

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Bloomberg News

The amount of money borrowed to finance stock purchases declined again in November--further evidence that market volatility is taking a toll on investors.

So-called margin debt at New York Stock Exchange member firms fell 6.1% to $219.1 billion last month, the Big Board said. It was the second straight monthly decline, and margin debt is now down 21% from its March peak of $278.5 billion.

Margin debt declined less in November than the value of the stock market overall. That indicates some of the most speculative stocks still have farther to fall, said Charles Biderman, president of the research firm TrimTabs.com.

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“While margin debt dropped 6%, the market dropped 10%,” said Biderman. “New margin debt is concentrated in the most speculative stocks and they’ll remain weak because you’ll have forced selling.”

Although the amount borrowed fell in November, margin debt is still up 21%--$36.9 billion--from the end of October 1999, according to TrimTabs. That’s when borrowing to buy stocks began to surge. At its March peak, margin debt equaled 1.54% of the market value of U.S. public companies, compared to 1.37% in November.

The March peak in margin debt as a percentage of market value was the highest since the current rules on margin borrowing were introduced in 1974, according to TrimTabs.

The surge helped fuel a rally in January and February, and then contributed to a slide in stock prices from March to May. As stocks fell, brokerages required investors who had borrowed money to buy shares to come up with more cash as the value of their collateral declined.

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