Margin Debt Has Biggest Drop in Years
Margin debt--money borrowed to buy stocks--tumbled 11.5% in March, the biggest drop in years and an additional sign that speculative fever is being wrung out of the market, analysts said.
What’s more, some online brokerages say that margin calls--demands by broker-lenders for more cash collateral from borrowers--were extremely heavy early this month as the Nasdaq market fell sharply the first three trading days.
Though the loss of such active margin traders is hurting many brokerages’ earnings, many Wall Street pros say it’s a long-term positive for the stock market as speculative froth is reduced.
What’s more, a reduction in margin activity lowers the likelihood of additional margin calls in weak markets. Those calls can have a cascading effect, worsening a decline by forcing margined traders to dump shares.
Total margin debt at New York Stock Exchange member brokerages fell to $165.4 billion at the end of March, the Big Board said Friday. That was down from $186.9 billion in February and down 41% from the all-time peak of $278.5 billion reached in March 2000, the month Nasdaq hit its record high.
At its peak, margin debt equaled about 1.5% of total U.S. stock market capitalization. It since has shrunk to 1%. By that measure and in absolute dollars, margin debt is now back to where it was in March 1999.
“All the speculation since then has been wiped out,” said Charles Biderman, president of Mutual Fund TrimTabs, a Santa Rosa, Calif.-based market research firm.
Biderman considers it a sign that a market bottom has been reached when margin debt falls faster than the market as a whole. That happened in March, when margin fell 11.5%, while the broad Wilshire 5,000 stock index fell 6.8%.
Along with margin calls, there was another powerful factor behind the stock sell-off of late March and early April, Biderman said: taxes.
“Americans paid $165 billion in taxes this week. A good portion of that was in the market,” Biderman said. “Tax selling begat margin selling, which begat more tax selling, because as the market fell you had to sell more shares to get enough to pay your tax bill.”
Once the tax selling ended, Biderman said, the decks were cleared for the rally we now are seeing--one that has lifted the Nasdaq composite index 32% since April 4.
At online brokerages, where tech stocks and buying on margin are especially popular, the decline in margin debt is far more pronounced than at major NYSE firms.
Margin debt at Datek Online today is less than half of what it was at its peak 13 months ago, said spokesman Mike Dunn. Trading activity has tailed off correspondingly, falling to an average of about 80,000 transactions a day, compared with 120,000 a day a year ago, Dunn said.
At Charles Schwab, the largest online brokerage, margin debt fell to $11.8 billion at the end of March, down 25% from December and down 46% from March 2000, a spokesman said.
But whether those speculators will be missed as the market struggles to maintain the current rally remains to be seen, analysts say.
Despite the drop in margin activity, Dunn said that there has been a recent strong upswing in new accounts overall at Datek, and that for at least a couple of days this week, trading approached the hottest levels of last year.
On Wednesday, when Nasdaq leaped 8%, Datek logged 150,000 trades. An additional 140,000 trades hit the tape Thursday as Nasdaq tacked on a 5% gain, Dunn said.
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STOCKS FALL
The stock market ran into profit-taking after a two-week rally. C3
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De-Leveraging
Margin debt outstanding--money borrowed to buy stocks--dived again in March as more investors rushed to close out their loans amid the market’s plunge.
Margin debt at New York Stock Exchange member brokerages, month-end data, in billions
March: $165.4 billion
Source: Bloomberg News
