The US equity market has fully recovered from the mid-May through late June swoon. It has been aided by new margin borrowing. We have not looked at margin use at the NYSE for a couple of months and it is continuing to trend higher as this Great Graphic from Pragmatic Capitalism illustrates.
Margin usage is now above the 1999 and 2007 peaks and this is drawing attention from industry and officials. The Federal Reserve sets the margin rules and has not adjusted them since 1974, when it lowered it to 50% from 65%.
Some observers see the increased use of margin to buy shares as a sign of potential vulnerability. A downturn would force leveraged players to liquidate, exacerbating any correction or trend reversal. We are a bit less concerned, and would attribute the equity market gains to a number of other factors as well, including companies borrowing to buy back their shares. Share buy backs are running well ahead of last year's pace and not only lifts prices directly through buying, but also reduces the float.
Margin usage is now above the 1999 and 2007 peaks and this is drawing attention from industry and officials. The Federal Reserve sets the margin rules and has not adjusted them since 1974, when it lowered it to 50% from 65%.
Some observers see the increased use of margin to buy shares as a sign of potential vulnerability. A downturn would force leveraged players to liquidate, exacerbating any correction or trend reversal. We are a bit less concerned, and would attribute the equity market gains to a number of other factors as well, including companies borrowing to buy back their shares. Share buy backs are running well ahead of last year's pace and not only lifts prices directly through buying, but also reduces the float.
Great Graphic: New High in Margin Debt
Reviewed by Marc Chandler
on
July 29, 2013
Rating:
Reviewed by Marc Chandler
on
July 29, 2013
Rating:
