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found on WSJ:
Gwenn
Heard on the Street
Margin Debt Set a Record
In January, Sparking Fears
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
The amount of debt that investors took on to buy
stocks in January shot up
to another record even as the value of stocks fell,
raising fresh concerns
about speculative activity on Wall Street.
It is a staggering statistic: Such debt -- known as
margin buying -- rose 7%
among New York Stock Exchange-member brokerage firms,
to $243.5
billion in January. Margin levels are now up 36%
since September.
The worry? This debt load could magnify any fall in
the stock market, as
selling from investors who are forced to meet margin
calls exacerbates a
decline.
A somewhat comforting thought -- at least on
a relative basis -- is that much of this piling on
of debt isn't being done by the proverbial guy
on the street. In fact, what is driving it appears
to be not an increase in leverage by the
average investor, but an increase in activity by
investors who already like to use leverage.
Anecdotal accounts suggest the extra debt has
been taken on primarily by a small portion of
investors who trade fast-moving technology
stocks, whose value has skyrocketed in the
past 12 months, and by hedge funds, big investment
pools for wealthy
individuals who often use leverage to maximize
returns.
At Dallas-based Southwest Securities Group Inc., for
example, which
clears for many day-trading firms, whose customers
trade in and out of the
same stocks all day from sophisticated workstations,
saw margin debt rise
about 35% in the final six months of 1999 to $900
million, said Eddie
Anderson, executive vice president of operations.
But equity in the accounts, he says, remained steady
at 49%. That means
about half of the stocks of the average Southwest
customer with a margin
account was backed with borrowed money, significantly
above the national
average. Mr. Anderson said the rise in margin debt
was due not to
customers becoming more leveraged, but to "the volume
and the
investment activity in the market in general."
So why the jitters? Margin lending has historically
moved in tandem with
the market's value. The recent burst of margin
borrowing in the market has
been more alarming because it has outrun the rise in
stocks' value, which
actually fell 4% in January and is up just 13% since
September. That
indicates a rise in leverage.
Margin debt now equals 1.57% of market value, equal
to its peak in the
fall of 1987 ahead of the October 1987 stock-market
crash, according to
Bianco Research, although different market value
measures suggest the
ratio was somewhat higher in the early 1980s. By
comparison, that ratio
approached 30% in 1929.
Under the Federal Reserve's Regulation T, an investor
may make up to
50% of an initial stock purchase with borrowed money.
Thereafter, he or
she may let the portion of debt rise no higher than
75% of the value of the
stocks in the account.
"There's no fear among individual investors," said
Charles Biderman, chief
executive of TrimTabs.com (www.TrimTabs.com), which
tracks flows of
money in and out of the securities markets. "They
can't imagine that stocks
can go down or they wouldn't be borrowing this
heavily."
"That's how you get those panic plunges," said Fred
Hickey, editor of High
Tech Strategist newsletter. "When we bottomed in
October 1998, it was
on a panic selling [triggered by] margin calls."
Many economists play down the rise in margin debt,
noting it remains tiny
relative to stock values and even other types of
debt, which are also rising
briskly. Consumer credit stood at $1.4 trillion and
mortgage debt at $4.5
trillion in December, both up 10% from a year
earlier, according to the
Fed.
At Charles Schwab Corp., the country's largest
discount broker, margin
debt has risen only slightly to 2.3% of customer
assets at the end of
December from 2.2% at the end of June (although 39%
of those assets are
mutual funds).
Regulators have watched the spike upward in margin
debt with concern.
Securities and Exchange Commission Chairman Arthur
Levitt, in a speech
Saturday, said, "In too many cases, investors are
focusing on the upside --
without carefully considering the downside." The SEC
recently launched a
study of the issue and is consulting with the Federal
Reserve, the Treasury
Department and the Commodity Futures Trading
Commission.
People familiar with those discussions said nothing
has been decided, but
the latest data will likely accelerate deliberations.
Most of the regulators
are skeptical about additional government action, and
Fed Chairman Alan
Greenspan, although acknowledging concern, has
specifically ruled out
curbing the level of borrowing allowed for buying
stocks. The most likely
action from Washington, if any, would be more
jawboning by officials, as
well as prodding the exchanges and firms to further
limit borrowing activity
in the most volatile stocks. In December, the NYSE
and National
Association of Securities Dealers proposed stricter
margin requirements
for day traders only. The proposal awaits SEC
approval.
Still, the focus on individual borrowing may overlook
rising leverage among
professionals such as hedge funds. Not since 1929 has
a market collapse
been attributed to overleveraged individuals,
historic accounts suggest. By
contrast, 1998's stock plunge was fueled by the near
collapse of
Long-Term Capital Management and other hedge funds
and the October
1987 crash was aggravated by professionals trading
stock-index futures.
Just two weeks ago, the bond market went wonky as the
Treasury's bond
buyback plan whipsawed leveraged dealers and hedge
funds.
Although margin debt rose 25% from the third to the
fourth quarters of
1999 at Schwab, it rose an even sharper 33% at Bear
Stearns Cos. As the
country's largest trade-clearing broker, Bear Stearns
handles margin
lending for many smaller brokerage firms. It also
lends to hedge funds;
indeed, slightly more than half of its clearing
business is for institutions such
as hedge funds.
Richard Lindsey, co-president of the firm's clearing
unit, said the rise in
margin debt reflects rising value of the stocks in
the accounts, not increased
leverage. Furthermore, "We, like many firms, over the
past year or so have
raised margin requirements on some of the
highfliers." Schwab initiated a
list of 22 volatile stocks requiring stricter margin
requirements in November
1998, and it has since grown to more than 200, a
spokesman said.
Still, Bear Stearns's Mr. Lindsey said the firm saw
more borrowing by
individual investors than hedge funds in the latest
quarter. Furthermore,
many hedge funds borrow through "joint back offices"
with brokerage
firms like Bear Stearns, thereby obtaining higher
leverage that doesn't
appear in margin data.
Some of the rise in household margin borrowing,
rather than financing
stock speculation, might be financing consumer
purchases through checks
and debit cards drawn on brokerage accounts. Mr.
Biderman says a
divorced acquaintance used his margin account in
December to make a
payment to his ex-wife. Unfortunately, his position
in Internet stock CMGI
Inc. went against him, forcing him to sell some in
January.
Christine Callies, market strategist for Credit
Suisse First Boston, worries
the economy could take a blow if leveraged investors
are forced to
liquidate rapidly. "The particular type of people
that have leveraged up
recently seem to be very excitable. We can guess
these guys aren't
leveraging up to buy AT&T. As interest rates go up,
they have to shoot for
higher returns to pay the service on the debt."
Jim Willsie, a retired engineer in Clearwater, Fla.,
can attest to that. If a
stock he owns falls, he'll often double his holdings
for the day with
borrowed money, on the theory the stock need only
retrace half its drop to
break even. But if it doesn't come back, and "You're
losing somebody
else's money, it hurts twice as much. That's when the
panic sets in." Last
summer he lost about $5,000 when he bailed out of
Internet highflier Ask
Jeeves Inc., only to watch it bounce right back.
-- Jacob M. Schlesinger contributed to this article.
Write to Greg Ip at gregory.ip@xxxxxxx
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