Stock-Market Margin Debt Plunges Most Since Lehman Moment




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ORIGINAL POST

POSTED BY Ed (22 days ago)
It gets serious. Margin calls?


No one knows what the total leverage in the stock market is. But we know it’s huge and has surged in past years, based on the limited data we have, and from reports by various brokers about their “securities-based loans” (SBLs), and from individual fiascos when, for example, a $1.6 billion SBL to just one guy blows up. There are many ways to use leverage to fund stock holdings, including credit card loans, HELOCs, loans at the institutional level, loans by companies to its executives to buy the company’s shares, or the super-hot category of SBLs, where brokers lend to their clients. None of them are reported on an overall basis.

The only form of stock market leverage that is reported monthly is “margin debt” – the amount individual and institutional investors borrow from their brokers against their portfolios. Margin debt is subject to well-rehearsed margin calls. And apparently, they have kicked off.

In the ugliest stock-market October anyone can remember, margin debt plunged by $40.5 billion, FINRA (Financial Industry Regulatory Authority) reported this morning – the biggest plunge since November 2008, weeks after Lehman Brothers had filed for bankruptcy:

https://wolfstreet.com/2018/11/21/stock-market-margin-debt-plunges-most-since-lehman-moment/

https://wolfstreet.com/wp-content/uploads/2018/11/US-margin-debt-change-MoM-2018-10.png

COMMENTS

Ed (22 days ago)
https://wolfstreet.com/wp-content/uploads/2018/11/US-margin-debt-1997_2018-10.png


Surging margin debt creates stock-market liquidity out of nothing, and this new liquidity is used to buy more stocks. In this manner, rising margin debt is the great accelerator on the way up.

When prices on individual stocks drop sharply – even as the S&P 500 index might decline at a moderate pace – investors, including hedge funds, with margin debt and concentrated holdings in these stocks may find that their portfolio has taken enough of a hit to where they get margin calls.

Now they have to dump stocks to pay down margin debt. This begets further selling pressure, which begets more margin calls, which begets more forced selling…. In this manner, a high level of margin debt turns into the great accelerator on the way down.


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