Monday, February 26, 2007
a deathly excess
MARGIN debt in the American stock market has reached a new record of $285bn. In other words, more borrowed money is being used to buy shares than ever before.
As David Rosenberg of Merrill Lynch observes, margin debt has jumped by $40bn in the past three months, a similar rate to early 2000, when the markets were in frenzy. As a proportion of market value, margin debt is now at its highest since the late 1920s, an era that was a by-word for speculation (and resulted in the crash of 1929-32).
There are further signs that sentiment is getting overheated. The proportion of cash held in mutual funds has dropped to 3.9%, equal to its record low (although those lows were recorded only in 2005). Stockmarket analyst Alan Newman says we have gone almost 950 trading days without a 10% correction on Wall Street, the third-longest period in history.
note particularly that margin debt has jumped some $40bn in just the last three months -- a rate of expansion that annualizes to 83%. in the context of the chart included here, this would seem to indicate that we may be very near the top in the markets.