“It is ... [individuals] trading through online brokers, who are most responsible for the jump in margin debt. Steven Galbraith, an analyst at the investment firm of Sanford C. Bernstein & Company, estimates that margin debt as a percent of market value has soared 459 percent at online brokers since 1995.
“Growth in margin debt at firms that are members of the New York Stock Exchange, by comparison, has gone up 190 percent during the same period. The value of the market, as measured by the Standard & Poor's 500 has risen 139 percent during that time. ...
“Perhaps because falling stocks always seem to bounce back these days, investors remain unworried. Margin debt on the New York Stock Exchange has surged 75 percent in the last 12 months and now exceeds $265 billion, a record. Debt ballooned almost 9 percent in February alone and now accounts for more than 1.5 percent of the Big Board's total market value, also a peak.
“Even more troubling is how fast margin debt is growing as a share of overall consumer credit. According to Mr. Galbraith's research, margin loans now account for 16 percent of total consumer borrowings, up from 7 percent in 1995.
“Numbers like these prove that the explosion in margin borrowing is coming from individual investors, not institutions, he said.
“‘They've supplanted buying a washer-drier with debt with buying Qualcomm on margin,’ Mr. Galbraith said. ...
“[I]n January, when the explosive growth in margin debt became evident, Alan Greenspan rejected calls to increase the initial amount required of investors when they buy stocks on margin. He argued that an increase in the margin requirement would be unfair to small investors because they would be unable to secure credit even as institutional investors could tap other sources of funds. ...
“Richard Sylla, a professor of financial history at the Stern School of Business at New York University, called Mr. Greenspan's small-investor argument inconsistent. ‘He's worried about the market being too high, but his argument that a margin requirement increase would make it harder for small investors to participate is in some sense saying, “I don't want to spoil the party for them,”’ Professor Sylla said. ...
“‘I'm worried not just about the margin but about people borrowing on other assets like homes and the double-dip effect that would have in the event of a market decline,’ said Arthur Levitt, chairman of the Securities and Exchange Commission. ‘If we have a market decline then that would play out not just in terms of lower security values but also in lower real estate values.’”
Full article is at: http://www.nytimes.com/yr/mo/day/news/financial/margin-trade.html
Carl
______________________________________________________ Get Your Private, Free Email at http://www.hotmail.com