Margin Debt Soars To 2008 Levels As Everyone Is "All In", Levered, And Selling Vol

Tyler Durden's picture

There were some readers who took offense at our "bloodbath" recap of yesterday's market action (modestly different from that provided by MarketWatch). And, all else equal, a modest 28 step drop in the E-Mini/SPX would hardly be earthshattering. However, all else was not equal, and based on peripheral facts, the reason for our qualifier is that as of last week virtually nobody was prepared for a move as violent and sharp as the one experienced in the last minutes of trading yesterday. In such a context a "mere" 1.5% drop in the futures market has a far more pronounced impact on participants than a 10% or even 5% drop would have had, had traders been positioned appropriately. They weren't. So what was the context? Let's find out.

First as the NYSE just reported margin debt just soared to a near five year high, with Margin Debt at a whopping $327 billion, surpassing the highest print since the Lehman collapse, and the highest level since February 2008. Not only is everyone all in based on , but they are all in on nearly record amounts of leverage.

As noted previously this happened just as the net long positioning of specs soared to an all time high.

In short - the "sidelines" speculator money is already all in, and is using gobs of leverage.

Second, when it comes to high beta, or traditionally the most volatile stocks, those that serves as either leaders or laggards in the market in its year end phases, we take a look at the Russell 2000 Mini speculative exposure as shown by the CFTC's weekly Commitment of Traders update. The chart below needs no explanation: the net non-commercial spec longs in the Russell 2000 have never been more bullish. If the market, which is priced to absolute levered perfection disappoints, the high beta exposure will be annihilated.

Third, and last, for all those who have had a sinking feeling ever since June that something was even more broken with the equity market, more so than usual, we have just one chart to prove all of them right. As this chart of net non-commercial CoT VIX exposure shows, starting in June and continuing ever since, the net exposure in VIX futures has gone down in what is virtually a straight line.

But what changed in June? Well, as some may recall, something very substantial - the head of the Fed's Markets Group, i.e., its trading desk, got a new head: one who has been rumored to have a different PPT style to his predecessor Brian Sack - a style that involves the relentless selling of VIX to take advantage of a market which is drowning in reflexivity, and in which the movement of the vol surface has a far greater impact on the underlying asset than any fundamentals or news flow: want to send the market higher (and have an infinite balance sheet at JV partner Citadel courtesy of your backstop, then just sell, sell, sell VIX).

At least we can now scrap the "rumored" part.

* * *

So to all those who are confused why a 1.5% drop in the market constitutes a bloodbath, now you know: with no hedges on, with massive margin exposure on, and with everyone all in, the last thing the market can sustain is selling, any selling, or else the dreaded margin calls start coming in and PMs have to satisfy margin insufficiency with more selling, setting of an avalanche of even more selling, which ends where, nobody knows. In fact one can argue that in this context a modest 1.5% drop may have a greater impact on sentiment and positioning than a whopping 10% drop did as recently as 2008 when everyone was more or less positioned to expect precisely such a thing. Because if one is 99% levered, a 1.5% move lower just wiped out all equity.

But hey: a few more percent and one can be certain that Wall Street's unofficial branch of government, the Fed, will get a solemn request by such representatives of "the people" as Chuck Schumer to "get to printwork" as soon as possible...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ekm's picture

Short answer: YES

A longer answer: That's what Reagan did in 1988 right before attacking Libya. Loaded up on crude, attacked libya, crude spiked, Reagan flushed the market with crude oil from the reserve, crude price collapsed.


There used to be a time when American had you know what is that.........oh yes.......real leaders.

disabledvet's picture

from a "super cycle of debt" to a "super cycle of violence." one of the better trades of our generation actually. don't mess with Senator Kerry as he becomes Secretary of State. This guy is no "wolf in sheep's clothing." a consensus has formed in Washington in how to deal with the "Afghanistan debacle"...and it involves getting MORE involved not less. I will be watching very closely for any movement on the peace process. to me that is far more important that the fiscal cliff as a market mover. If Israel and Palestine are at the table to talk "permanent settlement of border issues" then i'll start paying attention. I will also be watching very closely what the "American legation in Libya" looks like "post assassination." We can get rid of unemployment tomorrow...with a draft. I still don't think something like that will come...but the extraordinary knowledge base of this current professional military is something that without the people to pass it down too will simply wither and die. "And that is how we lose" as they say.

zebrasquid's picture

Market crashes = flight to safety = lower Govt bond rates = Can kicked

Non Passaran's picture

That is laughable.
Okay, give us a timeframe.
3 months? 6 months?

Don't tell me that the apparent lack of oil takes 9 months to materialize.

ekm's picture

Is there anything that is not laughable nowadays?

Freddie's picture

Buy the F'in Dip and Buy Apple.

Everyone loves Apple.  Apple is the bestest company there ever was.

"The Bernank Put. The Bernank prints money and puts it under your pillow."

Water Is Wet's picture

"more selling, setting of an avalanche of even more selling"

Tease.  This should go in the XXX section of Zerohedge porn.

Samsonov's picture

Still not a bloodbath.  Please stop debasing the currency of language by frivolously printing hyperbolic words.

Water Is Wet's picture

What would Joe Weisenthal do?

Spastica Rex's picture

Just think of hyperbole as American English.

Lordflin's picture

Orly, you appear to be a true believer... That is great... It truly is... But fiat is a confidence game... And confidence is running out. But hey... You keep your paper, and let me get suckered into buying up the metal... I can live with that...

TWSceptic's picture

I'm sure they can find even stronger language when SHTF so don't worry.

djsmps's picture

On this CNN "Money" show, they just said that the US is headed for an Economic Renaissance, unless the "fiscal cliff" inhibits it. But I gotta tell you, it doesn't feel like Florence around here.

Salon's picture

More like Diocletian Rome

ThirdWorldDude's picture

Was that before or after Nero set it on fire?    /s

BurningFuld's picture

Economic Rena-colapse you say?

Freddie's picture

Why do you watch that sh*t and why do you support The Matrix?  ALL TV and ALL Hollywood are total propaganda trash and they want to disarm you.  Stop supporting those propaganda scum for the NWO.   They are total liars.  If the fiscal cliff is fixed there will be a Eco Renaissance.  Also if the public is disarmed it will be unicorsn and skittles.  These people are so evil.  Fox is not any better. ALL of TV is shit.

F them.

Non Passaran's picture

Of course they are!
And look at Barron's - "Time to buy Europe".
Buy buy buy...

If that's true, it's time to buy silver.
If it isn't, then it's best to wait a bit and then buy silver.

q99x2's picture

BTFD Bernanke will hand a chunk of change to the PPT like they never dreamed of if necessary. The banksters have more important things like austerity to implement and gun control before they'll have any of that market crashing stuff.

Getting Old Sucks's picture

Question here.  Has anyone heard anything about keeping the cap gians tax at 15% in their so called fiscal cliff bargaining?  To me, seems like any increase possibilities would spur a sell off now before any new tax increase, and especially before a likely crash if no deal is reached.  Please educate me guys.  


Salon's picture

The market has priced in no increase in capital gains taxes

Market is confident fiscal cliff is a non event.

I am betting against the market on this one

fonzannoon's picture

Even if you bring cap gains and div tax up to say 25%....where else are you going to put your money? A 5% div paying stock taxed at 25% is still much better than your bank or bonds. You have to put your money in the market. It's your only option. PUT YOUR MONEY IN THE MARKET DAMMIT! YOU HEAR ME? WHADDAYA GOT....SHIT IN YOUR EARS?

  - CNBS

akak's picture

The problem is not with any shit in our ears, it's much more a matter of the public increasingly spurning all the  desperate, transparently self-serving and contemptible shit spewing from the stockpimping whores in the corporate-controlled media.

Getting Old Sucks's picture

Will do Fonz.  Well, maybe a little.  After the crash of course.

fonzannoon's picture

Just try to enjoy the good things in life Getting old. There will always be plenty of bad. You seem like a good dude. Believe in karma. It's real.

BlueCheeseBandit's picture

The only shit I see is coming out of the mouths of those on CNNC.

q99x2's picture

Really nice article for a Saturday. Great info.

rehypothecator's picture

Zerohedge is far more deserving of a Nobel Prize in economics than any central banker or his Keynesian lackey.  

[edited to add "far"]

TrustWho's picture

You are speaking like Ron Paul.

Freddie's picture

Oh I disagree!  Paul Krugman is far more deserving than anyone. (rolls eyes)

Excursionist's picture

Disagree about the article's quality / utility.

A multi-year time series of margin debt dollars (in nominal terms no less) is of little or no value without the accompanying equity dollars standing behind the margin debt.

Margin debt may be back to go-go day highs, but leverage may not.  This is a key leap in logic the article's first chart expects you to make.  All things being held equal, would you short ES based on such a leap?

whoopsing's picture

Is it still considered flying if your plane has lost its wings, but you havent hit the ground yet?

Orly's picture

I think it's called "falling- with style."

-Buzz Lightyear

Lord Of Finance's picture

Orly, u are one smart chick, and if that is your picture, u are quite adorable. Will u marry me:D


Ultimately, bernanke or whoever will have to raise rates to bring this fiasco to reset. Inflation will have to kick in, the fed will not be able to deny it any longer, as Greenspan had to acknowledge which is what really pricked mr. housing bubble. The next prick will deflate the bond bubble. Speaking of 'pricks'; pay no attention to these hostile replies. Their anger is a response of their ignorance.

Rompoculos's picture

Every market is cornered now, or soon will be. There is enough debt fiat sloshing around chasing everything, and enough time has passed without a real recovery or debt destruction, that the conviction players are in their respective corners and are not coming out. The hot money last-to-the-party have pushed the prices of pretty much everything up too high. Now we wait.

orangegeek's picture

The term bloodbath can probably be used in a year from now.


The Dow Jones Daily has turned over yet again.


When Q4 earnings start reporting in a couple of weeks, that should speak volumes.  Q2 and Q3 were exercises in finding profit because revenue was flat/declining - and they did.  Let's see if the Dow 30 can do it again.

The Axe's picture

Tyler, this is not the first time we have seen a crazy afterhour later become just a nightmare....After all we no longer have a equity market...that works....

yogibear's picture

Bubble Time!

Keep blowing the bubble bigger, Bubble Bernanke and the fed.

Eventually the bubble pops. When it does it will be a sight to be seen.

Just have to be amused at the Fed's ever expanding balance sheet.

Currency crisis dead ahead. 

ebworthen's picture

"...Margin Debt at a whopping $327 billion, surpassing the highest print since the Lehman collapse, and the highest level since February 2008."

And if it weren't for Nanny FED propping the banks and making cotton candy out of the markets there would not be so many levered up at the county fair high on debt sugar riding the roller coaster.

By propping the banks and markets the FED has created yet another bubble; wonder who benefits?


devo's picture

I think everyone knows we'll hear fiscal cliff rumors on Sunday night, futures will levitate 250-300 points, and psychology will once again be 100% bullish. Eventually stocks will out price (collapsing?) earnings and FED liquidity, but you have to let it play out. Usually when everyone is bullish it's a good time to be bearish, but not sure that holds true in this time of central planning desperation. They will do anything.

One thing that's happening is people are moving out of stocks and into rental property for their returns. I have no idea how that will pan out. Right now it's put a floor under decent property, but I'm not sure there are enough qualified tenants (ie. good wages) to maintain that trend. Subprime renter bubble? Do these new landlords put their returns into stocks? I think that's the relevant question.

Also, how much of the FED liquidity/speculation is in gold? If it's a high amount, then gold is in trouble, too. People seem bearish on gold right now so I'm thinking that drop from 1750 to 1650 cleared out some speculators. I'm just wondering how many buyers are "strong hands" at 1650. To see a shortage of physical and subsequent high premiums we need fewer speculators and more strong hands, even in the paper markets.

riphowardkatz's picture

total myth that fed thinks the market has to be up at any one point,

they dont. in fact they prefer a little of the irrational exuburance being let out. they have a ways to go, straight lines are too obvious and going perpindicular is  the primary fear. letting the air out solves both of those.


Clowns on Acid's picture

rip - it also allows the Fed to point to Congress as the culprit for the time being....

Catullus's picture

If the Fed is relentlessly selling vol, then doesn't that mean someone is buying it on the cheap and therefore is hedging accordingly?

Assetman's picture

VIX and their derivatives won't get too far out of hand... unless you see an unraveling in the TED spread and/or 1-month LIBOR.  A brief pop of the VIX to around 30 will give Mr. Potter all sorts of ammo to manipulate things in 2013.  Potter is pretty smart in his approach, because VIX can be recycled without the market facing total collapse. 

See, that invented Fiscal Cliff crisis has some value after all.

One interesting note, though, is that the TED has been acting pretty erratically... and may have already reveresed its downward trend.  With so much available liquidity from QE++++++, I don't think LIBOR will follow.  So... this is likely just a "sucking in" all those people who want to buy volatility and think they can make a big profit.  The odds are still not in your favor here.

Tyler Durden's picture

The TED Spread lost all utility lost all utility some time in mid-2009. Libor is a complete joke which nobody looks at anymore. The only real pivot indicators of monetary tenseness revolve around the shadow banking system such as general collateral readings, including what is or isn't "special", and any and all readings of repoability, as well as the occasional currency or inflation forward swaps (although these two, like the ViX can be manipulated using reflexive pathways). Everything else is noise.

ekm's picture

No doubt.

It's all and all about REAL collateral. Something useful.

max2205's picture

The man is still behind the curtain pulling levers and pushing knobs even though we all know who he is.