NYSE Margin Debt Storms Back To All Time Highs

Tyler Durden's picture

A month ago we explained why ordinary margin debt (such as that tracked by the NYSE) is largely irrelevant as it completely ignores the leverage of the largest investor class (aside from the Primary Dealers who use Fed reserves as collateral against which to purchase equity index futures), namely hedge funds and whose leverage blows out ordinary retail investors out of the water. Nonetheless, NYSE margin debt is still useful as an indicator of prevailing retail and less than sophisticated investor leverage, and thus euphoria, in the market.

It is from this perspective that we observe how after dropping modestly from all time highs hit in February, NYSE margin debt has recouped virtually all its losses and is now essentially back to all time highs. And as a parallel to that, investor net worth, defined as total Free Credit Cash and Credit Balances in Margin accounts less Margin Debt, has once again dropped to all time lows.

And while it may represent a mere subset of overall market leverage, it is perhaps worth rereading Deutsche Bank's warning on the topic from a year ago, in which the German bank, embroiled in the latest financial reporting credibility scandal, hopes that "not all margin calls come at one in case of a sell-off."

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Duffminster's picture

Maybe the money is being used to buy High Yield Bonds?


The high yield corporate bond market may be the best indicator that a substantial market correction has a higher probability of occuring near term than any other indicator except perhaps the “Cook Cumulative Tick,”, which looks at the relation between the NYSE Tick and US stock prices. Keep in mind that a lot of the high yield corporate bond issuances have been used by companies to make huge stock buybacks and issue dividends.  I've put together a few articles on the Bond market for those also looking at how to assess market risk at this time.

"Mile wide, inch deep
Bond market liquidity dries up"

"...The cushion protecting fixed-income investors from market shocks, particularly in the $6.6 trillion corporate bond market, is melting, which is creating a new form of risk when it comes to buying these securities. In response, investors are reevaluating how they hold bonds sold by companies from Apple Inc. to Ford Motor Co. to DreamWorks Animation, as well as reshaping how they interact in the secondary trading market. The changes have served as a key factor eroding the traditional conviction that the bond market shields investors from risk...."

"...The combination of smaller holdings by dealers and a surge in the amount of outstanding corporate debt suggests that there’s more inventory to change hands with fewer institutions willing to facilitate those transactions. Whereas dealers once held about 4% of all outstanding corporate debt on their balance sheets, they now hold closer to 0.5%, according to Oliver Randall, a professor of finance at Emory University, who has done research on corporate bond market liquidity ..."

"...The smaller amount that dealers hold on their books means they can’t unconditionally buy bonds that investors are trying to sell, especially in large blocks. But there’s another issue at play: the low interest-rate environment that characterized much of the post-crisis economy has brought many new issuers into the market. New corporate bond sales have surged as issuers rushed to take advantage of still attractive rates and investors sought the relatively higher income of corporate debt...."

And a whole lot of the money was raised to do share buybacks and issue dividends.

"Stock trader who called three crashes sees 20% collapse" - “Cook Cumulative Tick,” - flashing warning

"Code Red In High Yield" - Forbes - Steve Blumenthal
"In my 20 years of managing high yield bond investments, I’ve never seen so many signals that scream caution. Desperate to find yield, investors have poured billions into high yield bond funds and ETFs driving the yield on the Barclays High Yield Bond Index to just 5.54% — the lowest level in history. Investors are positioning in a risk they may not fully understand...."

"Fridson: High Yield Bonds 'Extremely Overvalued' For Nine Months, A New Record"
"...According to high yield bond market guru Marty Fridson, U.S. high yield bonds have been “extremely overvalued” for nine consecutive months, the longest such streak ever..."
"...the overvaluation is not isolated in the bottom tier of credits, says Fridson, “contrary to the representations of those who hope to keep attracting capital to the asset class.”

Cattender's picture

it's Different this time..

DoChenRollingBearing's picture

That is one fugly graph.

BandGap's picture

No shit, oscillation heading towards disintegration.

The system is wobbling at a high frequency as it attempts to correct itself at shorter and shorter cycles. Fatigue has set it, just a matter of time.

Yen Cross's picture

    Don't worry, because it will be different this time... Excuse me while I go feed my herd of unicorns.

ekm1's picture

And nobody gives a flying excrement

ebworthen's picture

"Put it all on 30-1 for double six's!"

Yes, the Craps tables are hopping again.

HUGE_Gamma's picture

Can someone explain why the "retail" positioning is relevant? What does it matter if 1000 pikers but 5k into XYZ compared to billion dollar funds.

RiderOnTheStorm's picture

The "smart money" investors are leaving the market and handing their "bag" over the retail traders.  The larger the bag that the  retail traders hold, the closer we are to a top.  The retail "bag holders" are considered "dumb money" at tops.  Their like the canary in the coal mine.

RiderOnTheStorm's picture

If you can imagine a canary with a big bag!

skidsmango1's picture

as a proxy for the overall mood of the retailers?  These folks are all in and when they go stampeding for the door and would this also mean the moms and pops dumping their mutual funds?  Funds have to sell to meet redemptions and so on?



yogibear's picture

Why wouldn't be? With the market hitting new highs almost weekly more people trying to amplify their profits.

AdvancingTime's picture

The stock market is the only place to make monet and it is best to double down.  What do stock markets around the world have in common with "girls gone wild" the video of college girls on spring break? The answer is both are crazy out of control. We have grown very complacent as money around the world has continued to flow into intangibles and promises.

Currently the market is all a twitter and locked in a "greed and stupidity loop." The loop can be explained as follows, stocks are rising so why get out, not getting out is causing the stocks to rise. When stocks do pullback it is a buying opportunity. Yes, we are indeed experiencing a double down and let it ride mentality. I don't have to explain the greed part. More about this subject in the article below.


RMolineaux's picture

Time for the Fed to increase required margins while stocks are still rising.  It will be impossible when they start to fall.  What could be more simple?