October 29, 2013
Attain Capital
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The financial world is abuzz lately, attempting to decipher what exactly record levels of NYSE margin debt means for the future of the stock market rally. The numbers are a little scary at first glance, with the amount of money borrowed from stock accounts (usually to buy more stock with the borrowed funds, thereby adding leverage to their accounts) moving up to $400 Billion, and over 2.25% of United States GDP. See below from the blog Value Walk:
Charts Courtesy: Value Walk
(Disclaimer: Past performance is not necessarily indicative of future results)
The scary part about those numbers is that the last time they were this high (at least on the percentage of GDP scale) was in 2000 and 2007, which for those who can remember a time before the stock market just went straight up – were the peaks preceding some rather nasty downturns in the stock market. Here’s the performance of the S&P 500 in the period after margin debt first reached 2.25% of GDP previously:
Source: Value Walk
(Disclaimer: Past performance is not necessarily indicative of future results)
Why does margin debt precede market meltdowns? Well – for one it is a signal of over-confidence in the market – which is usually a contrarian indicator, but the bigger issue is that borrowing has the little issue of needing to be paid back… Arabian Money provides a rather simple explanation:
“…margin debt works in both directions. It accelerates the upside in stocks by allowing punters to buy with borrowed money but then it accelerates the drop in a stock market by taking it away from them. How does it do that? Well think about it. If you owe money then you will be forced to sell a perfectly good asset in a falling market to pay off your debt, and that sale accelerates the fall in stock prices.”
Basically, when you borrow to buy stocks, and those stocks go down – you are forced to sell to pay back what you borrowed. The larger amount of borrowed money there is, the larger the amount of forced selling on the way down.
But not everybody is so sure this means doom and gloom – the Reformed Broker points us to the Philosophical Economics Blog as proof that this is just the latest bogeyman propped up by bears to send false warnings. His argument essentially boils down to the fact that margin debt rises as the market rises, and will usually if not always be at record highs when the market is at record highs. He points to August of 1983 as an example where margin debt and stock prices were at all time highs, right before the market had one of the greatest bull runs in history counter proof (conveniently leaving off the internet bubble burst from the chart).
Chart Courtesy: Philosophical Economics Blog
(Disclaimer: Past performance is not necessarily indicative of future results)
So where are we now? Are we in 1983, or back in 2007? Are we about to enter an even larger bull market, or see prices fall 50% or more? There sure is a lot different in the world today than in 1983, or even 2007 for that matter. And the moral of the story is a single indicator like this doesn’t tell the whole story. Use it as a data point, sure. But realize it is just that, a single data point to be considered with all the others – earnings growth, valuations, GDP, the Fed and more. It’s a lot to take in, making us thankful that those in managed futures don’t have to always worry about this sort of thing, as a freak blizzard last month pointed out.
Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.
Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.
Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.
Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.
RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.
Limitations on RCM Quintile + Star Rankings
The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.
See the full terms of use and risk disclaimer here.
Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.
Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.
Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.
Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.
RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.
Limitations on RCM Quintile + Star Rankings
The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.
See the full terms of use and risk disclaimer here.