Leverage & Deleveraging

[winston]

Why This is No Time to Borrow “On Margin” by Alexander Green

http://www.investmentu.com/2012/October ... argin.html

[winston]

NYSE Margin Debt Approaches All-Time High by Cullen Roche


http://pragcap.com/nyse-margin-debt-app ... -time-high

[winston]

Margin Buying Surpasses 2007 Danger Levels – Is Another Market Crash Coming? By Gary Gately

http://moneymorning.com/2013/06/05/marg ... sh-coming/

[winston]

An Amazing Chart About U.S. Finance You Have to See to Believe By Dr. David Eifrig

Yesterday, Steve shared some great news for U.S. investors…

He showed readers that housing is still near all-time highs in affordability. It's a fact few people realize.

Today, I'm going to share an even more amazing fact… one that leaves me bullish on U.S. housing and stocks.

Before I tell you this fact, I have to give you a warning: This essay is going to dispel a belief that most newsletter readers hold dearly. Despite the clear evidence, you might not even believe it.

The fact?

The U.S. household debt burden just hit a record low.

That's not a misprint…

The burden of debt in U.S. households has fallen to its lowest level in more than 30 years (since it was first recorded in 1980). The amount of a household's debt payment as a percent of disposable personal income fell to just 10.4%, according to the Federal Reserve.

As you can see in the chart below… U.S. debt soared during the economic downturn. But today, it's plummeting.

The Fed's low-interest-rate policy has given people a chance to pay down debts and refinance the interest payments. Of course, some debt has been defaulted upon, too.

Either way, the U.S. consumer now has the most potential borrowing power in my investing lifetime.

Lower debt payments means people have more money to spend on travel, luxury items, and investing. That's good news for keeping the U.S. economy chugging along.

In an essay earlier this year, I shared a handful of charts that show how the U.S. economy is slowly improving. Contraction spending is ticking higher. Business activity readings are holding steady. Private employment is growing. Still, it's definitely not growing fast enough to make inflation a problem.

This is a good environment for real estate, stocks, and municipal bonds. And since household debt is so low, the idea of owning assets that benefit when people are able to spend money is attractive.

That includes restaurants, hotels, and luxury stores… And I'm still encouraging readers of my Retirement Millionaire service to buy stocks like payroll-processor ADP and blue-chip bank Wells Fargo.

Conventional wisdom and the fear-mongering press would have you believe that U.S. households are hopelessly in debt. But that's simply not the case. And it's yet another reason to own the types of assets I just described.


Source: Retirement Millionaire

[winston]

What Every Investor Should Worry About Today By Jeff Clark
Thursday, August 1, 2013

Leverage destroys. Just ask Robert Citron.

In 1993, Citron was a hero. He was a public servant who discovered a way to earn high returns in a declining-interest-rate environment. While other municipal treasurers were struggling to earn any sort of return at all, Citron was cleaning up. The gains on his investments made up for any shortfalls in his county budget, kept several county government programs alive, and eliminated any talk of raising taxes.

Citron's strategy wasn't all that complicated. He put county money into Reverse Purchase Agreements (RPAs) and Floating Rate Notes (FRNs) that were designed to increase in yield as interest rates fell. He juiced the yields even more by leveraging up (borrowing money) to invest in these securities. After all, if he could borrow funds at 3% and generate a 6% return, leverage was a good thing.

Citron was so successful that neighboring municipalities entrusted him with their funds in the hopes of receiving equally high returns. And they did… for a while.

But in February 1994, the Federal Reserve Board raised short-term interest rates by 0.25%. Liquidity disappeared from the RPA and FRN markets… And Citron's investment portfolio blew up.

Many of his securities lost 60%-80% of their value.

Citron was convinced that if he could just hold on until conditions returned to normal, everything would work out all right. But he didn't have the luxury of time. You see, he had borrowed money to make those investments.

The sudden drop in value made his lenders nervous, and they wanted Citron to either put up more collateral or liquidate enough of the securities to pay off the loans.

His county didn't have any more collateral. So Citron was forced to liquidate for pennies on the dollar. The money he received wasn't even enough to pay off the loans against the portfolio.

A few months later, Citron resigned as Treasurer of Orange County, California. And Orange County became known as the largest municipal bankruptcy ever in the United States.

But here's the thing…

Citron was right. Within a few months of the bankruptcy, interest rates started to fall again, liquidity returned to the RPA and FRN markets, and almost all the securities Orange County sold for pennies on the dollar were trading near par. If he could have held on, everything would have been all right.

It wasn't the investments that destroyed Orange County. It was the leverage.

By borrowing money to buy securities, Citron put Orange County at the mercy of its lenders. Lenders don't care if you make a good or bad investment decision. They only care about getting their money back. When they fear their money is at risk, lenders will call in the loan. If you don't have the money to back it up, you can be forced to sell depressed assets in illiquid conditions. That's the nature of a "margin call."

It's what destroyed Orange County… It's what brought down Lehman Brothers… And it was at the heart of the 2008 financial crisis.

Leverage exacerbated the stock market crash of 1987. It led to the extreme stock valuations in 2000. It accelerated the decline from the market top in 2007.

And leverage is what every investor ought to be worried about today.

You see, NYSE margin debt is at an all-time high. Investors are borrowing money to buy stocks. So as the market rallies to new highs, investors are now more leveraged than at any other time in history.

History tells us this is a bad thing.

In March 2000, margin debt on the New York Stock Exchange climbed to more than $278 million for the first time ever. Then it started falling. Four months later, the S&P 500 peaked above 1,500 and entered a severe bear market. The index lost 45% of its value over the next two years.

In July 2007, margin debt set a new all-time high above $381 million. Then it started to fall. Two months later, the S&P 500 set a new record above 1,550. Eighteen months later, it traded as low as 667.

Last April, margin debt rose above $384 million – another new all-time high, the first since 2007. True to form, the S&P 500 rallied to a new high last month. But margin debt has been declining since hitting its high in April.

If the historic trend persists, that's a bad sign for stock prices.


Source: www.growthstockwire.com

[winston]

Margin debt at risky levels…S&P 500 fell 50% last two times it was here! by Chris Kimble

When investors get cocky, they end up borrowing money to invest in the stock market, via margin accounts.

The above outstanding chart, created by Doug Short, reflects that margin debt remains near record levels.

Why could this be important? The last two times in the past 13-years, when margin debt was this high the S&P 500 declined 50% in value.

Does it mean SPY will decline 50% again? NOPE!

If history is a guide, it does reflect that stocks are above average in risk at this time!

http://blog.kimblechartingsolutions.com ... -was-here/

[winston]

Margin Debt: Move Along, Nothing to See Here

NYSE Margin Debt just reached another record high, and an increasing number of market skeptics are expressing concerns.

They reason as follows. A willingness to buy stocks on margin suggests confidence and optimism. But markets don’t perform well when investors are already confident and optimistic.

Moreover, people invested on margin are less able to tolerate price fluctuations. As their presence in a market grows, so does the risk that otherwise healthy challenges to the market’s advance will provoke rapid, self-fulfilling unwinds of positions.

http://philosophicaleconomics.wordpress ... rgin-debt/

[winston]

Margin Debt

In October, total margin debt on the New York Stock Exchange stood at a record $412.5 billion (up from $401.2 billion in September).

Margin debt is the total value of securities purchased on margin. It's a way for folks to get exposure to securities with less cash upfront. Playing with margin can amplify your gains… But it can also make your losses much greater.

Today, investors are chasing an already-at-record-highs market even higher… And they're using record amounts of debt to do so. It works beautifully until we see a correction… and the levered masses are forced to liquidate their positions and pay that debt back.

Why is this bad news? It's just another sign of the excess and froth in today's market. Asset prices are at all-time highs, debt is at all-time highs… What could go wrong?


Source: Growth Stock Wire

[winston]

Blackstone Introduces Weapon of Mass Destruction

By Louis Basenese

Source: Wall Street Daily


http://www.thetradingreport.com/2014/02 ... struction/

[winston]

Debt Exceeds $100 Trillion as Governments Binge By John Glover

The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates.

http://www.bloomberg.com/news/2014-03-1 ... d=politics