The Big Borrowing Market Bubble-maker

When the herd is begging, stealing and especially borrowing to get in on the market action, take note.

Some might even say be afraid.

I don’t know if that’s the best reaction at this point. But today I read a startling statistic. And it suggests that we should all be paying close attention to what our fellow investors are doing right now.

According to the Wall Street Journal, margin debt climbed to a record high in February.

As a refresher, margin debt is basically a short-term loan. It enables investors to buy more stock than they actually have money for in their brokerage accounts.

To get this margin loan, investors must pledge securities they own (stocks or bonds) as essentially collateral to get the loan from their brokers.

So, this rising margin debt means investors are borrowing more money from their brokers so they can buy more stocks.

This is a clear sign that individual investors were feeling uber-bullish about stocks in February.

But why should we worry when investors are, en masse, so bullish?

Well, because when the level of borrowing hits a fever pitch, it’s often the last breath of a tired bull.

So, how much did investors borrow from their brokers in February?

Plenty.

Here’s the money quote from the WSJ piece:

The amount investors borrowed against their brokerage accounts climbed to $528.2 billion in February, according to the most recent data available from the New York Stock Exchange, released Wednesday. That is up 2.9% from $513.3 billion in January, which had been the first margin debt record in nearly two years.

Indeed, there’s been a steady rise in margin debt over the past few months. All that borrowing and buying has helped contribute to the post-election bubble of sorts we’ve seen that’s taken stocks to all-time highs.

Related story: Up, Up and Away … Stocks Soar in a Beautiful Trump Balloon

This kind of action can serve as a contrarian indicator. Here’s why …

Rising margin debt usually indicates a situation where investors have put aside risk … and perhaps forgotten that stocks don’t just go up, but they also go down.

We know this because margin debt has a history of surging to record highs right before market bubbles burst.

It happened in 2000, and it happened in 2007.

Will it happen again in 2017?

The jury is still out on that. But consider that the S&P 500 is on pace to finish in the red in March. As of this writing, the broader measure of the domestic equity market is down 0.08% over the past four weeks.

That’s not what I would call a busted bubble. However, it is what I call a market stall.

Now, one point that the WSJ article made that is important to remember is this …

Margin debt rose to record highs several times during the past eight years of this bull market.

Moreover, the article points out that when measured against the rising value of the market, the current level of margin debt is not a record.

Margin debt totaled 2.5% of market capitalization on the New York Stock Exchange in February, roughly level with where it was in 2013.

Still, when I see contrarian signs of unbridled bullishness, I start to think about ways you can protect your money.

That could mean taking profits in winning positions … or tightening stop-loss orders … or taking positions on the short side and looking for opportunities in non-correlated, alternative investments.

Related story: Life, Liberty & 5% Interest for All

Why do this?

Well, because unlike some margin borrowers, Uncommon Wisdom Daily editors know that stocks can, and often do, go down.

So if you’ve gone into margin debt in your account to double down on the bull market, well, consider yourself warned.

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I want to know what you think, so if you have a comment or question about today’s Afternoon Edition topic, or any of the topics we cover, let me know. All you have to do is leave me a comment on our website or send me an e-mail.

***

The buying, whether on margin or not, continued during Thursday’s session. The broader indices all ended the day higher. The Nasdaq closed at a record high (up 0.3% to 5,914.34), even with Lululemon Athletica’s (LULU) 23.4% post-earnings slide.

• How to spend $52,000 this year: Have a baby. The Agriculture Department says it will now cost about $233,610 to raise a child to age 18. And a new NerdWallet survey shows that the first year will likely be the most-expensive. The $52,000 figure is based on what a family earning $200,000 will spend. That’s roughly the average U.S. family’s household income, which the Census Bureau says was $56,516 in 2015.

• Soccer baby boom: Nine months ago, Iceland triumphed over England at the Euro 2016 tournament in Nice, France. This past weekend, a hospital in Iceland said it administered a record number of epidurals on pregnant women giving birth. (Goal.com)

• Missing million-dollar Maple Leaf: A 220-pound, 99.9% pure gold coin disappeared from Berlin’s Bode Museum on Monday. The coin, produced by Canada in 2007, is in the Guinness Book of Records and has been on loan since 2010. In today’s prices, "The Big Maple Leaf," is worth about $4 million.

• Missing U.S. penny? Senators John McCain (R-Ariz.) and Mike Enzi (R-Wyo.) want to replace the dollar bill with a $1 coin, slash the cost to produce nickels and kill the penny, which costs more than 1 cent to make. Their proposed legislation suggests taxpayers could save $16 billion. (Senate.gov)

• ‘Failing pile of garbage’ to go public in 2018. That’s what President Trump called news and entertainment site BuzzFeed in January, which helped the company raise $25,000 for the Committee to Protect Journalists. No word yet about the company’s potential valuation, but some say its IPO could be similar to Snapchat (SNAP), which also targets "Gen Z" and millennials.

• The House voted 215-205 to repeal Obama-era internet-privacy rules. Internet Service Providers like Comcast (CMCSA), Time Warner (TWX) and AT&T (T) now don’t need to get your consent to share or sell your sensitive information. That includes medical, personal, financial and other browsing data.

• It’s about to cost a lot more to buy an immigrant investor visa: The current half-million-dollar price tag could soar to $1.35 million after April 28, when the current program expires.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “The Big Borrowing Market Bubble-maker”

  1. hi sir /mrs i am investor i saw your email about borrowing i have stocks and securities i want to borrow they are on nyse please respond i send emals know respond please respond if you need my bank details please let me know i need $500.000

  2. A family making $200,000 may spend $50,000 in the first year on their kid. I can assure you that many families making less than that do not. My son is four and we haven’t spent $50,000 on him yet.

    Also that figure may include the cost of hospital bills, but if you have insurance you won’t be paying all of that. My brother’s kid cost over $100,000 in hospital bills because my sister-in-law had a c-section combined with a couple week hospital stay (before and after combined), but they only paid their deductible.

    Why their hospital bill was over $100,000 when there are plenty of top hospitals in Asia that would’ve charged them a fraction of that is a completely different topic. I have a house in Vietnam as well and there’s a quality private hospital near here run by a company from Singapore that would’ve almost certainly delivered the same level of care for less than $10,000.

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