Monday, August 15, 2011

Leverage on Wall Streets Drop to Low of 2011

I would consider this a new positive all things being equal, as the nasty selloff we have had apparently has caused quite a bit of margin calling at the institutional level.  Not surprising with the 'whoosing' down action we saw on 3-4 days over the past two weeks.  More remarkable is how quickly Wall Street levered right back up post 2008-early 2009 but I guess its not surprise when The Bernank puts a green light on speculation and easy money.

Why is this a net positive?  Again, all things being equal - when the institutions lever back up, that's new buying power that will re-enter the market.

  • Investor credit at Wall Street brokerages is falling by the most in a year as the Standard & Poor’s 500 Index suffers its biggest losses since the bull market began.  Borrowed money in accounts at 61 New York Stock Exchange firms has fallen 4.6 percent, the biggest drop since June 2010, according to a July 22 statement from New York-based NYSE Euronext.  Leverage slipped to the lowest level of 2011 last week, according to Morgan Stanley’s prime brokerage.
  • The decline at NYSE firms followed a 36 percent increase to $320.7 billion in eight months, the biggest expansion since 2007. (yeah! QE2 - a green light to speculate at will!
  • Lenders have been calling in loans since April, when the benchmark gauge for American equities began a plunge that has wiped out more than $2 trillion in value. “People tend to lever up in bull markets. When you look at risks in these markets, when there’s more downside risk than upside in the short term, people don’t want to amplify losses.”
  • Net hedge-fund leverage slumped to its lowest point this year at 49 percent of balances as of Aug. 10, according to an Aug. 12 note from Morgan Stanley’s prime brokerage. Last year, it reached its lowest point on Aug. 31 at 41 percent, (the week QE2 was 'hinted' at strongly be The Bernank at Jackson Hole, WY
  • “People are dumping equities, emerging market equities, things seen as risk assets, and alongside with that we’re seeing leverage being taken down.
  • Margin debt at NYSE firms peaked in July 2007 at $381.4 billion, a 41 percent increase from the level in November 2006. The S&P 500 reached its record high of 1,565.15 on Oct. 9, 2007, then tumbled 57 percent through March 2009. 
  • Margin debt climbed to its previous high of $278.5 billion in March 2000. (notice a pattern?) The S&P 500 also peaked at a record that month before entering a bear market in which it lost 49 percent through October 2002.

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