Margin migraine (historical media appearances)

Sunday, December 15, 2013| by John Aidan Byrne of the NY Post.

The next stock-market Armageddon is just around the corner.

Market bears see today’s ballooning NYSE margin debt — a record $420 billion — as a precursor to a heart-thumping correction.

“It’s always been a warning sign,” former NYSE margin regulator Steven Levine told The Post. “History repeats itself, it always does.”

The margin debt of investors — which is buying equities on credit — is racing far ahead of their credit balances, which means they’ve taken on more risk and leverage.

It’s the classic scenario before a crash. These investors today — hugely concentrated in hedge funds and among the one percenters — are bidding up stocks on rampant speculation, the pros say.

“I could suggest making a comparison to the Crash of 1987, the first major crash since 1929 driven by margin debt — speculation being the key,” said Levine, who has closely examined the latest data.

“Margin debt has a heavier concentration of specific customers today — I don’t see John Q. Public. It’s the hedge funds and wealthy individuals who follow them that account for most of the margin debt.”

The Crash of Oct. 19, 1987, known as Black Monday, wiped 22.61 percent off the Dow, a then-staggering 508-point drop to 1,738.74.

Levine, an industry consultant who left the executive ranks of the NYSE in 1998, says today’s bubbly markets, with the Dow hovering around 16,000 and hitting nominal new highs, also reminds him of 1989. There was rampant speculation and expanding margin then.

And it came unglued on Friday, Oct. 13, 1989, on reports of the breakdown in the leveraged buyout of UAL. “That was all due to investors who arbitraged UAL up the gazoo,” Levine recalled. The Dow lost 190.58 points, erasing 6.9 percent, and closing at 2,569.26.

At the first signs of trouble today — say, a Eurozone crisis — the markets could react the same way and unleash a wave of margin calls, forcing prices down, the pros say.

Mark Martiak, senior wealth strategist at Premier Wealth Advisors in New York, sees a 5 percent to 10 percent pullback coming in the S&P 500 before April 1 next year.

He backs that up with research showing that, historically, stocks on average have had five pullbacks a year of similar size. “We only had two down months this year, so I see a pullback coming,” he told The Post.

Levine reckons that a group of about 12 hedge funds and a smattering of wealthy individuals account for most of today’s margin debt. “The cost of carrying margin today is the cheapest in history,” he said.

These hedge funds and their followers know a good deal. But they’re no fools. “Will they pull out of the market quickly?” Levine asked. “They will pull out at the first downward announcement, whatever it is, on a global basis.”

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