Household Debt Down, Margin Debt Up

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The great deleveraging cycle that began after the 2008-09 credit crisis is in full swing.

U.S. households cut their debt burdens by 1% during the first quarter, according to the Federal Reserve Bank of New York. Household debt declined to $11.2 trillion compared with a peak of $12.7 trillion during the third quarter of 2008. Current debt levels are back to 2006 thresholds.  

The amount of mortgage debt (MBB - News) decreased to $7.93 trillion from $8.03 trillion and credit card balances also fell by $19 billion to $660 billion.

However, total student debt increased to $986 billion from $966 billion.

Not covered in the Fed's assessment of credit is margin debt, or the amount of borrowed money that investors are using to buy securities.

In March 2013, NYSE margin debt rose to $379.5 billion, which is just shy of a mid-2007 peak near $381 billion.

With the major stock benchmarks like the Dow Industrials (DIA - News) and S&P 500 (SPY - News) hitting all-time highs, the fever to buy stocks - especially with borrowed money - has picked up. (See chart below)

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In section C2 of the May 14, 2013 edition of the Wall Street Journal, here's how one brokerage firm is pitching margin:

"Would you like to borrow at 1.14%? You can. At Interactive Brokers, we lent over $10 billion to our customers' margin accounts at an average rate of 1.14% in the first quarter of 2013. We hope to lend more in the second."

Instead of discouraging speculative borrowing, Wall Street is encouraging it. Refresh our memories, but wasn't excessive margin debt the chief culprit behind the 1929 stock market crash? Oh, but this time is different, right?

Rising margin debt is a sentiment indicator that gives us a glimpse of investor confidence.

When margin debt gets excessive, it means that investors are probably overconfident and that stocks are near or close to a top. This, in fact, occurred during previous cycles. Back in 2000 and 2007 when NYSE margin debt peaked, so did the S&P 500.  

Will margin debt reach all-time highs? We await the April data to find out.

The May 2013 issue of the ETF Profit Strategy Newsletter examines the fundamental and technicals for ETFs linked to major asset classes. It includes our short list of mega investment themes along with our popular Technical Forecast that's updated several times per week.



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