Borrowing to Buy U.S. Shares Points to Optimism: Taking Stock
New York, March 11 (Bloomberg) -- Investors have boosted the amount borrowed to buy U.S. stocks for four straight months, the longest streak since the bear market began three years ago.
Clients of the New York Stock Exchange's member firms had $134.9 billion of so-called margin loans outstanding in January, the latest month for which numbers are available, according to the Big Board. The total was the highest in six months.
((Is this smart in the current market?))
The increasing use of margin, or credit, for stock purchase may reflect a sense among investors that the worst of the market's losses have passed, some money managers said.
``People are more comfortable with putting money back to work,'' said Brett Gallagher, who helps oversee $4 billion as head of U.S. equities for Julius Baer Investment Management. ``Things are not getting dramatically worse.''
January's margin debt is equivalent to 1.23 percent of the market value of U.S. public companies, said Charles Biderman, president of TrimTabs.com, an investment research firm.
In March 2000, when the Standard & Poor's 500 Index peaked, margin debt totaled $278.5 billion. That equaled 1.5 percent of companies' market value, the highest percentage since the current rules on borrowing were introduced in 1974, according to TrimTabs.
`Positioned'
Brokerage customers who purchase stocks ``on margin'' are required by federal rules to have collateral -- cash or stock --in their account that equals at least half the amount borrowed.
Surging margin debt contributed to the market's slide from its 2000 peak because as stocks dropped, investors had to put up more cash or sell shares they had bought on credit. Some of them voluntarily sold to head off so-called ``margin calls,'' in which brokers ask for more collateral.
As stocks retreated, margin debt decreased. Borrowing reached a four-year low of $130.2 billion in September. Between March 2000 and September, it didn't rise for more than two months in a row.
TrimTabs' Biderman said he is encouraged that margin debt has increased at a slower pace than the market since October, when benchmark stock indexes touched a five-year low. Borrowing grew 3.6 percent from October through January, and the S&P 500 gained 4 percent in the period.
That comparison is a sign that investors are being rational, Biderman said. Richard McCabe, chief market analyst at Merrill Lynch & Co., agreed.
``I don't think it suggests a large degree of speculation in the market, like in the late 1990s,'' McCabe said. Instead, the rise is one of several indicators suggesting the market may be ``positioned so that it could go up now,'' he said.
More Evidence
McCabe uses technical analysis, a method of predicting stock moves based on price patterns and statistical measures. Along with greater margin debt, he cited slower trading in declining stocks and a drop in the number of stocks making 52-week lows compared with October.
During that month, stocks on the NYSE that declined in price traded an average of 781 million shares a day. By last month, the figure had fallen to a daily average of 694 million shares, according to Bloomberg data.
The number of stocks making 52-week lows in October peaked at 604 on Oct. 9, compared with 207 on Feb. 13, said Paul Desmond, president of Lowry's Reports Inc., a stock-market advisory service in North Palm Beach, Florida.
Biderman singled out a pickup in corporate share repurchases and an rise in daily and monthly wages and salaries, as measured by the Treasury Department, as corroborating evidence that the margin-debt figures are favorable.
Not all chartwatchers agree.
`Similar Pattern'
``The real story is how little it's risen,'' said Philip Roth, chief technical analyst at Miller Tabak & Co., who added that he won't consider the rise in margin debt significant until there are month-to-month increases of about 10 percent.
``Margin debt is affected by traders and bottoms are made by investors, not traders,'' Roth said. ``I would expect to see investment demand, the market strengthen, then I would expect to see a rise in margin debt.''
Anecdotal evidence suggests institutional investors, rather than individuals, may be responsible for the rise in margin debt.
Charles Schwab Corp., the world's biggest discount broker, said margin debt has fallen steadily since 2000. Outstanding margin loans dropped 28 percent last year to $6.6 billion, said spokesman Glen Mathison. The firm had 8 million customer accounts with $765 billion in assets at the end of 2002.
While Schwab doesn't report monthly margin figures, those numbers are ``not going to show anything different,'' Mathison said. ``Investors in general have less money. Their portfolios have suffered in the declining markets and they would be more risk- averse.''
`Maximum Deterioration'
Even so, institutions may be using borrowed money to bet on a recovery in stocks because of signs the economy is turning around, some money managers said.
``We're seeing a lot of economic statistics follow a similar pattern,'' Gallagher said: ``dramatic declines that last for a few months, a stop in deterioration, and then month-to-month small advances that give people confidence that the economic worst has passed.''
U.S. business inventories are one example, he said. They began sinking in February 2001 and fell 1.4 percent, the largest drop in at least a decade, in October of that year. After failing to record a gain for six more months, stockpiles started to climb last May. In December, they rose for an eighth straight month.
Although U.S. stocks are still mired in a bear market, the rise in margin debt illustrates that investors are worried about missing a rally, Gallagher said.
The consensus among investors, he said, is that ``we have reached a point of maximum deterioration and the next direction may be up.''
AI
