Mark M. Martiak
Managing Director Investments, AIF®

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© 2018 Mark Martiak, AIF®  |Managing Director Investments

Margin migraine

Sunday, December 15, 2013

 

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.”

 

Copyright 2013 New York Post. Disclaimer: All third party materials are the responsibility of their respective authors, creators, and/or owners. First Allied is not responsible for third party materials, and the information reflects the opinion of its authors, creators, and/or owners at the time of its issuance, which opinions and information are subject to change at any time without notice and without obligation of notification. These materials were obtained from sources believed to be reliable and presented in good faith, nevertheless, First Allied has not independently verified the information contained therein, and does not guarantee tis accuracy or completeness. The information has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient, and is intended for informational purposes only and does not constitute a recommendation, or an offer, to buy or sell any securities or related financial instruments, nor is it intended to provide tax, legal or investment advice. We recommend that you procure financial and/or tax advice as to the implications (including tax) of investing in any of the companies mentioned. Mark MartiakPremier Financial Advisors Securities offered through First Allied Securities, Inc. A registered Broker/Dealer Member: FINRA/SIPC

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