Margin debt again escalated in June, putting some emphasis back into the smaller caps and their high beta compatriots. After surpassing the dot-com bubble’s previous levels for both nominal margin usage and negative investor net worth in February, some caution was re-admitted if only briefly. There wasn’t much discernable impact on the broader market indices, more than suggesting that margin debt isn’t the primary source of leverage for the overall stock space – that is left to primarily to stock repurchasing (on borrowed corporate funds), and LBO’s and other junk.

ABOOK July 2014 Magin DebtABOOK July 2014 Magin Debt FINRA Net Worth

Maybe that indicates a more “mature” marketplace where individual investors have stayed relatively less emphatic than the late 1990’s, but I have to wonder given that the primary pathway for margin leverage has run through the NYSE rather than what were formerly known as NASDAQ dealers. Whereas the previous dot-com bubble was largely tech stock related, thus debt was overwhelmingly NASDAQ-centric, this time the focus is on NYSE issues. That likely means ETF’s and other such derivative market positions.

Since this is largely a new process, we have no idea how it might unravel once pricing moves in the opposite direction (given the lack of any actual correction in so many months that I’ve lost count, we really, really are just guessing). The only real “action” so far has been limited to smaller caps. We can see the contours of a rough correlation between margin debt and the Russell 2000, for example.

ABOOK July 2014 Magin Debt Flat Russell 2000

The return of complacency in June is interesting, particularly with how much it diverges with the growing unease about the economy in the bond market – though that sentiment might be representative of nearly the entire runup since last summer’s bond selloff which stocks “dutifully” ignored entirely. While the stock market, broadly speaking, continues on its merry and nearly straight-line ascent, bond investors are growing increasingly cautious and more than a little dubious about “normalcy.”

ABOOK July 2014 Magin Debt Flat 5s10s

Again, leverage given what we see here about margin debt, leverage is far more unseen this time around than the dot-com era. Maybe that will provide a durable and lasting floor for stocks, but that seems a dubious proposition too tightly connected to some kind of newly-found “permanent plateau of prosperity.” I think it more likely than not the ending is the same as it always has been, with the leverage gains looking far more 1920’s than even 1990’s.

 

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