BUYERS LEVER UP ON MARGIN AS SHORT SELLERS DISAPPEAR

According to the latest data from the exchanges the bears are becoming an endangered species.  As short interest craters investors are taking on record levels of debt to borrow at low rates and purchase equities.  In essence, the Bernanke Put is spurring on another risk taking binge for Wall Street.

Yesterday, CNN reported on the decline in short interest.  As you can see, total short interest in the S&P has declined as the seemingly unstoppable bull market forces shorts out of the bearish game:

This is perfectly normal during a bull market, however, there are more disturbing trends in margin data. While Ben Bernanke fails to keep rates low and induce business borrowing, he is in fact stoking a speculative boom at the Wall Street casino.  According to Bloomberg Wall Street has been leveraging up in preparation for the Fed’s “wealth effect”:

Debt at margin accounts at the New York Stock Exchange minus cash and unused credit from margin accounts climbed to $46 billion, according to data released by NYSE yesterday. Hedge funds had $290 billion of debt from margin accounts in December, the largest sum since Lehman Brothers Holdings Inc. collapsed in September 2008.

“It makes a lot of sense given the low cost of borrowing and some equities’ valuations,” said Patrick Armstrong, who helps manage $356 million in multiasset strategies at Armstrong Investment Managers LLP in London. “There is a capital- structure arbitrage to be made by buying stocks with leverage.”

We’re not yet back to 2007 levels, but as the rally progresses it becomes more and more clear that nothing has really changed in the USA.  We are simply back to all the same gimmicks, policies and speculative games that got us into this mess.  The Bernanke Put is only helping to reinforce this.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. The solution for this mess comes through proper regulation (so far the silence is deafening). There’s an entire country full of people who think it’s admirable to get rich in the casino rather than actually WORK for it. The sad thing is that so many believe it to even be possible.

    I believe it to be caused by regulatory capture creating an environment where real work is effectively punished while gambling in the uber-casinos operates under no gaming law whatsoever. Investment banks are far more interested in gaming everyone via billion dollar exotic derivatives than they are in actually funding US business. That’s not helped by the fact that most US manufacturing has emigrated to China.

    Things have to change but it will take another huge collapse to provide the necessary anger to push it and the right people driving to ensure good outcomes.

  2. There are some other interesting statistics which are arguably more relevant than plain and simple margin debt. “We’re not back to 2007 levels” is not accurate as prices are also not nearly at 2007 levels. Thus measuring margin debt relative to some benchmark (S&P500?) would create a clearer picture and I think you will find that since 2001 basically the stock market has been one big pyramid scheme of margin debt.

    My take is that speculators are keeping prices high in the hopes that they can unload it onto a frenzied crowd later on and reduce the margin exposure, however if something goes wrong with the plan you get a frenzied panic, like we saw in April. This can happen again if anything important has the potential of devastating public morale (i.e. willingness to buy).

  3. Boy, that was a quick 3% pull-back. Guess Tom Demark will have better luck next time. Next up, 1425-1450 on SPX, probably by April.

  4. pretty impressive, b ferro. can’t disagree with you. about the only thing I can think of now that will derail it before that time is if violence spills into saudi arabia. otherwise, the bernanke put trumps all………

  5. This is an incendiary comment, but nothing will send it lower – 0% probability of that now. EVERYTHING has been thrown at this now, including ME revolution LOL. The best you get is a 2-3% dip. Shorting this market is one of the most health debilitating things anybody can do. It is amazing – it takes massive, massive volume to send it lower and it levitates on no participation. I think gold, ole Laslo B is spot on and this thing goes to 2,000+. Look at the historical Dow or SPX charts, this rally is unprcedented in nearly every way but the massive secular bull during the 90s. I was running an analysis this morning looking at the ratio of cumulative 6 month volume on up days vs. that on down days – this week we registered the highest reading ever on the SPY dating back to 1993. It doesn’t matter though – it’s just another piece of analysis that is irrelevant. Something bigger is at work here. There are very powerful interests here that cannot stomach a market decline – the sell-side institutions, the long only buy-siders and the Fed – if the market heads sustainably lower here, I’m not sure any of them will survive…the ball must stay in the air.

  6. Well, combine your comment with Cullen’s comment about someone goosing the futures overnight, and it is obvious that SOMEONE(S) have a large stake in the direction this is going.

    Your ZERO percent chance HAS to have a time period attached to it in some way (My perception), yet I guess you would just say (for the foreseeable future). I’m not taking the opposite side of your trade any longer! lol

    rhp

  7. Regulation stops nothing of the sort….so please don’t talk about regulation as this only stokes greater corruption amoung the money junkies who find a way around these rules or policies. Usually by corrupting the government agencies responsible for adminsitering the rules…..anyone remember the Standard and Poors rating of the credit default swaps? AAA…..or any of the other big rating agencies. This is a money junkie problem called ADDICTION to cheap cash which produces large bonuses and profits. It is this cheap money addiction that the FED is catering to. The TBTF banks hold the FED hostage by screaming that they whole thing will explode just so they will continue to get their fix. This has been fostered by decades of abuse and bailing these kleptocrats out with cheap money time and time again. If you have never sat in on an addictions therapy session then you really ought to. You might be amazed at the unpredictable and dangerous behavior displayed by the addict when they are not getting their fix. Thing these guys are any different? Think again.
    Bernanke and co. give these guys cheap cash and expect them to use discretion and humility? It is like giving an alcoholic free booze and telling them not to drink too much. Are they really going to listen???? They’ll say anything and then let their impulse take over or the sickness, call it what you wish. That people get hurt and lives get destroyed by their unpredictable behavior is irrelevant to them. Thier actions in the commodities markets are starving parts of the world but do they care? Of course not….it is all about profits. That fourteen thousand people die every day as a result of their worthless hot money finding its way into the markets, jacking up price (without the demand I might add) is absolutley insane and that no one does anything about it is an even bigger crime. Either way it won;t end well and now that the FED has opened this pandoras box they are going to find that it is now almost impossible for them to pull their actions back. Unbeknownst to the FED is the fact that their actions are going to bring about all that they wished to avoid and when this funny money collapse happens again they will be powerless to do much about it and all hell will break lose. What little credibility they will have had will be destroyed.

  8. Mediacratus, regulation can only happen if the people doing the regulating have to have ethics. Not the “its all ok” kind of ethics, but the kind where right is right and wrong is wrong. Most people’s education now doesn’t provide for this ethical background. Its over, buddy. When you are going to have your come to Jesus moment? When its too late?

  9. …the answer to speculation is not regulation but taxation on speculative, unearned income. No magic formulas needed, mate…just plain and simple tax rates on unearned income in the 90% vicinity will do the trick nicely

    …chances however are right now, it ain’t gonna happen based on the current power distribution within the US heavily in favor of a continuation of the finacialization of the US and world economies

    Kind Regards

  10. …in the meantime, back up the truck and make sure you’re smart enough (strategy to control greed) to leave the party at its hottest

    Kind Regards

  11. market dropped 50 handles in one week. you didn’t think it was going to bounce? most astute traders got long after the reversal on thursday and were looking for 1317-1326. new month starts i think tuesday so we’ll see if there is another ramp. the bernanke put talk and market never going down again is getting a little silly

  12. posted on spx500dailyindestracker:

    Friday, February 18, 2011

    …the index now in key resistance territory, a platform from where a sharp, bearish strike may be delivered to an overly complacent trading community. The logic of a ‘Lock-In profit’ strategy makes sense, subject to further development. *** Bingo ***

    Friday, February 25, 2011

    …suggesting, the market is not a ‘buy’ below *1325

    Kind Regards

  13. I agree, the market gave reasonable insight to a comming bounce on Thursday. Fib level target I’d seen was 1320 and it was not cleared. I say Monday likely leads more to the downside.