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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