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Buyers Lever up on Margin as Short Sellers Disappear

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February 25, 2011 – Comments (5)

Very interesting observations by The Pragmatic Capitalist.

Like I was saying in my last post Soc Gen’s Economic Surprise Indicator, I don't think this indicative of 'the top'. I think we are still in the middle of this cyclical bull.

But observations like these, and the ones in my last post, demonstrate a level of complacency in this rally. I think there are some signals (nascent as they are) for an intermediate term pullback. Again, I do not think this will be a crash, simply a mid rally correction / consolidation. In fact I think this will mark the beginning of the consoldiation period for the next several months (perhaps year or so) where the market consolidates gains and builds a base for the next leg of the cylical bull (which I think has several years to go).

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BUYERS LEVER UP ON MARGIN AS SHORT SELLERS DISAPPEAR
25 February 2011 by Cullen Roche

http://pragcap.com/nyse-margin-debt-rises-to-two-year-high

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.

5 Comments – Post Your Own

#1) On February 25, 2011 at 1:18 PM, MegaEurope (21.42) wrote:

Those numbers actually seem fairly tame compared to the size of the market.

If you rewind the chart to 1998, LTCM had $128B of net debt by itself.  Now that's scary.

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#2) On February 25, 2011 at 1:33 PM, outoffocus (22.91) wrote:

I dont think the bears are gone. Just in hibernation until the spring. lol

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#3) On February 25, 2011 at 1:44 PM, binve (< 20) wrote:

MegaEurope,

>>If you rewind the chart to 1998, LTCM had $128B of net debt by itself.  Now that's scary.

Indeed

outoffocus,

lol. :) Yeah, I have lost several limbs in bear traps :) I think the market has definitively told us we are in a cyclical bull right now, and so I am going to wait until the trends change before I think about being bearish again. Permafrog for me from now on :) http://caps.fool.com/Blogs/lessons-to-be-learned/538330 ... ribbit.

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#4) On February 25, 2011 at 4:41 PM, leohaas (33.21) wrote:

Re pullback: you missed it! The S&P topped at 1343 last Friday and bottomed at 1294 yesterday afternoon...

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#5) On February 25, 2011 at 4:44 PM, binve (< 20) wrote:

leohaas,

just buy the f**ing dip, right? :)

I hear you, this might just be another dip to be bought. The SPX is still trading above major support and major MAs. So this could easily be just a continuation of the last 5 months. I am not discounting that possibility at all: http://marketthoughtsandanalysis.blogspot.com/2011/02/cleaner.html..

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