Wednesday, May 8, 2013

Margin Debt (excerpt)

In the February 5 Morning Briefing, I outlined the Irrational Exuberance scenario as follows: “In a melt-up scenario, the market [S&P 500] would do just that, jumping to my yearend target [1665] or higher before the middle of the year. … The Fed’s critics, including dissenters on the FOMC, will warn that ultra-easy monetary policy is once again pumping air into a stock market bubble. So a melt-up could be followed by a meltdown, or at least a very nasty 15%-20% correction later this year if the Fed is forced to stop its quantitative easing by soaring stock prices…”

Alternatively, Fed Chairman Ben Bernanke and his dovish allies on the FOMC might respond to their critics by raising stock market margin requirements. During March, margin debt soared to $380 billion, up 28% y/y, matching the previous record high during July 2007. The margin requirement has been flat at 50% since January 1974.

Soaring margin debt certainly supports the charge that the Fed is once again inflating asset bubbles. However, valuation multiples aren’t flashing irrational exuberance yet, but that could change quickly in a debt-financed melt-up of stock prices.

Today's Morning Briefing: Exuberance. (1) Within shouting distance of 1665. (2) A short history of the bull’s P/E. (3) Taking Greece out of the P/E. (4) Probability-weighted math yields 1695 target for S&P 500. (5) Weighing the odds of a melt-up followed by a meltdown. (6) If stock prices soar, Fed will have to do something. (7) Phase out QE or raise margin requirements? (8) Throwing a wet towel on the bull. (9) Will someone please hit the pause button? (10) Good news out of Germany and China bolster outlook for slow, but steady global growth. (11) Copper starting to shine again? (More for subscribers.)

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