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Margin Debt Falls for 5th Month

March 17, 2001|Reuters

The amount investors borrowed from New York Stock Exchange member firms to buy stocks fell for a fifth straight month in February, the New York Stock Exchange said Friday.

Known as margin debt, the amount of loans from brokers outstanding slipped 5.2% to $186.9 billion, according to the Big Board.

The decline was expected by most analysts, as stocks and major market indexes have dropped in recent months. That prompted investors to borrow less and firms to call in loans.

"Investors are throwing up their hands and giving up on outright speculation," said Anthony Chan, chief economist at Banc One Investment Advisors, which has about $130 billion in assets under management. "This is healthy for the market."

Investors borrowed less money from brokerage firms in February to buy stocks, believing the market would continue to go down, and they were right, Chan said.

The tech-laden Nasdaq composite index dropped 22.4% in February, and the Standard & Poor's 500 index, a broad gauge of the stock market, fell 9.2%.

Margin debt hit a record level--$278.5 billion--in March of last year, when technology and Internet stocks peaked. Nasdaq has since fallen more than 60%.

Brokerages have been calling investors trading on margin--a practice that allows a buyer to put down a percentage of the purchase price and use the stock as collateral--since Nasdaq began to fall last year. When a stock falls far enough, a margin investor must either deposit more cash in his or her account or liquidate the stock.

"Margin account calls, according to Merrill Lynch, have soared back close to their November high, which was a record for the last 15 years," said Barton Biggs, chairman of Morgan Stanley Dean Witter's investment committee, in a recent note to clients.

Still, the consistent decline in margin debt suggests that the "market is probably preparing itself for an up trend and we won't have to worry about falling [stock] prices any longer," Chan said.

"A strong case can be made that since October, much of the speculation has been wrung out of the market," he said.

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