Looming Stock Market Trouble?

I’m not much of a gloom and doomer. Though I can recognize situations to stay out of. From today’s Kansas City Star Money Wise…

Investors are borrowing record amounts of money to finance trades on the New York Stock Exchange. Margin debt jumped to $343 billion in May.

Now for those that argue you can leverage stock investments, you can. But the rules for “the call” are much different.

2 Comments

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2 responses to “Looming Stock Market Trouble?

  1. Michael

    Chris,

    I am not sure what your critique is with margin investing. Its a great tool to leverage stocks and I think your stat speaks more to investors view on where the market is going, then on investors simply being more risk loving. Most of the margin money you mention is being used by large funds with strong investment fundamentals. In order to maximize their return, and by default their investors return, they are adding leverage.

    Furthermore, with the advent of many new fund structures out there, the use of leverage is becoming far more common. While I certainly would not recommend arm chair investors taking on huge leverage positions, I do not think leverage in itself is a bad thing.

  2. Chris Lengquist

    Micahael – my comment is more to the fact that when people, regular people, start investing more on leverage than capital the market will be more volitale should there be a shakeout.

    My closest example would be real estate investing. When non-owner occupant owners of real estate had to put down 10%-20% down on their investments they were always more able to weather storms.

    When folks who took out 0%-5% loans and had a rough patch it became easier to walk away. One foreclosure can lead to a downward pressure on a neighborhood. And multiples can get a panic started and lead us to where we are today in a lot of areas.

    Don’t take my comments as negative towards stocks and bond trading. If you read the entire blog you will see that I’m for diversification carefully studied. I just believe, as you know, real estate is a great vehicle for many many people and that in many cases it is safer and stronger than the stock market.

    Thanks for your comments. They are always welcome here.

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