NYSE MARGIN, FREE CREDITS AND AVAILABLE CASH

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APPLICABLE TIME FRAME(S):  

INTERMEDIATE TO LONG

 

REPORTING DELAYS:

Up to two months.

 

RECENT STUDIES:

04/29/13......More debt + less cash = smaller net worth

03/01/13......Available Cash dries up to near decade lows

 

EXPLANATION:

Each month, the New York Stock Exchange (NYSE) releases data on the customers of clearing firms overseen by the NYSE.  This data includes that of margin debt and free credit balances.

 

Margin Debt:  Provided they are approved to do so, a customer may borrow funds from a brokerage firm.  The brokerage firm will not do this unless the customer has existing collateral (i.e. stocks) in the account against which the customer can borrow. 

 

The customer can do with the cash whatever they wish, such as withdrawing it from the account to pay for a vacation, but the purpose most often used is to buy additional stocks.  This is often why you will hear "margin" and "leverage" used interchangeably. 

 

If the customer uses the borrowed funds to buy more stock, and the stock goes up, then the customer can realize gains much greater than they would have if they were not leveraged, since they are now holding more shares.  Of course, this works both ways - if the stock declines, the customer will lose more than if they were not leveraged, and if it falls far enough and there is not enough equity (collateral) in the account, the brokerage firm can call the loan in by giving the customer a margin call. 

 

The brokerage firm has the right to sell enough stock in the customer's account to cover the amount of their loan, even without the customer's consent.  This forced liquidation of margin accounts can spur further stock market declines as firms rush to protect their capital.

 

Increasing margin levels are not necessarily a problem - in fact, it can actually be a good thing for the market.  However, it is when margin levels reach extreme levels and begin to taper off that we need to be worried about substantial market declines.

 

The figures on the site are quoted in $ millions.  Margin debt is the red line on the chart.

 

Free Credit:  When a customer sells stock in a margin account (or a cash account), they are considered to have a free credit.  This is essentially just another name for cash.  This free credit balance is available to the customer to do with what they please.

 

The figures on the site are quoted in $ millions.  The aggregate free credit balance is the green line on the chart.

 

Available Cash:  This is our term for the difference between free credit balances in cash and margin accounts and debit balances.  Customer accounts can be thought of as a balance sheet, with liabilities (margin debt) and assets (free credit balances). 

 

By subtracting the liabilities from the assets, we get a picture of the net worth of the customers.  If the available cash is positive, then in aggregate customers have more free credit than debt, which is a rare condition and can be very bullish for the long-term health of the market.

 

The figures on the site are quoted in $ millions.  Available cash is the blue histogram on the chart.

 

GUIDELINES:

Generally, we want to be positive on the market when available cash levels are high and negative when available cash is low.  This is a very long-term indicator, best used when one's outlook is at least one year in the future. 

 

Due to the delayed nature of the data, and its inherent qualities, it is not intended as a specific timing mechanism, and should not be used as such.  Rather, it is most applicable for deciding when one should increase or decrease equity market exposure.

 

AVAILABLE CASH STATS:

  Since 1931
Mean -7,600
St. Dev.* 17,600
Maximum 44,590
Minimum -129,280

 

*Standard Deviation.  See below...

 

68% of readings (1 standard deviation) should be between -25,200 and 10,000

95% of readings (2 standard deviations) should be between -42,800 and 27,600

99% of readings (3 standard deviations) should be between -60,400 and 45,200

 

In other words, we should expect a reading under -42,800 or over 27,600 approximately 13 times per year.  Since such a reading would be relatively unusual, it suggests that we may be seeing an unsustainable trend.  These figures assume a normal distribution curve.

 

ADDITIONAL RESOURCES:

New York Stock Exchange (www.nyse.com)

 


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