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Saturday, December 25, 2010 11:09 AM

Margin Debt Soars to Highest Levels Since September 2008

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Margin debt is one measure of the amount of optimism or pessimism in the stock market. Rising margin debt generally correlates to a rising stock market. Margin use has soared to the highest level since September 2008.

Margin Debt vs. S&P 500

click on chart for sharper image

Margin Debt Data is from NYSE Factbook Securities Credit

ZeroHedge discussed margin debt in NYSE October Margin Debt Jumps To Highest Since Lehman Failure As Investor Net Worth Is At Lowest Since April Highs

It is not just the stock market that is at the highest levels since Lehman. Probably just as importantly, NYSE margin debt has surged to $269 billion, an increase of $13 billion from the prior month, and the highest since September 2008 when it was at $299 billion.

We are confident that NYSE cash in November will be at the lowest level of the year, not to mention December, as hedge funds leveraged everything they could, in some cases hitting as much as 3-4x gross leverage, in pursuit of beta, now that unleveraged alpha strategies have ceased to work. Which means that with retail stubbornly missing from the picture, the only beneficiaries of the HFT and Fed facilitated melt up are the 1000 or so hedge funds, where average net worth is in the 6 digits, that will be profitable this year.
Moreover, mutual fund cash levels have been near record lows since September, and topping it off, a respected friend tells me NYSE cash levels are negative $35 billion.

Collectively, this sounds like "all in" to me, and then some. However, just as in 2007, no one knows for sure when excessive optimism gets punished, historically it always is.

Mike "Mish" Shedlock
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