Margin debt unfolds further amid high-flying stock slaughter and forced sale


Margin Debt issued warnings from early 2021 that the Big S would hit the fan. People blew it.

By Wolf Richter for WOLF STREET.

Margin debt — the tip of the iceberg in the direction of the stock market’s overall leverage — fell $20 billion in May from April to $753 billion, according to Finra, based on reports from its member brokers. Margin debt peaked in October 2021 at $936 billion and began to decline in November 2021.

The Nasdaq peaked in mid-November as margin debt began to ease and has since fallen 33%. The S&P 500 peaked on the first trading day of January as margin debt began to plunge. And the S&P 500 has since fallen 22%.

In the seven months since the October spike, debt on margin has fallen $183 billion, or 20%, from mammoth levels a year ago, an indicator of market turmoil, but also an indicator that debt is still extremely high and has a long way to go:

Large increases in margin debt are associated with increases in stock prices because leverage creates buying pressure with borrowed money; but then the tables turn, and in a vicious mechanism that includes margin calls, major stock market events are associated with steep declines in leverage. Margin debt can serve as an effective warning of problems in the stock market.

The absolute amount of leverage in the stock market, for all forms of leverage, is unknown and no one tracks it. Margin debt reported by brokers is the only form of market leverage that is tracked and reported monthly.

Another form of stock market leverage, Securities Based Lending (SBL), is sporadically and partially reported by banks in their annual or quarterly reports. Some banks give amounts, other banks bundle it with other forms of loan. There is no total measurement for SBL amounts across all banks.

Other forms of stock market leverage include hedge funds and family offices that are operated at the institutional level. It’s not tracked either. They get margin calls, and every now and then one of them crashes. It’s only then, when creditors are digging through the rubble, that the world finds out just how much leverage there was.

Other forms of leverage include equity-based derivatives, such as those that took down family office Archegos in March 2021, wiping out billions of dollars of capital at major brokers that had provided the leverage effect. the sink. Nobody followed this leverage. Apparently, even the banks and brokers who funded it didn’t know at the time what their client’s total leverage was across all brokers combined.

Margin Debt and Trendy Stocks.

Sudden collapses in hype-and-hoopla stocks that are down 80% or 90% in a few months trigger a forced sell-off among the fringe crowd who planned to get rich quick on these stocks and had therefore concentrated holdings of these actions. Hundreds of stocks have collapsed, starting in February 2021, and I’ve documented some of them in my stock implodes.

Here are some well-known names whose stock prices have crashed. There are many other lesser-known names, including the EV SPAC, Electric Last Mile, which has already announced that its stock will drop to zero and die as it files for Chapter 7 liquidation a year after its introduction in stock Exchange.

Now imagine the margin calls triggered by these collapses (percentages from their highs through June 14 at midday):

  • Carvana: -94.5%
  • Vroom: -99%
  • Rivian: -84%
  • Nicholas: -93%
  • Lordtown: -98%
  • Zillow: -85%
  • Red fin: -92%
  • Compass: -80%
  • Door open: -87%
  • Platoon: -94%
  • DocuSign: -81%
  • Snap: -86%
  • Pinterest: -81%
  • Buzz flow: -88%
  • Coinbase: -88%
  • MicroStrategy: -88%
  • Robin: -91%
  • PayPal: -77%
  • Block (former Square): -79%
  • SoFi Tech: -79%
  • Affirm Holdings: -90%
  • Metromile: -96%
  • Wayfair: -87%
  • Softness: -77%
  • Shopify: -83%
  • Rent the Runway: -87%
  • Beyond Meat: -90%
  • Teladoc: -90%
  • Lyft: -84%
  • Snap: -86%
  • Zoom: -76%
  • Galactic Virgo: -86%
  • Palantir: -83%
  • MAC: -84%
  • Modern: -76%
  • DoorDash: -77%
  • Check: -85%
  • Roku: -85%

These stocks fell from ridiculous highs that many people assumed would lead to even more ridiculous highs, which is why they bought them in the first place. When stocks crashed, leveraged investors had to reduce their margin debt as collateral values ​​disappeared and they became forced sellers.

Leveraged investors with a concentration in these stocks could be completely wiped out, with their brokerage account balance reduced to next to nothing, if they don’t get rid of these instruments in time.

Even some of the biggest stocks have plunged far enough to trigger forced selling among marginalized investors (percentages from their highs through June 14 midday):

  • Netflix: -76%
  • Amazon: -45%
  • Tesla: -46%
  • Meta: -57%
  • Nvidia: -54%
  • Sales force: -47%
  • Intel: -44%

Debt on margin and market “events”.

I started warning about peaking in margin debt in January 2021, on the eve of the crash in many of the above stocks that began in February 2021. And I was blown away.

What matters are the sharp increases in margin debt before the fairsand the sharp declines during the fairs. The absolute dollar amounts over the decades do not matter. The chart below shows the relationship between margin debt and “events” in the S&P 500 index, including the current “event”.

But there were, and there always will be, people in our illustrious Wolf Street commentaries who said and will say that the board should be adjusted in some way — the better, I don’t know what, to hide the warning? These are the three most common adjustments they believe should be used:

  • The table below should be put on a logarithmic scale
  • Chart should be adjusted for inflation
  • The graph should be adjusted according to the level of the S&P 500 index.

People just didn’t want to see and still don’t want to see the warning signs. They prefer to adjust them in a clever statistical way, like a logarithmic scale. And then everything suddenly seems well screwed up.

The Fed warned of hidden leverage in the stock market, citing the collapse of Archegos, May 2021, and people blasting it. And the Fed specifically warned of margin debt among “young retail investors” in November 2021, and people blasted it even as the stock market had already started to unravel months earlier. So okay.

Note the incomparable beauty of the near-vertical spike in dollars and percentage debt on margin from March 2020 to October 2021, during the Fed’s $4.7 trillion money printing spree and rate clampdown mania of interest that are now falling apart:

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