Margin Loans on Upswing Again in June

NEW YORK — After a two-month drop, margin loans--money borrowed generally to purchase stocks--rose again in June, the New York Stock Exchange said Friday.

The increase suggests many speculators have been undeterred by the spring tech stock crash, and likewise, that many brokerages haven’t clamped down drastically in terms of extending credit.

Debit balances in margin accounts of NYSE member brokerages totaled $247.2 billion at the end of June, up 2.7% from the $240.6 billion recorded in May, the Big Board said.

Margin borrowing had peaked at $278.5 billion in March, then tumbled in April and May as technology stocks plunged and many investors who had bought those shares on credit rushed to sell to pay down their loans.

The March peak capped a steady climb in margin borrowing that began last summer. Many analysts warned that the borrowing binge was a symptom of excessive speculation, and would end badly.

And it did end badly, with the nearly 2,000-point tumble in the tech-heavy Nasdaq composite index from mid-March to mid-April.

Under Federal Reserve rules, investors may borrow up to 50% of the initial value of stock they buy through a margin account. After that, a so-called maintenance requirement set by the stock exchanges kicks in: The investor’s equity--the market value of stock minus the amount owed to the broker--may not fall below 25% of the stock’s market value.

During the spring market swoon, flocks of investors received “margin calls,” or demands from their brokers to deposit more cash into their depleted accounts.

On April 17, after the previous Friday’s record 355-point drop in the Nasdaq index, thousands of margin borrowers had their stock sold out by brokers to cover loans.

But with the rebound in stocks, and particularly tech stocks, since late May, speculators appear to be back into margin borrowing, albeit not at the pace of March.

Indeed, as a percentage of the stock market’s total value, or capitalization, margin debt is down: In June the debt total was 1.40% of the market’s value, down from 1.42% in May and the high-water mark of 1.54% in March.

But Charles Biderman, head of Santa Rosa, Calif., market-research firm TrimTabs.com, believes margin totals still are heady.

The current margin-to-market-cap ratio remains above the 1.38% reached in October 1987 before the market’s crash that month, he noted.

Another way of looking at it: Total market capitalization last December was almost exactly the same as at the end of June, but margin debt in December was $20 billion less than today.

“So the market’s unchanged and margin debt’s up $20 billion. How is that healthy?” asked Biderman. He thinks tech stocks still are overvalued and are primed to plunge.