Debt and housing
Finra posted the margin debt numbers yesterday. I haven’t been following these figures for very long but this seemed like a very long delay in their average reporting frequency. Was someone on extended vacation? Did the figures come in weird and need to be adjusted? I’m not sure. What I do know is that margin debt plays an important role as a key to the market. When margin debt is increasing, investors are signaling that they expect the market to go higher. The investors use this debt to leverage their returns in the market. They are able to buy more stock than they have money for. When margin debt reverses course, it can signal an end to the party as everyone sells to pay off their debt.
Much to my surprise, margin debt has hit a new all-time high in the month of August.
It bucked the trend of July and shot up to $912 billion. That is a substantial amount of leverage being employed. If this were to reverse, we would see a very sharp correction in the stock market.
The free credit balance also showed a rebound from July. The free credit balance is money that is sitting in money market accounts ready to be deployed into the market. This is the true “cash on the sidelines” figure.
It hasn’t surpassed the peak of December of 2020, but it looks to have reversed course. It was on a steady downtrend but now looks to be moving higher.
With both margin debt and free credit balances moving higher, there is plenty of fuel for the market to continue to climb the “wall of worry”. This doesn’t mean that there are significant issues ahead. The debt ceiling negotiations, Biden’s budget bill, the infrastructure package, and Evergrande’s default are all still wild card factors that could cause an investor panic.
One of the other keys to the market was the yield curve. Specifically the 10-year treasury minus the 2-year treasury. When this is positive, it signals that banks are making money when they borrow short and lend long.
Even with the “big” taper announcement from the Fed, it has held steady.
Next week Tuesday the money stock measures report comes out. This will solidify if the market will have the strength to climb higher.
Housing
Housing data has been coming out all week. Tuesday saw the release of housing starts and building permit data. Both pushed higher and beat their consensus expectations. Housing starts were 3.9% higher than the previous month. Building permits were 6% higher. Wednesday saw mortgage applications go up 4.9% which was the biggest rise in 8 weeks. Wednesday also saw that existing home sales dropped 2%. This morning we see that new home sales increased 1.5% month-over-month. This beat the market forecast and is the highest reading in four months. Median sales priced increased to $390k from $325k a year ago. The report also included that there are 12k more houses on the market than in July.
The housing market’s red hot pace earlier in the year has cooled slightly. We are starting to see more inventory but also higher prices. These high prices have caused the cooling of the market as it weighs on buyers’ affordability. Don’t be fooled, this market is still moving higher. Buyers just don’t have the same whipped up attitude about buying at any cost.
Now get out of here, get outside, enjoy the fall, eat an apple and I’ll see you next week.