Periodically, I take a look at the stats for combined NYSE and NASD margin debt to get a feel for how investors are handling risk. In bull markets, those that are not debt averse cannot get enough margin debt to fuel their purchases and brokerage firms love the extra revenue. It’s a happy time at the party for everyone involved. Unfortunately, the history is not very impressive when it comes to investors knowing how to anticipate when they have had too much and how to scale back. Next to an actual crash, I can think of nothing more painful for investors and their advisors than margin calls and forced selling.

So, where are we today? The most recent stats through January 2006 give me mixed signals. On the negative side, January 2006 Margin Debt totals are $256 Billion versus the March 2000 high of $300 Billion. We’re not quite at the historical high-water mark, but it’s close and it’s increasing at a rate of about $30 Billion each year since bottoming at the end of 2002. Following that trend absent any intervening event and we could be at new Margin Debt highs some time in 2007.

The other side of the balance sheet “Free Credit Balances” - aka “Cash” in the accounts is much better than it was in March 2000 and it gives me more reason to believe that we are not yet at unsustainable levels. January 2006 Free Credit was a combined $256 Billion compared to the $167 Billion that sat in the accounts in March 2000. One last statistic that I looked at was the Margin Debt to Cash ratio. At the peak, it was 1.8 (300/167) and currently, we have a ratio of 1.0 (256/256) so things aren’t quite as extreme today. On the other hand, 1:1 isn’t the most solvent scenario either.

Clearly, the market is not as relatively overleveraged as it was at the the start of the last slide, but then again, Margin Debt doesn’t look like it normally does near bottoms. It is tough to know when to say when, but I suspect we are approaching the last call at the party.