When it comes to concerns over leveraged equities, I am “On the Margin.” Over the past few days, many market commentators have called attention to the record levels in Margin Debt, especially as it relates to the levels in the year 2000. I don’t like taking every market statistic and comparing them to any one point in time and I think it’s rather dangerous to do so with the year 2000. But that doesn’t stop other people - bulls are busy explaining why margin debt doesn’t matter and bears are exaggerating why it does matter. What a surprise but the truth (according to me at least) lies somewhere in between the two extremes. Like all statistics, it’s important to do more than look at nominal values. Mind you, I am not fond of spinning every number with its inflation-adjusted value, but the bulls who have taken it upon themselves to suggest margin debt is irrelevant make some good points. They want you to evaluate Margin Debt in light of the dollar value of trades, short interest, and differentials in margin interest rates, etc over time. I leave it up to you to do that analysis. But the bears are not in error for calling attention to this matter. All it really shows to me is the increasing risk tolerance and leveraging that is consistent with other aspects of our economy inclusive of mortgage debt, household debt and the re-leveraging of corporate balance sheets.

I look at margin debt primarily in two ways: 1) The nominal value and 2) its relationship to the Free Credit Balances. While the current levels are high and increasing, they are not abnormally high relative to the credit balance. In fact, when you divide the combined NASD and NYSE Margin Debt by the Free Credit Balances - the result is 1.00. So while the Margin Levels are at or slightly higher than the peak of March 2000, the ratio was 1.8 back then and from December 2000 until now it has hovered between 0.75 and 1.04. Until I see a meaningful and sustained increase in this ratio, I am not overly concerned by Margin Debt. The real pain from Margin Debt is not felt until stockbrokers start making margin calls every day and that has not begun. When it does, you’ll know because those calls and the forced selling to meet margin requirements are about as painful as you can get.

The market is full of indicators like Margin Debt, inverted yield curves and the VIX. If you get hung up on any one of them, you are in trouble. When I look at all of them together, the odds are stacked against the bulls no matter how much spinning they do with any one statistic. But don’t fall into the trap of believing that any individual reading or even a simultaneous event of every bearish market indicator hitting extremes would signal the ringing of the market top bell. And one more thing, it is very unlikely we will have a pyramid top in this market. The bull - bear debate has become so ridiculously polarized that it appears both sides are fighting over a precipice. A decline in this market does not guarantee the end of the 4-year bull run and the start of a move like 2000 to 2003. More likely, the first real pullback will result in renewed buying and we will have to go through these iterations several times before this bull market is officially over.