Wednesday, June 8, 2011


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I blogged earlier about the decrease in stock market volume since the market bottomed in 2009.  While I find the lack of market breadth a little disconcerting, it is by no means a signal the markets are about to crash.  When I found this chart regarding margin, all I could do is shake my head.  First, you and I are paying through the nose for fuel to get to work, and to get from point A to point B, in general.  We saw recently when they hiked the margin requirements for silver, that the price corrected substantially as managers had to raise cash to cover their debts.

How can the regulators not see the affect excess margin is having on the price of fuel?  Given the relatively large amount of margin, it is not difficult to imagine what it is doing to prices.  The chart comes from Doug Short's website, and is compiled from data that is readily available.

While I am troubled by the regulators refusal to do anything that might have a negative affect on the banks' ability to generate commissions from orders bulked up and on steroids from the application of margin, what concerns me even more is the fact we (fund managers, actually) are leveraging up to the degree that we have only seen twice before, and each time the unwinding of it crashed the markets.

If that wasn't enough, consider that all this leverage is in the hands of fewer and fewer players!  Yet another thing that doesn't feel right about this so-called recovery.  Why do I feel like I am experiencing deja vu all over again?  How about you?

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