Sunday, March 9, 2008

Marginal Trading

What is a margin call? It's when you borrow a bunch of money you don't own against a smaller percentage of capital, and your subsequent investment goes kablooey, forcing you to put up more to maintain that spread. Here's a more official definition from wikipedia:

Margin call
When the margin posted in the margin account is below the minimum margin requirement, the broker or exchange issues a margin call. The investor now either has to increase the margin that he has deposited, or he can close out his position. He can do this by selling the securities, options or futures if he is long and by buying them back if he is short.

But what happens if you don't have additional capital to sustain those margins? Uh oh. Let's ask Thornburg. Hey Thornburg, what happens when $600 million in margin calls comes due and you don't have $600 million, or $60 million, or $6? Oh, your stock price goes from $10 to $1. But didn't you just tell us a few months ago that this wasn't going to happen, you know, on the day your stock went from $18 to $10? Thought so.

So what are some of the other lenders stuck at 20-1 leverage on their margin calls doing? Well, if you're Citi you've begged the Saudis for $30 billion, which they recently said was not enough. If you're USB you wait until the day earnings are out to tell anyone about your billions in margin calls. Or, if you're Lehman, you pretend you don't have any margin calls. There are lots of ways to play it smart. According to Reuters, J.P. Morgan says we are facing a "$325 billion systemic margin call." On top of that, they estimate that home prices will drop 30% from 2006 levels, only down 14% to date. Uh oh......

In another uplifting trend, personal bankruptcies are at a 3-year high. "The proliferation of available credit, combined with the increase in mortgage interest rates, has stretched everyone to their maximum, and they're going to break," analyst Brian Small said. Hey, and we're still months away from maximum ARM resets!

IOD: Start thinking about Microsoft.....

1 comment:

Tiger Coach said...

While the market will head in a lower directions...beware of the "sucker's rally"...There will be volatility...but with gas at 3.45 and a consumer who is broke...the theme will be financials again.