Tabell’s Market Letter – March 12, 1982

TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW 'VOAK STOCK eXCHANGE INC MEMBER AMeAICAN STOCK eXCHANGE March 12. 1982 The New York Stock Exchange will shortly release monthly figures for February on NYSE firms carryjngcustomers…stockmarginsccountswhich.Bhouldshowacontinuingdec1ine-ln.NXSEmal'gin 1 debt. Since these figures have 'been available''debit balances'of margin 'accollntl'rin aggregate'teriDs have generally moved in the same direction as stock prices but at a more exaggerated rate. The single exception is the period from the 1976 high to the 1978 low on the DJIA. when margin debt increased with minor interruptions to new highs through June. 1981. This correlation with the longterm trend of the market can be clearly seen from the chart on the opposite page. Margin customers of the NYSE member firms reduced their margin debt in January by 970 million to 13.1 billion. the second largest monthly decline in margin debt since the start of the present series in 1965. Sale of stock from margin accounts suggests heavy liquidation. by customers who were unwilling to pay the high cost of holding shares on credit. The sharp drop in stock prices experienced in early January clearly acted as a catalyst in this reduction. On the other hand. the NYSE reported that margin accounts totaled 1.535.000 in January. a record high for the series. Because of the recent correction in the market. coupled with the extraordinarily high cost of broker loans used to finance stock purchases. this total number of margin accounts is indeed remarkable. In the following exhibit we will try to put these figures in perspective by comparing the behavior of margin accounts to margin debt. We have taken the highs and lows of the margin accounts /debt ratio and compared them to corresponding major highs and lows of the DJlA. EXHIBIT I Margin Debt (mil) Accounts (thou) Ratio Date Dow-Jones June. 1968 Hign 6690 940 I4.li5 11729768 985.08 July. 1970 Low 3780 770 20.37 5/26/70 631.16 Dec. 1972 High 7900 750 9.49 1/11/73 1051.70 Dec. 1974 Low 3910 625 15.98 12/6/74 577.60 June. 1981 High 14870 1320 8.88 4/27/81 1024.05 Jan . 1982 Low 13090 1535 11.73 3/8/82 795.47 Froffi'196S'todate 'theange6f -tliis7atioiS2073Thign on July,-l970' an-d794-low ollOctbb-er….- – -1 1978. The ratio tends to be high at major market bottoms (July. 1970 and December. 1974) and low at market tops (December. 1972). The relatively high ratio in June. 1968. a market high. can obvi- ously be attributed to the large amount of speculation in the market. Also. the ratio tends to peak before market highs and after a market low. If these observations are valid. the recent decline in customer margin debt would indicate lower levels in the DJIA. EXHIBIT II Margin Debt (mil) Total Market Value Percentage Date Dow-Jones June. 1968 H!gn 6690 641037 1.043 1i729768 985.08 July. 1970 Low 3780 531077 .712 5126/70 631.16 Dec. 1972 High 7900 872000 .906 1/11173 1051.70 Dec. 1974 Low 3910 511054 .765 12/6/74 577.60 June. 1981 High 14870 1224000 1. 215 4/27/81 1024.05 Jan. 1982 Low 13090 1116000 1.173 3/8/82 795.47 Another way we are able to analyze the customers' stock market debt is to compare it to the total market value of equities listed on the NYSE. From 1965 to date the range of the percentage of margin debt to total NYSE market value has been 1. 53 high on October. 1978 and .597 low on January. 1971. The observations seem to conclude the higher the percentage of margin debt to market value. the higher the averages. and. conversely. the lower the percentage. the lower the averages. From these studies. it is apparent since June. 1981. margin debt has peaked out coincident with highs reached early in 1981. This is the lowest level to date margin debt has reached since October. 1980. If we accept the premise that increased margin debt feeds a bull market. we must be willing to accept the opposite to be true. The gradual erosion that has been experienced since June. 1981 could pick up momentum and put further. downside pressure on.the market. This, be- comes particularly significant when we examine the number of customers carrying margin accounts under 40 equity. This figure currently totals 12 of total margin accounts. but more importantly. an alarming 37 of total margin debt. a figure in excess of 4.8 billion. In simplest terms. this means the quality of credit continues to deteriorate with 37 of the debt in accounts in the lowest equity class. It should be remembered that in August-September. 1974 this ratio reached a high of 23. a series record representing 58 of total margin debt and was thought to be a major contribu- tor to the decline in late 1974. Although it is difficult to predict how low the level of margin debt could reach. we can identify the establishment of a recent downward trend in margin debt itself. Until this trend is reversed. it would seem difficult to argue against eontinued downside' pressure on the general market. RJSrs ROBERT J. SIMPKINS. JR. DELAFIELD. HARVEY. TABELL Dow-Jones Industrials (1200 p.m.) 798.99 S P Composite (1200 p.m.) 108.39 Cumulative Index (3/11/82 1030.86 No stotement or eltpresslon of opInion or any other matler here'n COfltomed IS, or IS 10 be deemed 10 be, directly or ,nd.reclly, On offer or the sol1Cllollon of on offer to buy Or ,ell ony security referred 10 or mentioned The motter I presented merely for the convenience of Ihe subscriber While c believe the OtJrccs of our Informa- hon 10 be reliable, we In no way represent or guarantee Ihe accuracy thereof nor of The statements mude herem Any action to be loken by Ihe subCnber should be bosed On hiS o.vn Inveshgol,on and Information Janney Montgomery Scott, Inc, as a corporation, ond Its of/lcers or employC!es, may now have, or may later lake, positions or trades In respeCT to any SeCUflties mentioned In thiS or any future Issue, and such p051hon may be different from any views now or hereafter e,.;pressed In rhl!; or any other Issue Janney Montgomery Scott, Jnc, which 1 registered wlJh the SEC os on Investment odvlsor, moy give adVICe 10 liS Investment odll150ry ond othlll C\lslomer Independently of any stotements made In thiS Of In any other Issue Further mformOllan on any security rnenhoned herein IS ovallable on requesl a- ,, 0 – z(f) 0 '…. —1 –I , ' CD , .- . ICD w 0 z L'l crc- 1)nn 'I ,I, 1 Inf) 1 \ 1001 900 1 / Vvv800 NJ 1\ ,Ir r7nn I I f I I v\ V ; i , fJVv I I , 6nn 1c; 1l I 11 1) 11 1n I, ,, l I I \ I i, , I DJIR 11 II ! j . j \ IVv I! I ! 9- \ V ,I 8- I 1\ 7I 6 5 I I , !I – 4 !\t- ,, NYSE ,- i I I, I I' 3 1968 1969 ;, , 1970 1971 1972 1973 1974 1975 1976 RRGIN DET 1977 1978 'I 1979 11980 120G f- liDO – 1000 f- gOG f- 8GO 700 V. 600 IS 14 13 12 11 – 10 9 -8 f- 7 f- 6 f- 5 f- 4 3 1981 1982