Anatomy Of A Market Rescue And A Proper Screwing

by Chris

Yesterday’s “”market”” close saw an intense blast of market on close selling pressure.  Lots of selling, and the various indexes in the US all closed right at or very near their lows.

When speculators borrow money to put into the equity markets they usually do so with a margin account.  Margin debt is very close to its all-time highs and vastly higher than before either the 2000 and 2007 peaks.

When your bets go against you, you get the dreaded “margin call” where your brokerage calls you up and you have to either pony up cash for the difference or you have positions force-sold to cover the gap.

For example, suppose you had $100k invested and then borrowed another $100k putting it all into the FAANG stocks, creating a total leveraged portfolio valued at $200k.  The margin requirement is 50% so you have to maintain a $100k balance on your non-margined account value.

Now the FAANGs have a bad two days and drop 10% over those two days, and your account value drops by $20k to $180k.

Your broker then calls you up (realistically at the end of the first day too…just simplifying here) and politely demands that you immediately wire $20,000 into your account.  Maybe you don’t have that (and are suddenly aware that your main account has suffered a 20% loss due to leverage) and you elect to have $20k of shares sold to cover the loss.

Nuts!

It’s a very painful lesson, but not nearly as painful as waking up the next day and discovering that “somebody” began rescuing the ““market”” literally the very minute it closed down.

The purple arrow marks the exact close of the cash market at 4:00 p.m.  That’s where the margin calls went out based on that closing price. Over the next few hours the S&P 500 futures launched a robust 40 points(!).

Hopefully everybody who got a margin call saw that action and acted accordingly, but many certainly did not.

It’s almost as if the “”market”” is some sort of punishment machine run for the exclusive gain of the insiders or something.  At any rate, that’s a right proper margin screwing on that chart there.

As for today, the rescue that began at market close is now in force across the world.  It remains to be seen which central banks or PPT authorities were involved in this and how much fiat money it took.  Maybe we’ll never find out (but I’m going to scour the central bank balance sheet disclosures when they come out in a month or two) but the really interesting thing to watch for is for one of these rescues to actually fail.

To paraphrase an old lefty slogan, what if they threw a rescue and nobody showed up?

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