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With stocks near all-time highs, investors are taking on record levels of margin debt, something that could accelerate a decline if the market turns south.
Margin levels, or the amount borrowed to purchase securities, climbed to a new record of $401 billion in September, according to NYSE Euronext data released this week. The monthly increase of 4.78 percent was also the largest gain since January. The NYSE figures represent the margin accounts of member firms.
"Investors love going on margin in a rising market environment, but when the market declines, it can be extremely painful" says Paul Hickey, co-founder of Bespoke Investment Group. "Don't forget that if you go on margin you also have to pay interest on that loan, and some brokers charge pretty high rates, so you are already starting in the hole."
Wall Street doesn't seem to care if companies are carrying debt on their balance sheets – as long as they are putting that money to work, perhaps even towards a dividend or buyback.
CNBC research shows that only about 23 companies in the S&P 500 have managed to stay debt-free. Yet, when looking at the year-to-date stock performance, only eight of these names are outperforming the S&P 500. Those companies are Chipotle, MasterCard, Bed Bath & Beyond, Paychex, Visa, Akamai, Robert Half and Forest Labs. Out of these, Mastercard, Paychex, Visa and Robert Half all pay a dividend.
Lazard Capital's Managing Director Art Hogan says having no debt isn't necessarily a big plus for a company and that now it is actually a favorable time for companies to take on debt. "It makes sense for companies to take on reasonable levels of debt when it is affordable and interest rates are relatively low. Companies continue on the whole to have reasonable debt-to-equity ratios and most of the selling pressure that we have seen in this current uncertainty has been agnostic of debt levels and more of the risk off sell all stocks variety," says Hogan.
Since the S&P 500 hit a record price of 1,729.86 on Sept. 19, volatility is up more than 50 percent. While the market retracts from its highs, some of this year's winners are bearing the brunt of the losses.
Case in point: Vertex Pharmaceuticals. The stock gained more than 90 percent before pulling back almost 20 percent from its 52-week high. While investors have benefited handsomely year-to-date, some of those gains are evaporating. Similarly, First Solar is trading more than 28 percent below its 52-week high in May, after nearly doubling from the beginning of the year through May.
Other major indexes are also feeling the heat. The Nasdaq 100 has fallen 2.7 percent in the past two days, its worst two-day loss in over three months, while the Dow is off by 930 points, or 6 percent, from its all-time high of 15,709.58 in September.
Some Wall Street darlings, including Facebook, Netflix, Priceline and Yahoo, are down over 8 percent for the week. Biotech is also getting hammered. The NYSE Arca Biotech Index fell by 4.5 percent on Tuesday—its worst percentage drop in two years. One reason for the sharp decline is that these stocks have been hot performers, with S&P 500 biotech companies up about 60 percent in 2013.
Here are other names that had phenomenal runs this year but are now pulling back.
As Wall Street deals with the effects of the U.S. government shutdown, investors are also bracing for another hectic earnings season set to begin this month.
Preliminary guidance for third-quarter results provides little case for optimism. For Q3 2013, only 18 companies have issued positive EPS guidance, whereas 94 companies have issued negative guidance—the highest number since at least 2006, according to figures compiled by Thomson Reuters I/B/E/S.
The Nasdaq 100 is up big this year, but the companies leading the gains may not be the ones you think.
The stock market gains this year are shaping out to be the best in well over a decade. With September heading toward its close, the S&P 500 is on track for its best first three quarters since 1997.
The index has soared 19.4 percent this year, but how long will the rally continue?
Since 1928, the market has been up this much only 14 other times. In 10 of those instances, the S&P 500 continued to climb in the last quarter of the year, posting an average gain of 6.9 percent.
When the market was down, however, it was down big. Consider two of the last four times the S&P 500 fell in Q4, both of which took place during crash years: Q4 1987 (-23%) and Q4 1929 (-29%).
Anytime there's a $40 billion transaction being announced, you take notice. That's the case for Microsoft, which set a massive stock buyback program along with a dividend increase on Tuesday, two days ahead of a highly anticipated investor meeting.
Microsoft is trying to make a pledge to shareholders that it will remain friendly by authorizing a $40 billion stock buyback program, replacing the prior $40 billion stock buyback plan set to expire at the end of this month.
It also boosted its quarterly dividend by 22 percent to 28 cents per share. On Thursday this week, shareholders will learn from Microsoft about its plans to replace Chief Executive Steve Ballmer, who is expected to retire within a year.
Microsoft is not alone, though; there are a host of other companies that could be candidates for dividend increases.
The Nasdaq Dividend Achievers Index looks at US companies that are traded on either the Nasdaq or NYSE and have raised their yearly dividend payments for at least the last 10 years.
Three of the stocks caught our eye.
Since Lehman Brothers filed for bankruptcy five years ago, a screen of the S&P 500 reveals that only about 20 percent of the index components remain in the red.
According to data compiled by CNBC, a fourth of those companies belong to the financial sector. Shares of Citibank, Bank of America and AIG, for example, are still down more than 37 percent in the last five years while the S&P 500 is up 39 percent over the same period.
Among the winners, Regeneron Pharmaceuticals and Priceline.com are the two best performing stocks, rallying more than 1,100 percent. Other consumer names such as Netflix, Chipotle, Whole Foods and Starbucks are also up significantly, rising more than 400 percent.
Indeed, the S&P Consumer Discretionary sector is up 100 percent in the past five years, leading the gains in the S&P 500 –Health Care and Technology follow, up 61 percent and 60 percent, respectively.
Demand for small-cap stocks is increasing relative to established large-cap names, a divergence that may signal continued investor confidence in U.S.-centered growth.
The Russell 2000 index, which is most sensitive to domestic economic expansion, hit a new record Monday, surpassing its previous high of 1,063.52 on Aug. 5.
The benchmark has gained more than 6 percent in the past three months, compared with gains of 3 percent for the S&P 500 and of 1 percent for the Dow. The Russell has soared 24 percent this year.
Small-cap leadership is usually considered a bullish sign for the overall market, according to market professionals, as the sector is considered a gauge of the health of the domestic economy.
Technology has also been a bright spot for the market in the past three months, with the Nasdaq up 8 percent.
Should investors take any clues from this trend?
Dan Greenhaus, chief global strategist at BTIG, holds that improvement in Europe and China should benefit large caps over the next few months, while Art Hogan, managing director at Lazard Capital Markets, says investors should focus on names prone to capital appreciation on a cyclical basis versus defensive stocks, as things appear to stabilize in some emerging economies.
Paraskevidekatriaphobia is the fear of Friday the 13th. For the stock market, however, this 'unlucky' day tends to be relatively calm, with average gains of only 0.2 percent or less.
Below is a look at how stocks traded on this superstitious day.