Margins cut by half--NYSE; upswing said possible

By Deepa Seetharaman

NEW YORK, Oct 30 (Reuters) - Stock investors cut borrowings by 50 percent in September from August as the market faltered on Lehman Brothers' collapse, eroding faith in equities and scarce credit, according to New York Stock Exchange data on Wednesday.

Credit balances in so-called margin accounts fell to roughly $193 million from a yearly high of $386 million in August. A year earlier, balances were 7 percent higher at about $208.5 million. Balances have grown steadily since 2006.

Brokers lend investors cash through margin accounts so they can purchase stocks, bonds or derivatives. Stocks and cash serve as collateral for the loan, which allows account holders to reap handsome profits during upturn.

But when the value of a stock drops, account holders are required to put up cash or sell stocks. That the balance is low is evidence of the stock sell-off of the past two months.

Credit balances are considered an indicator of investor sentiment, but analysts said the drop could suggest a coming rebound.

"The selling has already been done," said Chip Hanlon, president of Delta Global Advisors Inc. "Supply is going to have a much harder time driving prices any lower from here. The seller is becoming exhausted."

The NYSE also posted its monthly margin debt figures, which rose 2.7 percent to nearly $300 million in September from August but dropped 9 percent from a year earlier. Margin debt, which is the dollar value of stock, bonds and derivatives purchased on borrowed money, tends to rise when investors are optimistic about the market.

Typically sharp declines in margin debt have been followed by a better market, said Paul Nolte, director of investments at Hinsdale Associates.

But future months may still see declines before picking up again, Nolte said.

"We absolutely could have more to go," he said. "Just the fact that we've reached this doesn't mean the market's turned tail.

"But we are in the neighborhood," he said.

(Editing by Kenneth Barry)