Artificial Stock Market rally?

http://www.fool.com/investing/general/2010/01/08/is-fed-buying-behind-the-stock-rally.aspx

Do we have the Federal Reserve to thank for the recent stock rally? The only logical answer is yes, according to TimTabs, a research firm that tracks money flows in and out of the stock market. As I read the title of their report, I thought it might be a mad-hatter conspiracy theory, but the analysis is rather compelling. If they are correct, it could have significant implications for the longevity of the powerful rally that lifted the market from its March lows last year.

Following the Cash

Here is the line of reasoning. US stocks gained $6 trillion in aggregate market value starting in mid-March. According to TrimTabs, historically, increases in stock market value require a met cash inflow into stocks equivalent to 10% increase, or $600 billion in this instance. However, the firm could not trace the origins of anything close to that sum from among traditional market participaters.

(see summarization of Trimtabs findings on table)

If Trimtab is right, we are far short of the $600 billion needed to fuel the rally we witnessed. But would a central bank intervene directly in its equity markets? Although unorthodox, this has occured at least three times -- in two advanced economies, no less -- since 1968.

Hong Kong shuffle

During the 1998 Asian currency crisis, the Hong Kong Monetary Authority (HKMA) purchased US $15.1 billion worth of Hong Kong shares -- approximately 6% of the value of the entire market -- to stabilize markets. At the time, the US Treasury and then-fed chief Alan Greenspan roundly criticized Hong Kong's reaction. The Hong Kong government ultimately bundled the shares into an index fund that they sold to the public in the course of realizing US $14 billion in profits.

Last year, starting on Feb 23, the Bank of Japan (BOJ) purchased 207 billion yen (approximately $2.2 billion) in bank-held shares, with a target investment of 1 trillion yen. Between 2002 and 2004, the BOJ also bought stocks as part of a 3 trillion yen-buying program, which it started to unwind in 2007 -- shares sales were halted a year later as Lehman Brothers collapsed.

Going "all in" on bank stocks

Comparing the two, the BOJ's interention looks like the better model for a hypothetical Fed action. I'd be more inclined to believe that the Fed implemented a smaller, more focused operation consisting in buying bank shares on the open market to complement its TARP investments. Last March, with all eyes on the banking sector and bank stocks suffering devastating losses, the Fed could have reasoned that a turnaround in bank stock prices would have a significant positive impact on market sentiment.

In aggregate, US financials gained $1.3 trillion in market value from the March 9 market low through the end of 2009 (see table in article). According to Trimtabs "10%" rule of thumb, that increase would have necessitated just $130 billion of new cash invested in the sector -- a trifling sum in this era of billion-dollar bailouts.

Regardless of where the cash came from, one thing is certain. Financials led the rally. From its low, the S&P 500 rose 65% in 2009, the KBW Bank eclipsed that performance with a 118% gain.

Ultimately, though, this is all just conjecture, I think the likelyhood of a Fed share buying campaign is very low, and here is why: Both the Hong Kong and Japanese central banks publically announced their plans to buy equities; if the Fed has intervened in the stock market, it has done so in total secrecy. At a time when the central bank is already facing unprecendented backlash concerning its role leading up to and during the crisis, this would surely amount to political suicide if it were to surface. I don't think it happened -- but I can't rule it out entirely.

Conjecture is fleeting, tangible risks remain

Either way, I've warned Fool readers repeatedly about the risks of owning low-quality, speculative financial shares, most prominent among which are three companies that are on official government life support: AIG, Fannie Mae and Feddie Mac. In all three cases, the government's exit strategy is a mystery; on Christmas Eve, the US Treasury announced that it was removing the $200 billion caps on the funding it can provide Fannie and Freddie over the next three years. The risks to the owner-speculator of these companies remain substantiated.

Which corner are you going to argue in this debate?

Originally posted by FMF
Which corner are you going to argue in this debate?

I suggest the Fed bought the stocks. If not, where did the money come from? It seems to me the only possibility.

Originally posted by whodey
I suggest the Fed bought the stocks. If not, where did the money come from? It seems to me the only possibility.

That's right, stock markets have never gone up before. Stock markets rising after a financial crisis and mass panic selling is also extremely rare.

Originally posted by whodey
I suggest the Fed bought the stocks. If not, where did the money come from? It seems to me the only possibility.

Your own cut & paste suggests that it's highly unlikely.

Originally posted by FMF
Your own cut & paste suggests that it's highly unlikely.

Only because the author thinks that doing so secretly would be akin to political suicide. However, as we both know the federal government has probably done MANY things secretly that would have been considered political suicde had they come to light.

So how will it come to light? Who can prove anything?

If not, what is your theory?

Originally posted by whodey
Only because the author thinks that doing so secretly would be akin to political suicide. However, as we both know the federal government has probably done MANY things secretly that would have been considered political suicde had they come to light.

Yes, whatever. But even your own cut and paste - which you've used to start this thread - suggests that it's highly unlikely.

Originally posted by FMF
Yes, whatever. But even your own cut and paste - which you've used to start this thread - suggests that it's highly unlikely.

No insight as to where the money may have come from? Maybe aliens came down, you never know!! In fact, maybe God donnit!! 😛

Originally posted by whodey
No insight as to where the money may have come from?

You are claiming your theory - which is dismissed out of hand by your own cut & paste - is an "insight"?

Originally posted by FMF
Yes, whatever. But even your own cut and paste - which you've used to start this thread - suggests that it's highly unlikely.

But if TrimTab's rule of thumb say so, it must be true.

Originally posted by Palynka
But if TrimTab's rule of thumb say so, it must be true.

You're only saying this because you want us to think that you think TrimTab's rule of thumb isn't true but the way you've said it suggests that you too think it must be true.

I think one of they key lines is "However, the firm could not trace the origins of anything close to that sum from among traditional market participaters. " So the question is, is this firm really that good that you trust them to have eliminated every possible other source of the money ?

Originally posted by Barts
I think one of they key lines is "However, the firm could not trace the origins of anything close to that sum from among traditional market participaters. " So the question is, is this firm really that good that you trust them to have eliminated every possible other source of the money ?

We are essentially talking about $400 billiion of unaccounted funds flooding the market. I would assume that something is amiss, or the firm is so inept they should not be in business.

As for who might have that kind of money, what say you? Who has $400 billion, assuming that figure is true? Would it not have to be uncle Ben?

Originally posted by whodey
We are essentially talking about $400 billiion of unaccounted funds flooding the market. I would assume that something is amiss, or the firm is so inept they should not be in business.

As for who might have that kind of money, what say you? Who has $400 billion, assuming that figure is true? Would it not have to be uncle Ben?

Why would one assume the figure to be true?

Originally posted by whodey
I suggest the Fed bought the stocks. If not, where did the money come from? It seems to me the only possibility.

China?
The capitalist class as a whole?