Yet another report has come out questioning the real strength behind the recent stock market rally and the widespread belief that government (i.e. tax-payer) dollars are actually behind it, much like the bailout of the banks and the automotive industry. The report by TrimTabs Investment Research has largely been ignored by a docile mainstream media which as usual follows the establishment's boostering of the Dow's stellar recovery since March 2009.
The report points out that while the real economy has faltered and traditional sources of capital have remained neutral, stocks have defied gravity, and wonders whether its not really down to the Federal Reserve and the US government working behind the scenes.
History is peppered with so-called "secrets' known to only a few insiders but suspected by a much wider population. Examples include the widespread use of performance enhancing drugs by top athletes and the suspicion of such practices by their adoring fans; the pedophile tendencies of some priests known by the Catholic hierarchy and suspected by some of the faithful laity; and the Nazi death camps known only to the party leadership but suspected by some of the patriotic voters who initially put them into power.
In all these cases, the people at the top maintained the fiction because it wasn't in their interest for the truth to come out. But for those lesser mortals who only had their suspicions they would simply prefer that the rumors were not accurate because the truth was too awful to contemplate, and there was always the possibility of some vague guilt by association.
To this litany of lies may we now add the US government and its manipulation of the stock market? In the 21st Century perception is everything and manipulation of data from Wall Street is now more important than the actual performance of the real economy. If the Dow is going up then everything must be fine - unemployment, bankruptcies, housing foreclosures, and actual sales figures almost become irrelevant. As the report points out "the wealth effect of rising stock prices soothed the nerves and boosted the net worth of the half of Americans who own stock."
However, investors have become increasingly suspicious of the $6 trillion stock market rally. Truth be told, the very last thing they want to believe is that it's all down to market manipulation.
The TrimTabs report says historically the market cap rises by about 10 times the amount of new net cash invested. But the roughly $600 billion of net new cash needed to boost the market cap by $6 trillion since March 09 has not come from traditional sources. So where did it come from? If the US government has bailed out the banks and auto industry with billions then why not the stock market as well?
It's not beyond the bounds of possibilities that the government has been buying S & P 500 futures with the connivance of the major banks in receipt of bailout funds. The report quotes former Fed board member Robert Heller who opined in the Wall Street Journal in 1989, "Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole." In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could "theoretically buy anything to pump money into the system." In an article in the Daily Telegraph in 2006, former Clinton administration official George Stephanopoulos mentioned the existence of "an informal agreement among the major banks to come in and start to buy stock if there appears to be a problem."
There is certainly no shortage of speculation on the existence of the so-called Plunge Protection Team. The Fed or the Treasury could easily buy a nominal $60-70 billion of S&P 500 stock futures every month for as long as necessary. The TrimTabs report reveals that depending on margin levels, as little as $5-15 billion per month was all that was necessary to lift the S&P 500 from its low point by about 67%. Compared to the huge sums swallowed up in the bank & auto industry bailouts, this is small beer.
The report continues "Since the stock market was extremely oversold in early March, not only would a new $60 to $70 billion per month of buying power have stopped stock prices from plunging, but it would have encouraged huge amounts of sideline cash to flow into equities to absorb the $295 billion in newly printed shares that have been sold since the start of April. This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. Some market watchers have charted that virtually all of the market's upside since mid-September has come from after-hours futures activity.'
The report concludes "that if government has been behind the sharp stock rise, it could trigger a major equities meltdown when the government stops buying and even worse, starts selling'.