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Is Fed Buying Behind the Stock Rally?

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Do we have the Federal Reserve to thank for the recent stock rally? The only logical answer is yes, according to TrimTabs, 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's the line of reasoning: U.S. stocks gained $6 trillion in aggregate market value starting in mid-March. According to TrimTabs, historically, increases in stock market value require a net cash inflow into stocks equivalent to 10% of the increase, or $600 billion in this instance. However, the firm couldn't trace the origins of anything close to that sum from among traditional market participants. The following table summarizes TrimTabs' findings:

Investor Type

Buying Stock During the Rally?

TrimTabs' Comments



Net sellers of stock (share issues).

Individual Investors (Retail Stock Funds)

No (Insignificant)

Net inflows to U.S. equity funds and ETFs total just $17 billion since the beginning of April.

Individual Investors (Direct Purchases)


High market volatility and neutral individual investor sentiment argue against significant purchases.

Foreign Investors


Foreign investors purchased $109 billion worth of U.S. stocks from April through October.

Pension Funds


Anecdotal evidence suggests pension funds have moved no more than $100 billion into stocks since the rally began.

Hedge Funds


Probably not in significant amounts as hedge funds suffered net outflows of $12 billion between April and November.

Source: TrimTabs.

If TrimTabs is right, we're 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 occurred (at least) three times -- in two advanced economies, no less -- since 1998.

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 U.S. Treasury and then-Fed chief Alan Greenspan roundly criticized Hong Kong's action. 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 billion $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 intervention 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, U.S. financials gained $1.3 trillion in market value from the March 9 market low through the end of 2009 (see table below). 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 trillion-dollar bailouts.


Increase in Market Value Between 03/09/2009 and 12/31/2009

JPMorgan Chase (NYSE: JPM  )

$111.3 billion

Bank of America (NYSE: BAC  )

$106.3 billion

Wells Fargo (NYSE: WFC  )

$95.7 billion

Citigroup (NYSE: C  )

$69.9 billion

Goldman Sachs (NYSE: GS  )

$52.7 billion

Berkshire Hathaway (NYSE: BRK-A  )

$40.2 billion

Total -- Entire Financial Sector

$1.3 trillion

Source: Author's calculations, based on data from Capital IQ, a division of Standard & Poor's.

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 index eclipsed that performance with a 118% gain.

Ultimately, though, this is all just conjecture. I think the likelihood of a Fed share buying campaign is very low, and here's why: Both the Hong Kong and Japanese central banks publicly 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 unprecedented 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 (NYSE: AIG  ) , Fannie Mae and Freddie Mac. In all three cases, the government's exit strategy is a mystery; on Christmas Eve, the U.S. 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-speculators of these companies remain substantial.

The Fed's policies are creating a new set of tangible risks for investors. Motley Fool Global Gains co-advisor Tim Hanson explains why it's time to get out now.

If you're concerned about the threat of inflation -- and other risks facing the economy -- focus on companies with sustainable dividend growth. The team at Motley Fool Income Investor can show you how to build -- and manage -- a portfolio of high-quality company stocks with robust dividend yields. To find out their six Buy First stocks, take advantage of a 30-day free trial today.

Alex Dumortier has no beneficial interest in any of the companies mentioned in this article. Berkshire Hathaway is a Motley Fool Inside Value pick and a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.

Read/Post Comments (33) | Recommend This Article (113)

Comments from our Foolish Readers

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  • Report this Comment On January 08, 2010, at 2:04 PM, XMFSinchiruna wrote:

    Great article, Alex!

    Eric Sprott raised the same questions with respect to the bond market. His December newsletter is a recommended read.

  • Report this Comment On January 08, 2010, at 2:32 PM, camistocks wrote:

    Back in early 2009 there were several people calling for the bottom of the bear market and start of a new bull market. It's not as if the rally came out of the blue sky... Hey even Dr. Doom Marc Faber called the bottom and the strong rally!

  • Report this Comment On January 08, 2010, at 2:41 PM, Melaschasm wrote:

    I am guessing that a big part of the inflows to the stock market are from TARP bailouts, and 0% interest loans from the Fed to banks.

    If you are managing a bank which was not about to go under, where would you put the 10s of billions the government required you to take?

    If you can get 0% interest loans from the Fed, why not borrow a ton of money, and invest in stocks?

    People have been wondering what the banks are doing with all the new money, which is not being lent out. I would say that buying stock is a likely answer to that question.

    Also, the government has made it clear that 'to big to fail' banks will be protected from losses, but be able to keep all profits. In such a situation, it would be logical for to buy up large shares of other 'to big to fail' banks. That way if one goes under they all go under, and thus can be certain that if we have another crash, the government will absorb the losses.

  • Report this Comment On January 08, 2010, at 5:29 PM, ibropin wrote:

    I truly think you have hit the nail on the head. More so than you know. I do not think it is banks using tarp funds though. This rally has been the tail wagging the dog from the beginning . I think that all of us have sat here an read the reports daily and wondered why is it still running what is driving it, their has been some force other that the ones of us that felt the co. were under valued.

  • Report this Comment On January 08, 2010, at 5:35 PM, MstrChief wrote:

    Good artical! I think Melaschasm hit the nail on the head. If I was a big banker and calling the shots, I would be buying the other bank's shares as they would be mine. With free money yet! Free money? Oh yes, yours and mine.

  • Report this Comment On January 08, 2010, at 5:40 PM, PsycheDaddy wrote:

    What about the PPT or Plunge Protection Team? Is this for real or just another conspiracy theory?

  • Report this Comment On January 08, 2010, at 5:44 PM, tkell31 wrote:

    Sheer conjecture, but I'm sure the conspiracy theorist will love it. When does the I know who shot JFK article come out? Please go sell crazy somewhere else, this site has plenty of people doing it already.

  • Report this Comment On January 08, 2010, at 7:27 PM, Varchild2008 wrote:

    Interesting but here's what I know....

    TSP (Federal TSP) Can create inflows of multiple billions of dollars in a single month. pretty easy.

    And I noticed TSP inflows after months and months of outlows sometime around late Q2 early Q3 of 2009. is what I use to track this as they write articles occasionally about the inflow and outflow of TSP money.

    I personally have been doing purchasing of stocks at an alarming rate in 2009. I bought into (BAC) right around the March bottom.

    The reality is that it was a combination of (C) Victor Pandit C.E.O. and (BAC) Kenneth Lewis C.E.O.

    Both issuing press releases saying they were profitable in the first quarter of 2009. Once that happened the Stock Market hit bottom. I was a BULL on Financials when Ken Lewis made his statement.

    Everyone looking for some OTHER reason for the financial rally..... is completely wrong.... It's not the FEDs.... It's Victor Pandit + Ken Lewis....

  • Report this Comment On January 08, 2010, at 7:58 PM, thisislabor wrote:

    yes, through goldman sachs. so what's the problem?

  • Report this Comment On January 08, 2010, at 8:39 PM, Rollerofthedice wrote:

    Why would you select an inflamatory title for an article like this and then, near the end of the article, include "Ultimately, though, this is all just conjecture."

  • Report this Comment On January 08, 2010, at 8:42 PM, Rollerofthedice wrote:

    Why would you select an inflamatory/sensationalism title for an article like this and then include, near the end of the article, "Ultimately, though, this is all just conjecture"?

  • Report this Comment On January 08, 2010, at 8:49 PM, drericrasmussen wrote:

    I think Trim Tabs should trim its tabs more carefully. Many of us began buying aggressively in March and many of us have taken leveraged positions as evidence of the recovery has spread. I doubled my net-owned portfolion in 2008 and every time I look back are discovery how much better I could have done.

    I find it disturbing that Motley ones would set forth a line of thought that is more appropriate to Roswell, New Mexico than serious thinking about global equity markets.

    As for your comparison of Hong Kong and Japan I was the Assistant Financial Attache for US Treasury in Tokyo and the chief economist for Jardine Fleming in Tokyo. Hong Kong monetary officials knew their economy was solid; they could buy, hold and win. Japan's economy is still half dead. For every Sony or Hoya Glass you have a zombie bank or a completely uncompetitive rice field. Add in an aging population, and a nearly genetic reluctance to embrace change and you have 10 more years of snooze for the GDP.

  • Report this Comment On January 08, 2010, at 8:54 PM, rubenamy wrote:

    Will a correction in the market occur? PE ratios are low or non-existant. Conjecture and Stimulus spended have occured and the recover of the market was a net result. The question is how to make money given the new set of rules. Governments are printing money - the USD just happens to be the least worst fiat currency today. It is highly unlikely that it will fail. Inflation is coming (by design). The fed "will" have to tighten the belt with interest rates and equities will suffer. But as long as the free ride continues - play along with the band. The big money is moving the market (and bonds, USD, Gold etc.....) just as it always has. Just keep your ear to the ground so you hear the chord change from F major (Major Failure) to G major. Because there is always one more card in the deck that you didn't see coming.

  • Report this Comment On January 09, 2010, at 1:38 AM, coozbee45 wrote:

    I've been reading these comments, and I believe it is possible for this to be happening. But the question is WHO in the Fed is doing this and WHERE is it coming from. I mean you have to have some kind of account and someone has to be controlling it right?

    So is this so that others are encouraged to start buying again? A lot have people have taken it in the shorts pretty bad. I'm waiting to recuperate from my losses, and some I don't think will ever make back at all. Am I wrong, and is there a correction coming?

  • Report this Comment On January 09, 2010, at 8:04 AM, Bindlepete wrote:

    The Plunge

  • Report this Comment On January 09, 2010, at 9:34 AM, mesapet wrote:

    The trade deficit causes an outflow of liquidity which is compensated by debt purchase, to repatriate the liquidity outflow. Therefore if the deficit ceases, a gradual decline in liquidity will result in the collapse of the DOW. But if the deficit continues, the value of the dollar will ultimately decline, and the DOW will fall.

    Although the trade deficit is 60-70% due to oil and oil product imports, it is also 30-40% due to outsourced purchases. Both situations are the fault of Congress, which is sucking its thumb. Just wait 'til my stocks get back to where they were!! It'll be hasta la vista, muchachos .

  • Report this Comment On January 09, 2010, at 10:32 AM, TigerPack1 wrote:

    What about the $1 trillion or so in short covering? Morons.

    We had reached the largest short position in the history of mankind at the bottom. Everyone was shorting with no uptick rule (which still is lacking by the way and will likely create a new panic selling problem later in 2010). Just as the market was manipulated lower in price by the massive onslaught of short selling America down the river, the short covering rally of 2009 was largely a function of changing sentiment. No conspiracy Trim Tabs, just stupid analysis leaving out the biggest component of buying.


  • Report this Comment On January 09, 2010, at 12:58 PM, Dannysea wrote:

    How about this conjecture?

    Insurance companies receive 1+ trillion, buy bank stocks, stocks stabilize. Where the $$ come from? How about the open end of the 800 billion of the approved Congress stimulus plan; for did not Congress also talk about how the amounts were for starters, and that they were engineered for future payouts without Congressional approval?

    Then the scary part is who is the Comptroller of these $$? The White House?


  • Report this Comment On January 10, 2010, at 10:25 PM, bc0203 wrote:

    Actually, back in 1988, Ronald Reagan signed an executive order to establish a specific committee designed to prevent major market collapses. Details on a story at this link:

  • Report this Comment On January 12, 2010, at 9:37 AM, TMFGalagan wrote:

    Alex -

    Did TrimTabs do the corresponding research during the market meltdown period to see if enough liquidity was drained from the stock market to justify the magnitude of the downturn?

    If the market fell more than it should have based on fund flows, then it makes more sense that it might rise more than it should have based on subsequent fund flows.

    I've found many analyses of the rally fail to account for the fact that the meltdown might have been equally irrational in the other direction, and thus the irrational effects cancel each other out.


    dan (TMF Galagan)

  • Report this Comment On January 13, 2010, at 8:31 PM, adjlong wrote:

    Did anyone see or hear about the 150,000 e-mini S&Ps that traded at 113750 today? Rumor has it that the fed was selling their position to GS...........

  • Report this Comment On January 14, 2010, at 1:27 AM, MotleyPicker wrote:

    Quote: "if the Fed has intervened in the stock market, it has done so in total secrecy...this would surely amount to political suicide if it were to surface..."

    Quote: "...the question is WHO in the Fed is doing this and WHERE is it coming from?"

    Well guess what guys? The Fed refuses to tell, it refuses an audit, and unless a miracle occured in DC today while I was busy working, we still don't know what's really going on there.

    Oh, well, other than the Fed just posted the biggest profit in the history of money.

    How they made it?

    That's still a secret, and will probably remain so even if Bernanke & his cohorts have to commit Hari-Kari.

  • Report this Comment On January 14, 2010, at 10:53 AM, TMFBent wrote:

    The idea that the Federal reserve goes without audits is a myth.

  • Report this Comment On January 14, 2010, at 11:04 AM, cmfhousel wrote:

    For those interested, here's the weekly rundown of the Fed's balance sheet.

  • Report this Comment On January 14, 2010, at 1:08 PM, TMFBent wrote:

    Dude, stop harshing my conspiracy buzz with your so-called "facts."

  • Report this Comment On January 14, 2010, at 2:24 PM, bigcat1969 wrote:

    Well who owns 60% of GM? Who owns Fannie and Freddie? Who owns a good chunk of Citi and gave them huge tax breaks? It's not exactly a free market is it?

  • Report this Comment On January 14, 2010, at 2:25 PM, bigcat1969 wrote:

    Well who owns 60% of GM? Who owns Fannie and Freddie? Who owns a good chunk of Citi and gave them huge tax breaks? It's not exactly a free market is it?

  • Report this Comment On January 14, 2010, at 4:42 PM, MotleyPicker wrote:

    quote: "The idea that the Federal reserve goes without audits is a myth."

    Mea culpa.

    I should have said that they don't reveal the specific details of their audits. They essentially audit theirselves, and keep the results confidential. The public sees only broad generalities IMHO.

    They are not held to the ordinary rules to "protect" the FED from "political influence".

    Or perhaps it's really to disguise the politics influencing their transactions.

    As I said, they're not telling.

  • Report this Comment On January 15, 2010, at 4:57 PM, gazkaz wrote:

    Reagan authorised the Fed TO INTERVENE in the markets (Treasuries & Equities) to stabilise the markets.

    The Fed is NOT a government department - IT IS privately owned and funded by a consortium of US banks.

    When CNN and there informed commentators are wondering why on such low volumes the market has increased so much, and, commenting on the amount of "Aftermarket Trades", and unable to pin down the source of the liquidity - it begins to beg more than just a question.

    Golman Sachs former staff move to the top US government posts and adviser positions, and then back again.

    Surely not the same GS bank staff that is involved in the US investigation into packaging duff sub prime, selling it, and derivative (betting) that they would crash - and slapping themselves on the backs for winning both ways & more (with our money) and paying themselves humungous bonuses made as a result.

    If you had said that a few years ago -everyone would have laughed at the "conspiracy theorist whacko" who was suggesting it.

    Funny old world - hindsight - may again prove the "whackos" strangely on the ball.

  • Report this Comment On September 28, 2010, at 11:43 PM, TheFedRocks wrote:

    Great article Alex, but you overlooked the EXTRAORDINARY HUBRIS of our political system.

    Consider This:

    1) Buying EVERY stock in the US Market would cost less than $20T; the entire world markets are estimated at $60T or so.

    2) 20T is a few keystrokes for the Fed

    2a) The Fed is NOT subject to margin calls, equity requirements, draw down fear, has no limit on its buying power, and can tag shorts to keep the STOP cover buyback profit (I worked on some of this software back in the day).

    3) When you're thinking in 100's of billions, trillions are mean nothing; like $1 to $10 for any of us, it's just another zero, means nothing (you must be inside that institution to understand what is in their heads, it is amazing)

    4) A rally, in this environment, of the DOW to 30,000+ points would be remembered FOREVER.

    4a) The Fed and Washington would be hailed as the second coming of Christ

    4b) Absolute secrecy of the Fed would guarantee complete credit goes to "global investors" or the market in general.

    5) The politicians would take immediate credit, "the stimulus just took time to work" and "we have been doing so much behind the scenes, you are now seeing the result"

    6) The $20 Trillion created by the Fed to do so would be soaked up by a SAVING population, so money would not truly move through the system immediately (v=t/n where t is decreasing while n is increasing means a neutral v)

    6a) The inflationary effect would be years in the distance, and TODAY is all that matters to ALL politicians and the majority of voters.

    7) Inflation may rise moderately, but it can always be explained away or called, "cost of living" and people will forget about it.

    8) KEEPING unemployment above the true 17-20% figure is key to inflation staying under control. HENCE, and this is the TRUE validation of all this, you will see NO attempt to remedy unemployment or create millions of jobs by government in less than five years (the end of Obama's term). They CAN'T! [proof of this is in the Velocity of money theory or V = T/M. (T)ransactions are reduced as (M)oney is increased so you have a decreasing (V)elocity. Put TOO MANY people to work however, and T goes up increasing (V)elocity and thereby creating inflation - therefore, you can increase M all you want, but you better keep T to a minimum!]

    If you think for ONE SECOND that the Fed is worried about fallout of ANY kind from creating $20-50T of money, you are sadly mistaken. If ANY human being had UNLIMITED buying power, NO oversight, and a guarantee of NEVER being found out ... they would go crazy; the Fed is NO DIFFERENT.

    Further, the Fed basically controls congress, the Senate voted 95-5 AGAINST any kind of audit or investigation of the Fed in March (one with limited date spans perhaps, and even a FULL audit would see the destruction of data so fast by, yet another, keystroke), so they gave the Fed Carte Blanche to do "whatever it takes" to save retirement funds, pension funds (where most union members have their money) and Wall Street.

    Mark my words, the DOW will continue through 25,000 unabated over the next year; not through anything other than the power of a keystroke by the Fed. Any fallout from this can be handled, the immediate benefit is unmeasurable.

    It's all about the money; money moves things, especially humans.

    "When the math does not add up, you're missing a variable in your equation. It's usually a variable you don't believe to exist"

    — Albert Einstein

    “Anything important is never left to the vote of the people. We only get to vote on some man; we never get to vote on what he is to do.”

    — Will Rogers

    "Give me control of a nation's money and I care not who makes it's laws"

    — Mayer Amschel Bauer Rothschild

  • Report this Comment On September 29, 2010, at 2:23 PM, TMFAleph1 wrote:


    Thanks for your comments, but I can say with certainty that the Dow won't break 25,000 over the next year.

    Alex D

  • Report this Comment On September 29, 2010, at 2:54 PM, mtf00l wrote:

    Sounds like a bet! 25,000 any time in 2011. This should be interesting. Will we or won't we?

  • Report this Comment On October 27, 2010, at 8:54 PM, fhcgroup wrote:

    Dow 25,000, Dow 30,000 are interesting predictions. Are company profits and dividends going to rise at the same rate? What is the currency going to be valued at, relating to purchasing power? Will $20 still buy what $20 buys today or will it only buy what $7 buys today? Remember the German Weir-mar Republic's Stock Market shot through the roof but it's currency became worthless at the same time.

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