Who Is Bent On Buying Stocks?


I am not a conspiracy-theory nut, but I always had a nagging suspicion that something was wrong with the recent Wall Street rally. My apprehension grew almost concomitantly with the unrelenting upward drive of a market that turned so blatantly oblivious to bad economic data. Since March '09, there was plenty of bad economic news to create panic amongst any stock traders, but almost none of the bad news seemed to have impacted the bullish trend on Wall Street. How come?

According to TimTabs, a research firm that tracks liquidity flows in the market, the unusual circumstances that led the U.S. market rally might be explained by secret government moves to purchase stocks!

Charles Biderman, the founder and chief executive of TrimTabs, said in a statement released January 5, that his firm could not identify the source of the new money that pushed stock prices up so far so fast.

The source of approximately $600 billion net new cash necessary to lift the market's overall capitalization by $6 trillion last year could not be identified by TrimTabs, Biderman said. The money, he said, didn't come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds. He added that The Federal Reserve or the Treasury could have easily manipulated the stock market by buying $60 to $70 billion worth of futures of the S&P 500 Index.

Just for the record, and besides Mr. Biderman's statement, I would add a couple of speculations of my own:

- The Fed and the Treasury may have spent most, if not all the bailout money buying stocks, either directly or indirectly, in order to restore investors' confidence. After all, doesn't the entire trading depend on psychological factors that have nothing to do with cold figures?

- Washington's most influential economic planners have strong connections with Wall Street. It is normal that they believe the stock market is the only driving force that could lead to a viable economic recovery. Given their background, they are certainly more convinced than others that Wall Street is the magic bullet with which all the ailing sectors of the economy can be salvaged.

- I can easily imagine those planners setting a specific target-- a "self-combustion" point that, when reached, would absolve the government from any further involvement. They may have figured that as the stock market reaches a self-sustaining bullish drive, the government would ultimately recover any money spent on stocks, or even make a profit.

This theory may explain the Fed's reluctance, despite all the prodding from Congress, to disclose which banks are benefiting from the bailout money.

It may also explain the banks unusual restraint in processing foreclosed homes. This may have to do with the banks belief that, thanks to Wall Street and government money, the housing sector will get back on its feet, rather sooner than later.

The banks are holding off on putting a good percentage of their REO properties on the market to avoid pushing prices lower. Their aim is to help push the prices back up, turning upside-down mortgagees into viable customers, as they will have no reason to walk away from their homes.

The government and the Fed have obviously embraced the same model of reasoning; mortgage interest rates have been pushed down to historic levels, tax-payers money is being spent right and left for mortgage modifications aimed at reversing the delinquency rates, and Congress has extended the home buyer tax credit until April 2010.

On paper, this scenario sounds great, but there are unknown factors, such as the soaring unemployment figures and the housing shadow inventory, that may continue to act as the one indomitable horse which can wreck the entire recovery scheme.

If we add to that the fact that the option ARM resets are just beginning to kick in, especially in California, that the Federal Reserve may soon run out of money to buy mortgage-backed securities, and that hundreds of thousands of homeowners may decide to sell their properties this year, due to unemployment, retirement, or simply to become renters in an increasingly favorable rental market, it is fair to say that this year holds a lot more surprises than most of us think.

As we can see from the headlines at this very moment, Wall Street is still turning a blind eye to the economic data of the day:

Economy loses 85,000 jobs as employers remain wary

Stocks Close in the Green as Traders Take Jobs Report in Stride

Consumer borrowing falls sharply in November

Dow Gains 1.8% for Week; Financials Rally

So what's really going on?