The U.S. stock market rallied about 2% last week arguably without a major, positive headline driving the buying.
- Some people on Wall Street pointed to Tuesday’s Federal Reserve’s statement about how they prefer to see more inflation as the main reason for the stock market’s rally. The problem with this explanation is that stocks ended lower following the Federal Reserve’s announcement on Tuesday. In addition, the Federal Reserve didn’t say anything about how they would go about to create more inflation. The Federal Reserve’s announcement was all talk and little action.
- Some financial media outlets pointed to U.S. home sales figures and durable goods orders as other possible reasons for stocks to rally higher. The problem with this explanation is that both pieces of data were not good and there were financial media outlets completely contradicting each other in their reporting about the nature of the data. For instance, The Financial Times reported that last week’s U.S. durable goods data was better than expected and was thus a driver of higher stock prices. In contrast, the Wall Street Journal reported that stocks went up last Friday despite weaker than expected durable goods data in the U.S. Meanwhile, the home sales data was not only below expectations-it was a complete disaster.
Unsurprisingly, I do not believe that the U.S. stock market’s major move last week was justified based on the nature of the news that was out there. I suspected that something else had to be at work…
To further the controversy/suspicion surrounding the recent movement in the stock market, Rick Santelli, the CNBC financial reporter whose rant against the government last year inspired the rise of America’s Tea Party Movement, implied on Monday morning that September’s stock market rally was “bought and paid for” at 9:37 of the following video.
Zerohedge, a financial website that I follow regularly, reported that there was indeed some suspicious activity going on throughout all last week which may have been responsible for the stock market’s seemingly inexplicable rally. This suspicious activity is what I want to cover in today’s blog post because the average person is highly unlikely going to hear about it when reading a newspaper or a mainstream news website.
Zerohedge reported that the Federal Reserve conducted Permanent Open Market Operations (POMO) virtually every day last week before the U.S. stock market opened. POMO is a procedure where the Federal Reserve either buy or sales securities (U.S. Treasuries) in an effort to affect the amount of reserves in the banking system. The Federal Reserve generally conducts these transactions with its primary dealers, the select banks and security dealers who have a special relationship with the Federal Reserve.
The suspicion that some people who follow the financial markets closely, including those at Zerohedge, is that these primary dealers are taking the proceeds from POMO activities (they’re often selling U.S. Treasuries to the Federal Reserve in the POMO activities that take place) and pouring that money into the stock market (while using extreme leverage) so that stock prices rise artificially.
- A very informative primer on the Federal Reserve’s Permanent Open Market Operations can be found at the following link. The research report found that there were unusually large late-day rallies in the stock market on days when the Federal Reserve conducted POMO activities during its 2009 test period.
Many people who monitor the Fed’s POMO activities believe these activities were the primary driver of the stock market’s rally last week. The following link shows illustrates the impact that the Fed’s POMO activities might have had on the stock market last week. Link
- I suspect the Fed’s POMO activities probably were the primary reason behind last week’s rally because the news was not good enough to push the stock market as high as it moved.
CNBC Europe conducted an interview that they probably wished they never conducted with technical strategist Robin Griffiths on Monday. CNBC Europe wanted Griffiths to provide his views on the future direction of the stock market and bond market based on how stock market and bond market chart patterns look (technical analysis). Instead of immediately providing a technical analysis of various markets, Griffiths spent the first 2:03 of the interview railing against the Federal Reserve’s alleged intervention into the stock market via its POMO activities. The following is the brief interview that CNBC Europe conducted with Griffiths (not sure they’ll invite him back on after his rant) Link
If we assume there is intervention into the stock market, then the question has to be asked: “why does someone want to intervene in the stock market to push prices higher?” I believe there could be several reasons why those in charge may want to intervene to push the stock market higher. Here are three reasons that I’ve thought of quickly off the top of my head… there are probably several more.
- Authorities may want to intervene to push stocks higher so money managers and hedge fund managers can have good performance numbers when people receive their quarterly or annual statements (the end of the quarter is this Thursday). This is important because past selloffs have occurred as a result of people cashing out of their investment after a money manager or hedge fund manger performed poorly for an extended period of time.
- People with influence or people with the potential to have influence (like Alan Greenspan) believe that pushing the stock market higher is the key to getting the U.S. out of the economic trouble that it is right now.
- Perhaps the most probable reason why the authorities may want to intervene to push stocks higher is that they want Americans to feel better about their own financial situation and feel better about the U.S. economy in hopes that American voters’ better feelings makes them less likely to vote against incumbents in November’s election.
I have no idea where the stock market is heading in the next couple of months. If I truly knew where the stock market is heading I’d probably be a millionaire soon. However, as someone who’s interested in making good long-term investments, it’s unsettling to hear that this kind of activity might be going on…
