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December 23, 2009 at 07:00 PM
Unusual events are often the consequence of unusual actions. The 65 percent rally from the March lows is one of those unusual events that can be rationalized but not really explained.
The economic indicators that really matter for this cycle – unemployment rates and property prices – have been moving in the wrong direction for months contradicting the stock market’s move to new recovery highs. Is it possible that banks are using government cash to artificially bid up prices?
Unfortunately, there are too many unknowns to conclusively answer this question, though I suppose the government would want it that way, that doesn’t mean we can’t reason on the matter. In fact, a look at the available information sheds some light on the manipulation theory while a look at history provides valuable clues as to its effect.
In 1988, in response to the 1987 Black Monday where stocks collapsed 22 percent, Ronald Reagan signed an executive order to establish a specific committee designed to prevent a major market collapse. As per this order, the Secretary of the Treasury, the chairman of the Federal Reserve, the chairman of the SEC and the chairman of the commodity futures trading commission make up the core of this team.
By extension, major financial institutions like JP Morgan Chase and Goldman Sachs are used to execute their orders. There is much more to this unique “financial powerhouse fraternity” designed to keep a lid on potential market meltdowns. (A detailed report about this secret team is available in the January issue of the ETF Profit Strategy Newsletter.)
How could this team buoy prices?
Supply and demand drives prices. Where the demand comes from does not matter.
In emergency situations, the Federal Reserve is said to lend money to major banks, which serve as surrogates who will take the money and buy markets, predominantly futures, through large unknown accounts.
The timing of those buys will be such that those shorting the market will be forced to buy back shares. In theory, this eliminates the most pessimistic investors and causes others to buy. Soon sideline money from mutual and hedge funds comes in, and the rally gathers a life of its own.
The notion that prices can be inflated artificially makes sense and sounds good in theory. Based on the evidence, this kind of maneuvering even seems to be more common than we think.
