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6 Theories On Why the Stock Market Has Rallied
There are at least 6 theories about why the stock market has rallied some 70% off its lows a year ago, even though nothing has been done to actually address the root causes of the financial crisis.
What The Dumb Money Believes
The dumb money believes what CNBC and their trusty stock churner ...
er, broker ... says: that the government has fixed the economy but it
just has to "kick in" (and that unemployment is just a lagging
indicator, nothing important. See this, this, this and this).
Therefore,
these folks believe that stocks are hugely undervalued, and that if
they buy while most people are still afraid, they'll make a killing
when the market goes to the moon.
Temporary Juice
Others believe that it is the
quantitative easing, low rates, bank bailouts, stimulus spending, and
other portions of the "wall of money" which the feds have thrown at the
economy are creating a temporary pump to the stock market.
But they think that - when the spigot is turned off - the market will tank.
The Situation is Inflation
Others believe that - regardless of continued loose monetary and fiscal
policy or real stock valuations, we're in for some serious inflation.
Stocks tend to preform well during inflationary periods.
For more on inflation versus deflation, see this.
Machines Run Amok
Tyler Durden
explains that all of the stock market gains have occurred after hours
when mystery buyers purchase stock futures in low volume environments
(and see this).
Vincent Deluard - a strategist for TrimTabs Investment Research (25% of the top 50 hedge funds in the world use TrimTabs' research for market timing) - said last month:
We've never seen this before – such a huge rally, and the little guy is out.
Some argue that it is high-frequency trading or momentum-chasing
trading algorithms doing the buying, and that the market will tank when
they change their game.
Fed Futures
Others argue that the government is itself buying stock futures.
Some believe that the Feds aren't buying, but that they have intentionally showered the big banks with money, and encouraged the banks to buy. In other words, they argue that the Feds are indirectly promoting a stock market rally.
Fraud Central
Karl Denninger believes that the market has rallied due to the systemic, fraudulent overvaluation of assets.
As Denninger wrote yesterday:
[A reader wrote] The FDIC to ask about [allegations of fraudulent valuations]. This was their response:
That’s the value the bank had them on their books on their year-end financials, but the true value is much less.
It is similar to someone in Las Vegas saying that their house is worth
$300,000 because that’s what they paid for it three years ago, but the
reality is, if they had to sell it in today’s market, they’d only get
$250,000 for it. The FDIC has to sell assets in today’s market...Or tomorrow's market.
The simple fact of the matter is that there it is, right in front of you.
A raw admission that the banks are carrying these loans at dramatically above their actual value.
Yes, this means that essentially all balance sheets must now be considered fraudulent, and thus the valuations assigned by the market to them are also fraudulent.
Extending
this to the stock market as a whole you now have a market that is
intentionally overvalued as a direct and proximate consequence of
fraud, permitted and endorsed by the government, of somewhere between
25-40%.
Now you know why the market rallied off the SPX 666 lows to where it is now. 1139 (where we are now) * .60 (a 40% haircut) = 683.40, or awfully close to that 666 bottom.
Of
course this "valuation" expressed in the market can only be maintained
for as long as the fraud is. If the ability to maintain that fraud is
lost for any reason then values will instantly collapse back to reflect
reality.
Note: Obviously, I believe this is a bear market rally which will eventually fizzle out.
If the bulls are instead right, then that will make me the dumb money.
(Look at the guy on the right, as well).
But I think it much more likely that the rally will lose all steam in the not-too-distant future.
Leave a comment about why you think the stock market has rallied, and how long you think the rally will continue.
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ozziindaus,
Please explain "DTCC cleared counterfeit trades. (Opposite to failed trades with naked shorts where the supply/demand of certain stocks is artificially manipulated)"
It might be that I need more coffee and you're saying something obvious... more likely, you know something I don't about how this kind of fraud would work ...
You know about Phantom shares (counterfeit) used to Naked short stocks with the intention to drive them down? Well the DTCC has the responsibility to clear trades within 3 days but obviously has a problem clearing the Naked variety and so it's deemed a failed trade. This comes too late as the share price has already been pounded into the ground ala Bear Sterns. Now suppose you are able to perform the same ILLEGAL act but in the opposite direction. i.e. you artificially and temporarily remove stock making them scarcer and therefore raising their value. The Phantom shares used to Naked short are now Phantom investors on the Naked Long side. All you need to complete the scheme is the DTCC to clear the trade. This is what happens in Bizarro world or otherwise known as the stock market.
WOW ozziindaus, excellent explanation.
I wondered about how the actual mechanism
worked.Never understood how the illegal nakeds
were allowed, but then as Black has stated, fraud has taken over the system completely,
having drivin out all legitimate behavior...
I didn't think about this. Restricting "available" shares would also happen to be the net effect if the Fed buys stocks on the open market -- a big buyer, shares are "removed" from availability, driving up the price of the remaining shares. (Yay, Pensions! We're Saved!)
Since the Fed can hold its assets forever (e.g., MBS forever, stocks forever, etc.), wow ... the Fed could actually raise indexes forever. Just wow.
However, total world stock market capitalization is only around $30T-$40T (the bond market 10x that)... I'm not convinced this is a big enough "slush fund" to manipulate prices forever, nor to combat the imminent unwinding of the $1Q derivitives market, and sovereign defaults.
It's a travesty that the Fed would seize real assets by printing money, but I don't think even that (illegal, immoral, unethical) crap can keep this thing going.
The Fed doesn't hold any shares (other than Maiden Lane), they didn't have to, they just had to buy futures at opportune moments to chanage the perception of value. The stock market doesn't trade on fundamentals, all you have to do is change perception and up or down it goes.
Bonds are different, they may not always reflect fundmentals, but eventually they have to- you either get paid at par or you don't. So the Fed has to hold bonds to manipulate their prices.
As for holding these forever, a lot of the juice for the market came from the MBS buys, but MBS are naturally amortizing assets (at least the ones the Fed owns) so they will naturally run off. Just the absence of buying alone will suck out $50B of liquidity a month, p&i on the mortgages they hold will drain another $7B out of the economy. Prepayments will suck more out.
Where was that $50B in MBS money going, where won't it go once the buying stops, and where will the money come from to pay down the mortgages?
QE2 is inevitable if you do the math, the only question is how long will it take to re-start after March 31st.
So the FED is using the momentum traders to do the dirty work and hold the bag when the decide that "it's time for a strong $" and scare some more money into Fed bonds. The FED creates the momentum and the momentum algos dutifully buy on the momentum assuming something real is underneath it.
When the FED stops injecting momentum, the equities crash won't be pretty. Surely they understand that. Is the FED ready to take down all major banks when thier tier one collateral goes poof? Have they decided that deflation can't be stopped, so just crash it all at once? I have a hard time seeing what the FED would consider an end-game.
This is a very good point, perhaps not obvious to the casual reader: Because the Fed paid (too much) for the bonds, the P&I stream goes to the Fed. That's money that leaves the economy, and which is deflationary (prepayments do the same, as you say).
I fear that the wash-rinse-repeat process can continue, however: Fed pays too much for what it "buys", and take too little for what it "sells", effectively transferring cash to its big friends with every transaction. Add a little more telegraphing and front-running, and the Fed is litterally shoveling cash into the mauls of the squid and JPM. Everything the Fed does is to attempt inflation, and while I expect it won't work in the short run and it will get out-of-control in the long run, that annoying middle-run is insanely long.
Sad.
Restricting "available" shares would also happen to be the net effect if the Fed buys stocks on the open market -- a big buyer, shares are "removed" from availability, driving up the price of the remaining shares. (Yay, Pensions! We're Saved!)
Since the Fed can hold its assets forever (e.g., MBS forever, stocks forever, etc.), wow ... the Fed could actually raise indexes forever. Just wow.
The primary reason that the Fed so desperately fights an audit.
Wow, that's stunning ... thanks.
It's obvious that the market has rallied in response to earnings. Q4 '09 S&P earnings were $17+, giving an annualized run-rate PE of just 16, which isn't crazy at all if you really believe 2010 earnings will hit the $78 consensus. Personally, I think earnings are heading back down to the low $60s and thus the market to the high 800s, and I think the rally ended at the highs today, which is when I put 80% of my accounts into SDS.
I bought skf last wednesday at 22.34 and it is now 20.98. Should I stay the course or are they rewriting the rules again so that ultrashort stocks will get hammered?
I am waiting until the end of the month to make major changes to my position, I am confident the end of the MBS buys is going to rock the market, the effects should be seen by mid-April
Huge barely mentioned problem. Govt mortgages have gone from a curiosity seldom encountered to 99% of all mortgages in the mainstream markets.
How does one buy special drawing rights? Through what kind of a dealer/broker?
Hope you are correct as this will also benefit the extensive shorts collection I've been accumulating of late