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What Drove the Stock Market Rally?

|Includes: Goldman Sachs Group Inc. (GS)

There are those who have speculated that the Fed and/or the Treasury could have manipulated the rally from March, 2009 to assure its continuance.  Charles Biderman, CEO of TrimTabs, has posted an interesting article that discusses this possibility (and others) at Zero Hedge (here).

Hat tip to Phil's Stock World (here).

Note added Jan.3:

I received a private e-mail from a reader who took me to task for publishing a "conspiracy theory" without comment.  The major point was that posting such a link as I did here gives credibility to a theory that is without evidence.

Biderman acknowledges right up front that he has no evidence of Fed or government manipulation of the stock market, so I don't think anyone who reads the linked article would be misled about evidence.

However, I do take the criticism by the reader seriously.  I should have shown the courtesy to my readers who may have just browsed the post here and not read the link, that I do not subscribe to any conspiracy theory that is without proof.

Direct manipulation of the stock market by the Fed and/or the Treasury is not likely to happen without a "paper trail" being evident, with or without an "audit of the Fed".

What I will contend is that the magnitude of the current rally was driven by a surge in liquidity.  The Fed and the government supplied the money (credit) and others used it.  We have had a low volume rally for much of the past nine months and the investment banking community has been a dominant player in driving the volume.  Where did the money come from to sustain the huge rally?  Biderman goes to great length to discuss where it did not come from.  It didn't come from:

*  Companies buying stock - they were net sellers.
*  Mutual funds - bond funds yes, stock funds no.
*  Retail investors - Biderman says "probably not".
*  Foreign investors - Biderman says about $109 billion (only about 1.8% of the market gain).
*  Hedge funds - Not likely - they have had a $12 B outflow according to Biderman.
*  Pension funds - Only $100 billion moved from bonds to stocks during the rally.

Biderman follows this list with another proclamation that he doesn't know where the money came from to drive the $6 trillion rally.  He then goes on to discuss a "conspiracy theory".

My own conspiracy theory is that the liquidity provided by the Fed and the government enabled trading desks at major investment banks (still masquerading as commercial banks with FDIC membership) to engage in a significant proportion of the trading volume in the form of day trading from which they derived ("skimmed") hundreds of billions in revenue.

This is my "conspiracy theory".  It is supported by the trading desk revenues of Goldman Sachs and other large banks.  The Fed and the Treasury may not have directly manipulated the rapidity and the size of the market rally.  However, they did enable it.
Now, let's close the intellectual loop.  If the economy is in recovery and will move to expansion and growth over the next several years, the stock market should rise.  There are arguments made today that the valuation of the market is proper for an economy in early recovery.  If the recovery has some stalls and stumbles, or even worse a second recessionary dip, the market will find that it is ahead of itself and some or most of the recent rally could be given back.

In conclusion, the rally from the March lows may be justified or not, depending on the future course of the economy.  However, it would not, in my opinion, have been as large and sustained in such smooth trajectory without the liquidity provided by the Fed and the government.    

No positions in GS.