By Simon Maierhofer , On Wednesday December 23, 2009, 12:47 pm EST
http://finance.yahoo.com/news/Are-Big-Banks-Pumping-Up-etfguide-3166930847.html?x=0&.v=1Even though big banks have received untold billions in bailout funds, banks are not lending. Where did all the money go?
Much of it went right back to the government as banks (NYSEArca: PJB - News) have loaded up on all sorts of Treasury bonds (NYSEArca: SHV - News). But where did the rest go?
Real estate (NYSEArca: RWR - News) prices are still falling, unemployment is sky-high, consumer spending is down and corporate profits are nowhere near to last year's levels.
The only thing that provides comfort for the masses is rising stock prices. The S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI) and Nasdaq (Nasdaq: ^IXIC) have gained in excess of 65% in less than ten months against a backdrop of continuously less than stellar news. The government, banks and other financial institutions (NYSEArca: XLF - News) have a vested interest in rising stock prices.
Things would look grim if it wasn't for the hope provided by the Dow and S&P's of the world. But more than hope is at stake. Another drop in investor's perception would send real estate (NYSEArca: IYR - News) and equity prices (NYSEArca: VTI - News) tumbling. It could also push many financial institutions to the brink of ruin and discredit all government efforts.
Looking at what's at stake and the motivations involved, could it be that some of the big players are manipulating the market to keep prices artificially afloat?
A secret committee
Don't you hate it when juicy news is making its rounds but you are kept out of the loop? Welcome to the club. Already back in 1988, Ronald Reagan signed an executive order to establish a specific committee designed to prevent major market collapses.
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.
The existence of this team is said to have been confirmed by former Clinton advisor George Stephanopoulos on Good Morning America. Last year, former Treasury Secretary Hank Paulson called for this 'financial fraternity' to meet with greater frequency and set up a command center at the U.S. Treasury designed to track global markets and serve as headquarter for the next crisis.
There is much more to this unique arrangement designed to keep a lid an potential market meltdowns and use major Wall Street firms as marionettes to accomplish this goal. A detailed report about this secret team is available in the most recent issue of the ETF Profit Strategy Newsletter.
Artificially inflating prices, how?
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.
A close ally
One of the obvious suspects to serve as surrogate and carry out the government's plan would be Goldman Sachs (NYSE: GS - News). For years, the ties between the U.S. government and Sachs have been too close for comfort. Earlier this year the ETF Profit Strategy Newsletter touched on a case of 'indiscretion' which never received much publicity.
Stephen Friedman, the chairman of the New York fed was instrumental in orchestrating the multi-billion bailout for Goldman and AIG. AIG (NYSEArca: AIG - News) used nearly $10 billion of the initial $85 billion to pay Goldman.
Chairman of the New York Fed was not the only title Mr. Friedman held. He also happened to be on Goldman's board during that time and was Goldman's CEO in the 1990s. Also during that time, Mr. Friedman was actively buying Goldman stock and generated profits worth millions of dollars.
Other ties between government and Sachs include Hank Paulson, former Secretary of the Treasury and former Goldman CEO. When Mr. Paulson needed someone to oversee see the government's first $700 billion bailout, Paulson recruited an inexperience, 35-year old, former Goldman investment banker. The list continues, but we'll stop here.
Putting the odds in your favor
The Financial Times reported that Goldman Sachs suffered only one losing day during the 65 business days of the third quarter. On 36 separate days during the quarter, the firm's trades netted more than $100 million.
In addition, Bloomberg reported that Goldman Sachs' effective income tax rate for 2008 was 1%. In dollars, Goldman's tax liability was $14 million. For the same year, Goldman reported a $2.3 billion profit and paid out $10.9 billion in bonuses.
One could argue that a record of 90%+ winning trades and a 1% tax rate could only be accomplished with certain connections to high-ranking government personnel.
Is it possible?
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.
But a simple look at the chart shows that even the government and big banks do not have superhuman powers, at least not unconditionally.
In 2000, 2002, 2008 and 2009, the major indexes a la S&P 500 (NYSEArca: SPY - News), Dow Jones (NYSEArca: DIA - News) and Nasdaq (Nasdaq: QQQQ - News) declined 30% or more.
It is now known, as it was back then, that the nation's most powerful financiers got together on October 24, 1929 to prevent a major meltdown. Their plan succeeded on that very day which came to be known as Black Thursday. The recovery on Black Thursday was as remarkable as the selling that made it so Black.
On Friday, the Times reported that the financial community felt 'secure in the knowledge that the most powerful banks in the country stood ready to prevent a recurrence of panic.' In a concerted advertising campaign in Monday's papers, stock market firms urged to pick stocks at bargain prices. The rest is history and the Great Depression unfolded in all its cruel ways.
On of the flaws of artificial buying is that all the money used to buy stocks will eventually have to be taken out. As we know, banks are not immune to greed and once prices start declining, banks are likely to be the first to cut their losses and flee the sinking ship.
What goes up ...
In summary, we can conclude that there seems to be an organized committee with the job description of lifting markets. Quite likely, their efforts have contributed to the protracted rally in stock prices. However, as we've seen, the market is too wild to be contained. Normal market forces still apply.
One of those age-old forces is investor sentiment, possibly the best known and most accurate contrarian indicator around. Extreme levels of pessimism tend to signal market bottoms while extreme levels of optimism tend to signal tops.
The ETF Profit Strategy Newsletter used this contrarian indicator as a foundation to issue the March 2nd Trend Change Alert which foretold a massive rally with a target range of Dow 9,000 - 10,000 a mere seven days before the March lows were reached.
Now once again, we see an extreme of investor sentiment - this time it's optimism. According to the Investors Intelligence survey, this week saw the highest percentage of bulls since December 2007.
More importantly, the major indexes are butting up against levels of resistance that have been years, even decades in the making. Those different resistance levels converge in the Dow 10,100 - Dow 10,500 range, which is the very range the Dow has been stuck in for over three months.
The ETF Profit Strategy Newsletter includes an analysis of predominant, and probably formidable, levels of resistance along with a short, mid and long-term forecast, and a target range for the ultimate market bottom. If history is a guide, and it usually is, the market will do what it wants, regardless of the government's efforts.
The question is this: Who are you putting your trust in, the market or big banks?
