Only buyers of the current rally are investment banks

Leigh Skene

The outperformance of risk assets over the past year suggests investors appear to believe that all credit problems have been solved – but nothing could be further from the truth, says Leigh Skene at Lombard Street Research.

“Rising stock markets and narrowing credit spreads depend on buyers being more anxious to buy than the sellers are to sell,” he says. “So who are the enthusiastic buyers of risk assets?”

Surprisingly, says Mr Skene, surveys show that the usual investors in major rallies – pension funds, hedge funds and retail investors – have not been net buyers of equities. And he says the most likely explanation for this anomaly in the biggest stock market rally since the 1930s is that major investment banks are the anxious buyers. More...

Still wonder if the market's rigged?

After a former Goldman Sachs employee was arrested by the FBI on federal charges for stealing software codes from Goldman's automated stock and commodities trading business, a story in Bloomberg indicated Goldman was concerned that there was a danger somebody who knew how to use their stolen program could use it to "manipulate markets in unfair ways". So how was Goldman using it?

Now read John Crudele's take:

According to the New York Stock Exchange figures for the week of April 13 that I quoted, Goldman executed twice as many big trades -- called "program" trades by the industry -- as any other firm. And, the bulk of the 1.234 billion shares bought by Goldman that week were paid for with the firm's own money.

Of course, Goldman would have to be mighty confident that stock prices were going up to risk so much of its own capital. Or, perhaps, it knew stocks would be rising. This was the time, remember, when banks were trying to recapitalize by selling shares to the public. Goldman, you'll also recall, had turned itself into a bank holding company so it could take $10 billion in government money under the Troubled Asset Relief Program.

Goldman also sold billions worth of new stock to the public while all this was happening. How much harder would it have been for banks to sell stock to nervous investors if the market was swooning rather than booming? Goldman's sudden and inexplicable optimism about stocks was incredibly opportune for the banking industry in general, for Goldman in particular and -- here's where the conspiracy starts to unfold -- for the government.

It's tough, however, to do what needs to be done to rescue the market when pesky journalists and annoying bloggers are looking over your shoulder. So a couple weeks ago the NYSE suddenly announced that brokerage firms would no longer have to report their program trades. The new rule takes effect next week. Convenient!