Why Stocks Are Soaring … Even though the Fed Stopped Quantitative Easing

The Answers Might Surprise You

Why are stocks still soaring, even though the Fed stopped QE?

Initially, QE arguably hasn’t totally stopped been stopped. And – of course – Japan’s massive QE is helping the Dow and S&P as well.

Additionally, several central banks are directly buying stocks.   They include the central banks of Switzerland, Japan, Israel, the Czech Republic, and a total of 23 percent of all nations worldwide.  (And it has long been rumored that the Fed buys stocks through proxies.)

Companies have also been buying back their own shares in record numbers.

Paul Buchheit notes:

In 1981, major corporations were spending less than 3 percent of their combined net income on buybacks, but in recent years they’ve been spending up to 95 percent of their profits on buybacks and dividends.

Business Insider points out:

Ever since the financial crisis, S&P 500 companies have spent about $2 trillion buying back shares of their own stock.

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Goldman Sachs’ David Kostin believes a temporary pullback may explain why the S&P 500 has tumbled from its all-time high of 2,019 on Sept. 19.

“Most companies are precluded from engaging in open-market stock repurchases during the five weeks before releasing earnings,” Kostin notes. “For many firms, the beginning of the blackout period coincided with the S&P 500 peak on September 18. So the sell-off occurred during a time when the single largest source of equity demand was absent.

In other words, when companies stop buying so much of their own stock, the stock market goes down.

Business Insider continues:

“We expect companies will actively repurchase shares in November and December,” he writes. “Since 2007, an average of 25% of annual buybacks has occurred during the last two months of the year.”

Kostin believes the comeback in buybacks will drive the S&P to 2,050 by year-end.

cotd buybacks volatility

Why November and December?

Yves Smith explains:

Notice how the bulk of buybacks are concentrated in the fourth quarter, with the obvious intent of goosing prices at year end so as to lead to higher executive pay for “increasing shareholder value”? [Yup … it’s all about bigger bonuses.] In fact, these companies are being gradually liquidated. Issuing debt, which public companies have done in copious volumes since the crash, and using it to buy shares is dissipating corporate assets.

In addition, the vast majority of stock trades are done by high frequency trading computer programs.  It’s childs play for big players to manipulate the price of stocks (and every other market).

The Fed has admitted that one of its main policy objectives is to boost stock prices.  Many well-known financial analysts – such as Jeremy Grantham, Charles Biderman and Scott Nations – say that the feds manipulate the stock market. And see this, this and this.

And the government facilitates fraudulent acts and fraudulent accounting by big corporations, and always settles prosecutions for pennies on the dollar (a form of stealth bailout) … which allows the companies to avoid losses and to falsely inflate their valuations.

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