What’s Really Pushing the Stock Market Higher

By Pam Martens: January 30, 2013

I was browsing the Wall Street Journal’s web site last night and found this interesting take on the Dow Jones Industrial Average’s flirtation with 14,000 – a number it last saw in October of 2007. “Small investors are jumping back into the stock market after abandoning it during the financial crisis, and their return is a big reason why the Dow is pushing toward an all-time high.”

The article was prominently placed at the very top of the left hand column under the headline “Individual Investors Aid Stock Surge.”

On January 25 of this year, the New York Times proclaimed a “flood” of new money from individual investors:

“Millions of people all but abandoned the market after the 2008 financial crisis, but now individual investors are pouring more money than they have in years into stock mutual funds. The flood, prompted by fading economic threats and better news on housing and jobs, has helped propel the broad market to within striking distance of its highest nominal level ever.”

Clearly, it’s time we discuss the word “distribution” as it’s understood by the denizens of Wall Street.

The retail brokerage firm that is joined at the hip to major investment banks on Wall Street is considered the distribution channel. The investment bank underwrites various equity (stock) and debt (bond) offerings, and exotic hybrids of both, and uses its thundering herd of stockbrokers (financial advisors) to distribute the product to the investing public (retail) investor.

For large investment banks which don’t have their own thundering herd, deals are syndicated to include Wall Street firms with tens of thousands of retail stockbrokers in order to get the product off the books of the Wall Street firms and into the portfolios of Moms and Pops across America.

A great, historical method of distributing product or pushing it out the door, is to create the public perception that investors on the sidelines are missing out on making vast riches. Along comes the headlines: “stocks surge,” “investors jumping back in,” “markets poised to set new highs.” And, indeed, in past market manias, stocks can continue to set new highs for long periods of time before suffering a serious correction.

The longer the headlines run, the longer the Wall Street firms are able to “distribute” what is on their books that they want to get rid of. Might they help keep the headlines running by priming the pump with their own money? Well, they all still have proprietary trading departments, don’t they; despite the promise of financial reform legislation (Dodd-Frank) to end the practice of trading for the house.

On August 27 of last year, we reported here at Wall Street On Parade on the massive outflows from stock mutual funds. On December 27 of last year, the Associated Press reported as follows:

“Since they started selling in April 2007, eight months before the start of the Great Recession, individual investors have pulled at least $380 billion from U.S. stock funds, a category that includes both mutual funds and exchange-traded funds, according to estimates by the AP. That is the equivalent of all the money they put into the
market in the previous five years.”

Since the beginning of the new year, stock fund inflows have been positive but hardly enough to make up for the massive outflows of the last five years. So, exactly where did all that money come from to push up this market?

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