Even Central Banks are Forced to Buy Stocks

Talk about a classic catch-22. Central banks around the world are haunted by the very monster they created – low interest rates. This forces them to buy stocks. But, this is not the only reason for relentless stock market highs.

The low-interest rate environment is not only putting the squeeze on savers and retiree’s, it’s also forcing central banks to look for greener interest pastures.

Central banks are caught in a classic catch-22 scenario. To spark their economies, central banks have lowered rates.

This has cost central banks around the globe $200 – $250 billion in interest income. Some of those losses have been offset by reduced payments of interest on the liabilities side of the balance sheet, but nevertheless, bankers are haunted by the monster they created.

What can central banks do to boost their bottom line?

According to a study by the Official Monetary and Financial Institutions Forum (OMFIF), “a cluster of central banking investors has become major players on world equity markets.”

The OMFIF report identifies $29.1 trillion in market investments. This includes investments in stocks, like the S&P 500 (SNP: ^GSPC), and precious metals.

Based on research from 2013, central banks held $10.9 trillion of currency reserves, that’s about 20% of the $55 trillion market value of global stocks.

A survey of central banks, taken in 2013, revealed that 23% of polled central banks own stocks or ETFs – like the SPDR S&P 500 ETF (NYSEArca: SPY) – or intend to buy stocks or ETFs.

For example, the Swiss National Bank has an equity quota of 15% and is investing in large, mid-and small-cap stocks in developed markets worldwide.

China’s State Administration of Foreign Exchange, part of the People’s Bank of China (PBoC), manages about $3.9 trillion and has become the world’s largest public sector holder of equities.

Here is where the ‘rising tide lifts all boats’ analogy comes in.

The Profit Radar Report has persistently maintained that buying power behind stocks (a proprietary gauge of demand chasing stocks) remains strong.

The Profit Radar Report uses this proprietary buying power index to gauge the odds of major market tops and stated in March, April, May, June and July that the buying power is too high for a major top (continous buying power updates are available via the Profit Radar Report).

But central bank liquidity is not the only reason for continuous S&P 500 highs. There is another reason, one that is much easier to monitor and gauge than covert central bank buying.

The reason why the S&P 500 continues to rally without a major correction (1,000 days and counting) is discussed here:

The Only Indicator that Foresaw a Persistent S&P 500 Rally with no Correction

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Popular German Newspaper Exclaims: Stocks Are on Drugs!

Stocks got a shot in the arm this week by favorable comments from ‘drug dealer’ Ben Bernanke. Ok, we’ve probably all heard about the drug – QE comparison, but no major newspaper has put it as bluntly and unmistakable as this one.

QE for the stock market is like drugs for a junkie. QE has the same effect (high) and the same eventual outcome (crash).

However, I had never seen this analogy on the front page of a major newspaper … until this week.

The Handelsblatt, Germany’s finance and economy newspaper, featured the “DAX on Drugs” (DAX auf Droge) article on the front page of the September 17 edition (image below).

The Handelsblatt writes (translated from German into English): “The flood of new money from central banks is driving stocks higher. For years, low interest rates have been a fast acting drug. Stocks are on a high. But more and more experts are warning of the dramatic consequences of inevitable withdrawal. Investors know that central banks are manipulating stock prices.”

That’s pretty blunt, but it doesn’t stop there: “In deed, it’s tough to find fundamental reasons for rising prices. Corporate profits are not keeping up with share prices. Even though analysts for 22 of the 30 DAX components lowered their profit forecasts, prices only moved in one direction, up.”

Stocks are Up, What’s the Problem?

Handelsblatt describes it this way: “The problem: Central banks are a temporary savior, but don’t eliminate the cause of the crisis, which is the enormous debt of citizens, corporations and countries. This creates an ever-growing addition to cheap money. Without this doping markets will crash. The longer markets are pushed up, the stronger the correction will be.”

Here’s what’s interesting about this article:

1) It graces the front page of a reputable newspaper
2) It talks about crisis even though the German DAX and US indexes are at all time highs
3) It openly and unmistakably shows the link between cheap money and share prices, calling it manipulation
4) It specifically refers to the Federal Reserve

What to Make of This

From a technical or chart analytical perspective, the German DAX is trading above strong support around 8,100. The up trend is in tact as long as trade stays above.

As a side note, there is no US traded ETF that replicates the DAX index (similar to the Dow Jones, the DAX consists of 30 ‘blue chip’ companies). The iShares MSCI Germany Index (NYSEArca: EWG) offers the best representation of the German stock market.

Germany obviously is Europe’s growth engine. The German stock market also accounts for 8.57% of the iShares MSCI EAFE International ETF (NYSEArca: EFA) and sports a close correlation to ‘our’ index of 30 blue chips, the Dow Jones .

The correlation to our Dow (NYSEArca: DIA) and S&P 500 (NYSEArca: SPY) makes the sentiment implication of the Handelsblatt article interesting.

Sentiment is a contrarian indicator, and the obviously bearish observations shared on the front page of a major newspaper are bullish for stocks. If it’s bullish for German stocks, it should also be bullish for US stocks.

If stocks rally despite obvious concerns, one wonders if anything can stop this QE bull? The following article takes a close look at this question and outlines what it will take to ‘slaughter’ this bull:

Who or What Can Kill This QE Bull Market?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF


Central Banks Are Now Buying Stocks and ETFs

We know that central banks are supposed to own government bonds. We also know that the Federal Reserve has and continues to ‘detoxify’ previously toxic assets like mortgage-backed securities. What we didn’t know is that central banks are now buying stocks and ETFs.

Last year I came up with a theory, might as well call it a conspiracy theory.

I was wondering, if the Federal Reserve wanted to drive up equity prices, what would be the most effective way to do so?

At the time, Apple was trading north of $600 and accounted for 20% of the Nasdaq-100 and 5% for the S&P 500 Index. Buying Apple shares would deliver the most bang for their buck (buying IBM may have a similar effect).

Well, there is no evidence that the Federal Reserve actually bought Apple (or IBM), but a recent Bloomberg article revealed that central banks are actively buying stocks and exchange traded funds (ETFs) in record amounts.

A survey of 60 central banks by Central Banking Publications and the Royal Bank of Scotland showed that 23% of the polled central banks own stocks/ETFs or intend to buy stocks/ETFs.

The Bank of Japan said that it will more than double its investment in ETFs to $35 billion by 2014. The Czech National Bank, Swiss National Bank and Bank of Israel all boosted their stock holdings to 10% or more.


In terms of risk tolerance, central banks fall into the ‘conservative investor’ category. Why? Central banks need to be able to act quickly to counter a move in their currency. Only the safest assets can be liquidated at any given time without (sizeable) losses.

However, their own low interest policies are catching up with them. Central banks are being haunted by the monster they created and have to take the medicine they’ve prescribed to many retirees – take more risk to get more income.

Consumer prices are rising somewhere around 1.5%. The average yield to maturity of the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index is at 1.34% (an all-time low). Central banks too are ‘losing’ money on their balance sheet.

How Much?

Central banks’ currently hold $10.9 trillion of currency reserves, that’s about 20% of the $55 trillion market value of global stocks.

Although buying stocks or ETFs is gaining popularity with central banks, about 70% of the surveyed central banks still consider buying equities tabu.

What Does it Mean?

Central banks fell in love with other asset classes before. Starting in 2010 until this day it was gold. Gold prices continued to rise for well over a year after central banks started buying.

Today gold is trading 25% below its 2011 peak. This shows that even asset classes favored by central banks don’t have to rise forever.