Federal Reserve ‘Financed’ 17% of all U.S. Stock Purchases

At one point or another over the last few years we’ve all heard about the bursting Federal Reserve Balance sheet (it’s still growing by the way). However, how big is the Fed’s balance sheet in correlation to the total U.S. stock market? It’s big!

A billion used to be a big number, but ‘billions’ today are outdated like Myspace.

Today we (and with ‘we’ I mean the Federal Reserve) talk in trillions.

The Federal Reserve’s balance sheet is about $3.7 trillion. As recently as July 2008 the Fed’s balance sheet was below $900 billion.

Since then the Fed embarked on a little shopping spree (about $3 trillion worth). As it turns out, when the Fed goes shopping, Wall Street goes shopping.

According to the World Bank, the total market capitalization of the U.S. stock market in 2012 was $18.67 trillion (2013 estimate around $21.4 trillion).

Based on preliminary 2013 figures, the Federal Reserve’s balance sheet could have bought 17% of all U.S. traded stocks.

The chart below provides a visual as it plots the total annual U.S. stock market capitalization against the S&P 500. According to Standard & Poor’s, there is over $5.14 trillion benchmarked to the S&P 500 index (NYSEArca: SPY).

We know that the Federal Reserve doesn’t directly buy equities (other central banks do), but it may as well have.

The Federal Reserve is pumping about $85 billion of fresh money (about $110 billion total since maturing funds are reinvested) into the ‘economy.’

‘Economy’ sounds better than big banks and financial institutions (the Fed calls them primary dealers, there are 21 such primary dealers, most of them U.S.-based), but that’s where the money is going.

Big banks on the other hand turn around and buy stocks and ETFs – which may include Financial Select Sector SPDR (NYSEArca: XLF), or SPDR S&P Bank ETF (NYSEArca: KBE), and of course Twitter, LinkedIn and Facebook (not Myspace).

Aha Moment

We’ve all heard how big the Federal Reserve’s balance sheet is before and have gotten used to (and desensitized) to the number.

However, when viewed in comparison to the total market capitalization of all U.S. traded stocks, it becomes obvious just how big a player the Federal Reserve really is.

If you – like me – are fascinated with large numbers, you’ll like this little piece of trivia:

Is it possible to put a price tag on all the assets held in the entire United States of America? Yes it is. In fact, we’ve done this right here (based on Federal Reserve data): How Much is The Entire United States of America Worth?

Simon Maierhofer is the publisher of the Profit Radar Report.

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IBM – The Dow’s Alpha Stock is on the Verge of Breaking Down

IBM is the Dow’s biggest powerhouse and one of the most important companies for the U.S. stock market. The blue chip has shot up 300% in four years and is sitting just above important support. A breakdown here could have far reaching ripple effects.

IBM is an “alpha stock.” Like an alpha dog or alpha male, alpha stocks lead the pack.

What makes IBM an alpha stock? There is IBM’s storied history and $217 billion market cap, but what ultimately makes it a leader is the 11.28% weighting it carries in the Dow Jones Industrials Average and Dow Jones Industrials Average ETF, also called Dow Diamonds (DIA). IBM is also the fifth largest component of the S&P 500 SPDR (SPY).

Unlike other indexes, the DJIA is price weighted, the pricier the stock, the heavier it’s weighted in the average. IBM trades at 190 and influences the Dow’s movements more than any other stock.

Only two other companies are as influential (or more influential) as IBM: Apple and Exxon Mobil. We know that Apple’s 30% haircut put the entire U.S. stock market in a funk, so what’s IBM’s message?

Long-Term Technical Outlook

IBM lost about 10% over the past three months. This sounds like a lot, but when put in context with a long-term chart, it’s no more than a drop in the bucket. Since November 2008, IBM soared from 69.50 to 211.79, a 303% increase.

The first quantitative easing (QE) intervention also commenced in November 2008, but surely any correlation between the two is purely coincidental. Regardless of the cause, the down side potential for a blue chip stock that’s tripled in four years is much greater than 10%.

Short-Term Technical Outlook

The short-term chart shows IBM toying with long-term (green trend line) and short-term support (black channel). A break below 190 would trigger a sell signal (stop-loss just above 192) with a possible short-term target of 177 – 182.

To me, the structure of the decline since the October high suggests that prices ultimately want to head lower. Trade above 190 allows for limited near-term strength, but only a move above 198 (channel rising) would unlock more bullish potential. A drop below 190, on the other hand, could be the straw that breaks the camel’s back.


Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.