Mystery of the Missing Buyers: Maybe It's the Feds

One uncomfortable detail for contrarians looking for an end to the rally in stocks is the comparative lack of capital flowing into the market. Other signs of excessive bullishness are easy to detect, as noted in recent posts here and here, but data showing tepid net buying of shares suggest that investors are not putting their money where their mouths are.

That should keep the advance going, some bulls contend. Until ordinary investors start buying stocks more fervently and with less equivocation, they say, there is no urgent reason to take profits.

Despite the 23.5 percent gain in the Standard & Poor's 500-stock index last year, investors pulled a net $25.7 billion out of mutual funds specializing in U.S. stocks, according to the research firm Morningstar Associates. That raises two questions: Where did the money come from to drive the market so high and, more important for bears, can stocks endure a significant decline if the public is apparently underinvested and skeptical of the rally.

A study by TrimTabs Investment Research finds that investment in U.S. stocks via mutual funds and exchange-traded funds has been positive since the start of April, with net inflows totaling $20 billion, but that is hardly enough to account for gains of 70 percent or more in popular indexes since the March lows.

Foreigners have purchased a net $109 billion, according to TrimTabs. Other buying, by hedge funds, pension plans and individuals, may have helped too, but only modestly.

On the other side of the ledger, the firm points out that businesses have been even more reluctant to take a flier on stocks as fund investors. Sales through initial public offerings and other share issues have easily exceeded buybacks during the run-up.

"Corporate America has been a huge net seller," the study says. "The float of shares has ballooned $133 billion since the start of April."

Charles Biderman, chief executive of TrimTabs, offers a controversial hypothesis to account for the rally amid such apparently limited interest from the usual suspects: The Feds are buying.

Biderman speculates that the Federal Reserve and other arms of the government have been buying stock index futures to the tune of $60 billion or more a month. He reckons that's what it would take to add the $6 trillion in value by which the stock market has grown.

"We have no way of proving this," Biderman says, "but what we do know is that it was neither the economy nor traditional sources of capital that created the boom in equities." The study warns that if the authorities stop buying or start selling, "it could trigger a major equities meltdown."

TrimTabs does some very good work, but Biderman's reasoning seems awfully thin. He's got no supporting evidence, as he acknowledges, and it's hard to imagine that the U.S. government, hardly known for its deft touch, could put the better part of a trillion bucks into the stock market without traders or free-market congressmen or scrutinizers of the Treasury and the Fed's balance sheet catching on and alerting the public.

The futures market does hint at a big source of buying that Biderman and others don't appear to be factoring into their calculations. More on that, and why the public's limp embrace of the rally may not be the contrarian bullish sign that it seems at first, next Tuesday.