Are Investment Banks Propping Up This Rally to Sucker in the Retail Crowd?

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housewives.jpgSo who is driving this stock market rally (if you can still call it that) that dates back to early March of 2009? Morningstar reports today that retail investors have finally been net buyers in April of domestic-equity mutual funds for the first time since May 2009. In sum, by only jumping in last month, they have missed a remarkable U.S. stock market rally by staying on the sidelines. So who has been buying? Not the usual suspects: pension funds, hedge funds and retail investors.

The FT says it’s been the investment banks who have been buying. In a short note by Leigh Skene of Lombard Street Research, the FT said major investment banks buying “would appear to be for one of two reasons. Firstly because they think the authorities will prevail in their (so far unsuccessful) efforts to inflate their way out of debt liquidation; or secondly because they are too big to fail and so can afford to take a huge gamble that enough buying will convince others to rush in and buy their inventory of risk assets at even higher prices.”

ZeroHedge.com agrees with the latter. In a post yesterday, ZeroHedge said that ICI figures estimate net retail investors started pulling money out of U.S. stock funds in early May, even before the 1,000-point intra-day drop last Thursday (6 May). Said ZeroHedge: “And now that the market has been thoroughly discredited, the primary dealers have no choice but to ramp it up on no volume yet again, in hopes of pulling in the momos [momentum investors] and the housewives [see accompanying photo] into it as usual, courtesy of the CNBC cheerleaders, just to pull the rug a few days before the next trillion dollar bail out is needed and ‘justified.’”

Sonya Morris, a mutual fund analyst at Morningstar, told me that while American investors may have “kind’a missed it [the U.S. rally], they were net buyers of international funds. So they participated in that rally.”

Our long-time mutual fund correspondent, Stan Luxenberg, sums up Morningstar’s estimated cash flow findings of U.S. mutual fund and exchange-traded fund asset flows through April 30, 2010, thusly:

“Domestic stock funds are finally starting to get inflows. For months investors were pulling money out of stock funds and putting it into bond funds. After the big downturns, investors were afraid to buy stocks. But now things appear to be turning around. People are pulling money out of money markets and putting it into stock funds. Bond funds continue to get strong inflows. But the flood of money into municipals has slowed down. Perhaps investors are worried about the shaky budgets of states and cities. Target date funds continue to take a huge share of new inflows. Despite criticism for their performance during the downturn, the target funds have become established parts of retirement plans. Many 401(k) investors are automatically putting all their contributions into target funds.”

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