The stock markets have been soaring higher since March 2009 when the S&P 500 Index traded as low as 666.78. Today, the S&P 500 Index trades above 1800.00 and continues to rally higher nearly every day. How could the stock markets go up so much in less than five years, yet the economy is still so sluggish? The answer is open to debate, however, most will agree that global central bank intervention has been the primary catalyst for higher equity prices.
1. The banking system around the world is still very fragile. The derivatives market that nearly destroyed our financial system in 2008 has grown even larger. It is estimated that the over the counter (OTC) derivatives market is now around $700 trillion. In 2008, the derivatives market was estimated to be around $500 trillion. The big banks are the primary traders in the derivatives market and these banks have grown exponentially larger since the 2008 financial crisis. So there are fewer players in the game now, it remains to be seen if that is a good thing or a bad thing. Countries such as China have been facing liquidity problems over the past year. This is not a healthy sign, especially since China is now the second largest economy in the world. Either way, banks around the world are still very fragile and that is why central banks around the world such as the Federal Reserve, Bank of Japan, Bank of England, and others continue to keep the easy money policies intact. They simply have to pad these large banks with liquidity. Why do you think the accounting standards were changed from mark-to-market to mark-to-model. Mark-to-Model accounting refers to the practice of pricing a position or portfolio at prices determined by financial models, in contrast to allowing the actual market determine the price.
2. Financial reports can easily say anything when magic accounting is involved. Just think about how many companies beat their earnings estimates by a penny every quarter. How is that possible? It is possible because the accounting standards allow certain charges, item exemptions, and other accounting tricks. This has been going on for years. It is still amazing how a company can beat its earnings estimate by a penny, but miss on revenue. We see this every earnings season. This is one of the reasons why traders and investors should use charts and technical analysis instead of news. Price action in the stock does not lie, while the earnings report can be full of misleading statements.
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View the full post at: 3 Things Wall Street Does Not Want You To Know