STOCK MARKET WATCH, Wednesday, December 21, 2011.

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2. How Central Banks Attempt to Prop Up the Economy By Eric Fry

Last edited Wed Dec 21, 2011, 09:59 AM - Edit history (1)

the financial markets are reflecting what our friend, John Mauldin, calls a “muddle through” economy...Notwithstanding Tuesday’s buoyant stock market action, the euro zone is still in crisis, the finances of most governments in the Western world are still in shambles… and Bank of America’s share price is still hovering around five dollars — just like it was in March of 2009, when then-Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke were busy patting each other on the back for “saving” the financial system. Toward the end of Monday’s trading session, Bank of America’s share price actually slipped below five dollars per share for the first time since mid-March 2009. That event may or may not be significant, depending upon which rumors one chooses to believe.

One of the juiciest rumors of the moment is that the Federal Reserve is desperately trying to prop up Bank of America, under the guise of helping to “save the euro.”...For example, the last time Bank of America’s share price flirted with five dollars was November 29. The stock hit $5.03 during that trading session before closing at $5.08. The following morning, at the crack of dawn, the Federal Reserve announced its latest “coordinated intervention” with the European Central Bank and a bevy of other central banks. Stock markets around the world skyrocketed on the news. Distressed financial stocks like Bank of America’s skyrocketed most of all.

Therefore, as we noted in the December 5th edition of The Daily Reckoning, “The King Report speculates that problems here at home may have also spurred the cavalry into action. ‘Fed concern about Bank of America was probably a prime factor in implementing the latest scheme,’ says King. ‘If BAC had fallen below $5, there could have been an avalanche of selling because some institutions cannot buy or hold a stock that is less than $5 per share. A cascading BAC could have generated an “Emperor has no clothes” moment for BAC. (Buffett would have been chagrined). So it was imperative that someone closed BAC above $5 on Tuesday and that some scheme had to be implemented to drive the price higher on Wednesday.’

“So just as expected/hoped,” the December 5th Daily Reckoning continued, “the markets rallied sharply on Wednesday, enabling BAC and a few other troubled financial institutions to live to fight another day. But the fight is far from over…and the troubled financial institutions are unlikely to emerge victorious, no matter how many times the central bank cavalry storms into battle.”...As predicted, the central bank intervention announcement on November 30 produced a very sharp, dramatic rally. Bank of America’s shares rallied as much as 16%, while the shares of many other banks and finance companies rallied even more. Nevertheless, by the end of yesterday’s trading session, those fleeting gains had more than disappeared… and there sat a forlorn Bank of America, priced at $4.98 a share...Is it not somewhat curious, that today’s 320 rally seemed to come out of nowhere, on no major news whatsoever? Is it not also somewhat curious that the stock market happened to the soar the very next morning after Bank of America fell below $5?

These kinds of coincidences are almost enough to make me believe crazy rumors.



Read more: How Central Banks Attempt to Prop Up the Economy http://dailyreckoning.com/how-central-banks-attempt-to-prop-up-the-economy/#ixzz1h8O8QlMe

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