After a really weak February, the Dow has put up nearly 1,200 points this month – more than 7% in a matter of weeks.
That's great news, right? We're here. Stocks are positive for 2016, above the important moving averages, above resistance, and just plain sitting pretty.
Like I said, great news, right?
The truth is I feel uneasy. And I'm not alone. No one who knows any better feels great about this rally.
There's a good reason for that: The free market isn't free anymore because it's being manipulated.
In fact, I'm seeing two major forces pulling the strings right now, and I see this rally as "smoke and mirrors." Stocks are going higher by design, and it's obscuring a dangerous truth.
And you're not going to like the reasons why any more than I do. Here's what's happening.
The Manipulation Is Worse Than You Think
It begins with the U.S. Federal Reserve, of course. It's no secret that they've been fooling with the markets for years, with artificially low interest rates and quantitative easing experiments, plus a few other tricks they know.
But what isn't commonly known is this…
Instead of just buying sovereign bonds, central banks now buy everything from mortgage bonds to stocks.
They're even contemplating creating their own exchange-traded funds (ETFs) to sell to the public so they can then buy them back. Some central banks have even pushed interest rates into negative territory, which is itself proof positive they are completely out of control.
The manipulation is so deep, and they're so far out on a ledge, all central banks can do to keep from losing control of markets and global economies is to continue manipulating in the desperate hope that global growth will bail them out of the holes they've dug for markets and themselves.
Here's something else they don't like to advertise – the real reason the Fed didn't raise rates at the last FOMC meeting.
Even though the Fed's all about being "data dependent," and the data they've been looking for to start "normalizing" rates has been filling up their inboxes, they ran into a big problem.
You see, the Fed conducts its "open market operations" – all the buying and selling of securities and bonds they do – through a group of 22 primary dealers – a bunch of big banks that includes Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), and Goldman Sachs Group Inc. (NYSE: GS).
Well, last month those primary dealers got a Mt. Everest-sized pile of U.S. Treasury bonds dumped on them – and they could have lost billions of dollars if the price of those bonds tanked.
As primary dealers, they have to buy and sell Treasury bonds to maintain prices, keep markets trading, and to facilitate the Fed's operations.
They ended up with over $121 billion in bonds last month, almost double the average of the past five years.
Primary dealers had to buy those bonds mostly from foreign central banks and sovereign wealth funds who were dumping Treasuries to raise money to support their currencies, meet budgets, and liquidate assets they knew wouldn't go down too much in price as they unloaded them.
If the Fed raised rates while its primary dealers were sitting on all those bonds, the price of those bonds would have tanked and the dealers would have lost billions in an instant…
…and that would have devastated the $13 trillion Treasury market.
Of course they weren't going to let their bank constituents lose that kind of money. So they punted on raising rates.
There's another reason the Fed didn't raise rates… and it just happens to be the other force that's goosing stocks at the moment.
And that's not a coincidence.
Companies Are Cooking Their Earnings Growth in a Big Way
This month, I told you how trillions of dollars of corporate buybacks have boosted stock prices by creating the temporary illusion that earnings per share are increasing, which is what investors want to see. It's also something the Fed would like to see before raising interest rates.
But those gains are far too often temporary measures to manipulate stock prices higher so executives can cash out their fat options awards.
But that's not the worst part. There's more to earnings manipulation.
There's GAAP (Generally Accepted Accounting Principles) earnings and non-GAAP earnings.
Now, I'm not an accountant, so I have to ask myself (and you have to ask yourself), if GAAP is based on accepted accounting principles, why would companies use non-GAAP accounting methods, which are – by definition – not generally accepted as being principled?
Because it makes their earnings look better…
Basically, non-GAAP accounting lets companies exclude certain losses from their accounting because they're supposed to be one-time charges.
Most of these are related to items like costs of a merger or acquisition, restructuring charges, writing down goodwill, asset impairment charges, and other supposed one-time charges.
Of course, there's a problem with principles when one-time charges keep recurring, as they tend to do too often under non-GAAP accounting.
The difference between GAAP and non-GAAP earnings is material. Take a look:
For all of 2015, S&P 500 non-GAAP 12-month trailing earnings, also known a pro-forma earnings, came in at $118.
GAAP earnings, however, were just $87 for 2015.
That's a huge difference.
Looking at non-GAAP earnings, investors would say earnings have been growing nicely. The truth is that GAAP earnings in 2015, after a seven-year bull market, are only around $5 higher than what they were in 2006 before the meltdown.
This is key – because even as the Fed talks up the "recovery," such as it is, there's no real, trustworthy data underpinning the surge in stocks and the supposed growth in earnings. It's all cooked up by creative accounting – and if the Fed were to raise rates in this environment, the entire house of cards would come down.
If that hasn't convinced you that these companies are pulling earnings out of thin air then just consider this:
The fourth quarter of 2015 saw non-GAAP earnings of $29.49, while GAAP earnings were $19.92.
If that's not manipulation, I don't know what is.
This Is Your Best Move Now
An increasing chorus of analysts, from Societe Generale's Andrew Lapthorne, to Deutsche Bank's David Bianco, to Warren Buffett in his latest Berkshire Hathaway shareholder letter, are worried about the distorted view of earnings investors are being subjected to.
For the record, I am, too.
It's no wonder investors aren't sure the market rally is real.
They should be worried – and you should be, too.
The best thing investors can do right now is to contact your broker (or hop online if you manage your own investments) and put down stop orders to get out of your winners if a reality check knocks the market back down to earth.
And since the manipulation isn't going to stop any time soon, and the market can be manipulated even higher, enjoy the ride as long as it lasts.
In the meantime, just keep raising your stops so you can take profits when – not if – the markets head back down.
When America looks in the mirror, it sees… Another Fed-engineered economic crisis around the corner. The bank is aiming to institute the same negative-interest-rate policy (NIRP) as Europe, which pounded down bank stocks on average 30% to 60% – in just a few months. Now America's on that same path to destruction… But Capital Wave Strategist Shah Gilani is going to show you four ways to protect yourself (and profit, too) in his latest free research report. Click here to get it right away, plus receive follow-up reports from Shah's Wall Street Insights & Indictments.
About the Author
Shah Gilani is Chief Financial Strategist for Money Map Press and boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker. He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk and established that company's "listed" and OTC trading desks. Shah founded a second hedge fund in 1999, which he ran until 2003. Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see. On top of the free newsletter, as editor of The 10X Trader, Money Map Report and Straight Line Profits, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade using a little-known strategy. Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on FOX Business' "Varney & Co."