Federal Reserve Stokes the 'One Percent' Stock Portfolio

NEW YORK ( TheStreet) -- The 1% not only control a vast amount of U.S. wealth, they also soaked up the majority of the stock market's post-crisis rebound thanks to the Federal Reserve.

A day after Fed governor Sarah Bloom Raskin said that lower interest rates aren't harming the finances of U.S. savers, new evidence suggests that benefits continue to be captured overwhelmingly by the top 1%.

On Friday, a study by University of California Berkeley economist Emmanuel Saez found that families in the top 1% captured 93% of the real income gained in 2010, the first post-crisis year of economic recovery. "Such an uneven recovery can help explain the recent public demonstrations against inequality," wrote Saez of the results and the ensuing protests like the Occupy Wall Street movement.

Evidence from the recovery shows that monetary policy and trillions spent to bolster the U.S. economy aren't being transmitted in a way that will help Main Street catch up with the 1%, as Fed governors and economic agenda setters may want or hope for.

"Critics of the Federal Reserve's accommodative monetary policy are correct that the low level of interest rates represents a strain on households who rely on income from interest-bearing assets," Fed governor Raskin argued in a Thursday speech. But Raskin also noted that low interest rates are benefitting home and auto financings, while fueling growth in other areas if middle income finance. "For these other types of assets, rates of return depend primarily on the strength of the economy and how fast the economy is growing. Thus, these returns should be supported, over time, by the accommodative monetary policy that we have in place."

A screen of Bloomberg data shows that 476 of the 500 S&P components have gained value since this time three years ago, bolstered by the impact of low rates and added crisis-preventing fiscal and monetary programs.

Long-time S&P 500 retail favorites Ford ( F), Priceline.com ( PCLN) and Apple ( AAPL) are top performers since in that time, notching 500%-plus gains.

Overall hotels giant Wyndham Worldwide ( WYN) is the top S&P performer in the past three years, notching an over 1000% stock gain that's put its stock to $44.28 a share. In 2011, the company's sales matched pre-recession levels of $4.1 billion as profits rose to $417 million. Meanwhile, Wyndham Worldwide continued a progressive boost to its quarterly dividend to 23 cents a share, after skipping a quarter of dividends in 2009.

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Apple and Priceline.com have also given ordinary investors who know the companies' products strong stock returns.

Priceline.com, which is up 680% on a doubling of the company's profits and near doubling in sales to $4.3 billion in the past three years, counts retirement and wealth managers T. Rowe Price, Fidelity and Vanguard as its largest shareholders. Among hedge fund investors, Tiger Global and Lone Pine are among priceline.com's largest holders, with 2%-plus stakes.

In aggregate, Main Street may have benefitted more than Wall Street from Apple's post-recession surge, as consumers flocked to devices like the iPhone and iPad. Asset manager accounts dominate Apple's largest shareholders, with no hedge funds among the company's top 15 holders, according to Bloomberg compilations of regulatory filings.

Overall, Fidelity, Vanguard and State Street are Apple's largest shareholders with over $18 billion stakes. For more on Apple shares, see the hedge fund managers scrambling to buy up shares.

Nevertheless, stock gains aside, data shows that the average American is still losing ground to the super-rich on the heels of the Fed's low interest rate policies.

In 2010, the average income of the 99% increased 0.2%, while the top income bracket gained 11.6%, capturing 93% of the overall 2.3% real income gain in the first recovery year, according to Saez of Berkeley's paper, titled Striking it Richer. The top decile share of income is 46.3%, higher than 2007, according to Saez.

If a dynamic of wealth losses by the middle class relative to the rich is set at the start of an upcycle, it augurs poorly for a narrowing of the wealth gap in coming recovery years.

That may especially be the case as key assets for the 99% like residential housing remain near cyclical lows, while other assets like stocks, commodities and alternative investments rocket higher.

While the data analysis lags a recent surge in the Dow Jones Industrial Average, don't expect low interest rates to help the middle class gain ground against the 1%, stemming growing economic inequities.

"It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover. National Accounts statistics show that corporate profits and dividends distributed have grown strongly in 2011 while wage and salary accruals have only grown only modestly," writes Saez, who highlights the persistence of unemployment.

Anecdotal evidence suggests that the elite are primed to continue to benefit from low rates. Since the crisis, hedge fund managers, the mega rich and Wall Street traders have been extolling virtues of a long held mantra "don't fight the Fed," which translated into English means that when the Fed is holding rates near zero, it's time to gorge on risk assets like stocks and commodities. Sayings like the "Greenspan Put" and the "Bernanke Put" take it a step further. Bet on the Federal Reserve spending billions to boost asset prices, regardless of whether growth or markets stall.

See everything that's wrong with the economy in 1 power point slide. For more on inflation and spending, see how consumers are fighting back from price increases. To better understand the Federal Reserve's outlook, see what Ben Bernanke didn't say in his recent economic report and why fund flows show bonds are still king.

For investors like David Tepper of Appaloosa Management that's meant an almost risk free way to bolster their coffers by billions.

Meanwhile, low interest rates that are now expected through 2014, spawned a different lexicon of "extend and pretend" in private equity circles.

Funds that made disastrous pre-crisis buyout bets averted the almost assured bankruptcy of those companies as their debts came due in 2010 and 2010. With low interest rates, bond investors bought of billions in high-yielding debt in recent years, helping their companies push out debts another five years, resetting the countdown to their demise. Moody's noted that the "maturity wall" has been pushed to 2016, keeping the music playing for many private equity investments in a February report. If only investors weren't asking for their money back the refinancing kabuki dance could go on for years longer.

The bottom line is that as markets rise to new post crisis highs, don't be surprised if that market momentum does little to undo the harm imparted on the majority of Americans during the recession.

For more on what the smart money is doing to grow their portfolio's, see 10 stocks owned by the best fund managers, 10 dividend stocks paying outsized yields and 9 dividend stocks that will let you retire.

-- Written by Antoine Gara in New York

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