Thursday, September 2, 2010

Nice Show, But Everybody Knows It's a Fake

Stocks continued to rally on Thursday, following up on the ridiculous upside surprise from the first day of September. There are many reasons to doubt that the US economy or US stocks are actually worth investing, and the overwhelming opinion from the average Joes and Janes of the world is that stocks are really just for suckers.

Outflows from mutual funds continued for the 17th consecutive week, so, if anyone is thinking that this is a good time to buy into the market, there are quite literally hundreds of thousands of people who are fleeing equities as quickly as they can. Bonds funds and cash are the asset classes du jour, and probably will remain so unless radical changes are made to the way Wall Street handles trading.

Investors have become wary of the Street's "wild West" approach and many believe the game is rigged against the small investor. These people have a case, after the meltdown of 2008, Bernie Madoff and the "Flash Crash" this past May. One cannot blame them for being careful; after all, it is their money we're talking about.

Today's action was in contrast to the prevailing news, again, as initial unemployment claims remained stubbornly high at 472,000 for the reported week and productivity was reported to have declined by 1.8% in the second quarter after slowing 0.9% in the first. About all this economy needs is less productive people working at the few jobs remaining. Unit labor coast are also on the rise, another bad omen for publicly-traded corporations.

For the most part, trading is, and has been, orchestrated by the five big banks - Goldman Sachs, JP Morgan Chase, Bank of America, Citigroup and Morgan Stanley. That's reflected in the overcrowding of trades and the herky-jerky motion of the indices. When the big boys act in unison, with large blocks, markets jump. It truly does crowd out the small investor. The playing field is dramatically tilted in favor of HTFs (High Frequency Traders) and big money.

Nonetheless, the show must go on, so the money was spent today to boost stocks once again, though the rally may be cut short by tomorrow's non-farm payroll, which, maybe this time, will actually be regarded as something substantial to trade off. The past few monthly employment reports have been on the weak side. if not outright horrible, but traders seemed to keep their wits on days when the numbers are released. It's the following Monday that all hell breaks loose, giving more credence to the rigged nature of the markets.

Dow 10,320.10, +50.63 (0.49%)
NASDAQ 2,200.01, +23.17 (1.06%)
S&P 500 1,090.10, +9.81 (0.91%)
NYSE Composite 6,966.25, +55.27 (0.80%)

As expected, advancing issues finished well ahead of decliners, 4327-2026. New highs bettered new lows, 360-56, but volume reverted back to a pathetically low level. The indication is that there was some allocation into winning positions, though without much commitment.

NASDAQ Volume 1,691,904,250
NYSE Volume 4,269,796,500

One telling sign that the rally in equities is mostly a figment of the imaginative inside traders was that oil stood still, finishing unchanged at $73.91. Gold continued to close in on all-time highs, finishing up $5.20, to $1,251.50. Silver rocketed ahead another 28 cents, to $19.64. It has been by far the best performer over the past two weeks.

David Rosenberg penned a thoughtful piece, claiming that we're in a Depression, not a recession, and, of course, he's right.

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