Fed-Led Rally Continues; Besides Big Five, Buyers Absent

Stocks just keep going up, up and away, as the Fed-induced liquidity rally lurched forward for the seventh day out of the last eight to the upside. This particular late-summer boost is courtesy of the Federal Reserve, remaining steadily along its path of QE (qualitative easing), today with a $3.4 billion POMO (Permanent Open Market Operation).

One could say the operation was a success, though the patient - US equity markets - are going to eventually become addicted to the easy money, if not already. With the Fed playing almost directly in the markets by purchasing and rolling over Treasuries from the Five Big Banks - JP Morgan, BofA, Citi, Morgan Stanley, Goldman Sachs - there's no good reason for stocks to do anything but go straight up, despite ridiculously low levels of trading volume.

Once the bands have the money in their grubby hands (all done electronically, so executing the movement of these massive amounts of money is both effortless and immediate), some of it surely finds its way into stocks, resulting in what most market viewers call a melt-up. With so much liquidity being provided at near-zero cost on a regular basis, stock indices could easily surpass the 2010 highs achieved in late April - early May.

There's still a way to go - about 600 points on the Dow - but the continuous flow of easy money virtually assures rising stocks and a falling dollar. It's really too bad the Fed and the banks had to resort to these tricks, but when you're broke and desperate, anything goes.

One has to question the policy of the Fed from the perspective of the political class. Republicans would like nothing better than a severe market crash prior to the elections, but the Fed seems to be working the wrong side of the aisle these days, so reports of the demise of the Democrats may be vastly overstated should this money-pumping activity proceed through to November.

As has been the case throughout the grand QE experiment in Keynesian economics, the only beneficiaries of this melt-up are the banks and some very savvy traders who have thrown fundamentals and caution to the wind. It's been a good trade for those involved. The Dow Jones Industrials are up 540 points since September began, with only one 107-point down day. The move will likely continue on course through the remainder of the week, as stock options expire this Friday, and boatloads of money are being made on the upside move.

For the rest of us, we sit back and watch the tableau unfold, secure in the fact that the gains are as artificial as a Vegas hooker's good looks. Banks are hedging as well, buying gold and recently, silver, along with oil and other rising commodities. Stocks, however, are the big kahuna for Wall Street, as the average Joe and Jane six-pack believe that a rising stock market equates to a burgeoning economy. It's truly not even close to being the case, and some data due out later this week may take issue with the "all good" theory circulating on the Street.

Dow 10,544.13, +81.36 (0.78%)
NASDAQ 2,285.71, +43.23 (1.93%)
S&P 500 1,121.90, +12.35 (1.11%)
NYSE Composite 7,156.18, +88.67 (1.25%)

Advancers danced all over declining issues, 4533-1261, and new highs bettered and battered new lows, 406-36, indicating that the rally has no stops in sight. Volume was better than normal on the NASDAQ, though once again in the doldrums on the NYSE. It's amusing to speculate, but once the volume ramps up, that's when a major correction has more probability, as fresh money generally gets trundled off to the big bank vaults.

NASDAQ Volume 1,966,425,500
NYSE Volume 3,893,587,000

Crude oil gained 74 cents, to $77.19. Gold managed a tiny 60 cent gain, to $1,245.10, while silver was up 31 cents, to $20.11, approaching its 2008 high.

Retail sales will be reported tomorrow prior to the opening bell, but the real highlights of the week will come Wednesday and Thursday, when capacity utilization, PPI and CPI are reported. Besides the numbers being purposely managed and massaged, there may be no highlights at all, which, if the Fed and the banks have their way, would be just fine and dandy.

Despite the reflection Wall Street is throwing off, the US economy is still dangerously close to implosion. Employment and housing are still in the throes of a depression, and the fiscal authority is being held together by string and scotch tape. If deflation doesn't take complete hold, runaway inflation will surely be the result, though for the near and middle-term, the outlook remains blush, that is, not quite rosy, but hardly pale.