Tuesday, August 9, 2011

Fed Honesty and Insane Markets

This was the mother of all snap-back, double-back rallies.

Let's see, first, after the sixth-worse day in US market history - taking the Dow as our guide - stocks opened sharply higher, then fell back to the flat line in the first fifteen minutes of trading, then rallied 200 points in the next 20 minutes.

After that, stocks just drifted along, as though yesterday's massive decline was some kind of mirage or a bad joke.

At 2:15 pm EDT, the FOMC issued what might be the most useful statement in the 98 year history of the Federal Reserve. It's not very long, so here's the whole thing (worth a look):

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. Indicators suggest a deterioration overall in labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events of Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities of imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that Inflation will settle, over coming quarters, at levels at or below both consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The salient points are many, but the stunner of them all was the statement that the federal funds rate would remain at ZERO to 1/4 percent and that this accommodative measure would remain in effect until the middle of 2013, or, put another way, for about the next two years.

At first, market reaction was positive, then turned completely negative just minutes after the release. What the Fed is saying, in effect, is that the US economy has just about sputtered out, but there's nothing the Fed can do at this point. They surrender to market forces and will keep rates at the absurdly low levels for the next two years.

What they didn't say might have been even more important. There was not even a hint of more quantitative easing (QE), as the last two rounds produced nothing other than price inflation and the build-up of the too-big-to-fail (TBTF) banks' balance sheets. The Fed also did not mention how or when it would begin unwinding its own over-stuffed balance sheet, currently at historic highs.

Once the market got the gist of the Fed's generosity and after falling more than 350 points from before the statement's release, it was off to the races and a nearly 600-point rally in the final hour and fifteen minutes of trading.

Us markets are, and will continue to be, completely insane, out of control except under that of the TBTF banks who control it. Some people lost money today and some made quite a bit. Anyone with any knowledge of the corrupt, inner workings of the stock market knows who won and who lost, and most of the losers were surely people without super fast computers and gee-whiz algorithms.

Dow 11,239.77, +429.92 (3.98%)
NASDAQ 2,482.52, +124.83 (5.29%)
S&P 500 1,172.53, +53.07 (4.74%)
NYSE Composite 7,258.04, +362.07 (5.25%)

Advancers clobbered decliners on the day, 5880-966, but new lows remained at elevated levels over new highs. There were just 16 new highs, but 484 new lows on the NASDAQ, while on the NYSE there were only 3 new highs and 702 new lows. That puts the combined numbers at 19 new highs and 1186 new lows, an extremely negative bias.

Volume was extreme once again, nearly as pronounced as yesterday's.

NASDAQ Volume 3,819,984,500
NYSE Volume 10,180,450,000

Commodities were literally all over the place. Oil zig-zagged over the unchanged line to a $2.01 loss, at $79.30 by the end of the day. Gold was higher all day, finally settling at $1,743.00, up $29.80, another record close. Silver, however, has become the whipping boy of the lovers of fiat, losing $1.50, to $37.88. Apparently, either the decade-long love affair with gold's first cousin is over or the shorting machinery of HSBC and JP Morgan has the markets covered. The latter is more than likely the case, though eventually silver will score enormous gains, once the masters of the universe are satisfied they've done their best to squelch any thought of making silver a negotiable currency again.

The gold-silver ratio is historically around 16-1, which, were that the case today, silver would cost somewhere in the neighborhood of $109 an ounce. The current gold-silver ratio is 46-1, though that is lower than what it's been in previous years. It still needs to find equilibrium. No doubt that silver is too cheap, but is gold too high? Probably not.

Thus ends another adventure through the canyons of Wall Street. Tune in tomorrow to find out that 90% of all trading is done by computers over which humans have no control. We are slaves to technology.

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