Phony Monetized Rally Rocks On

With the Fed monetizing the nation's debt and expanding its balance sheet faster than a Keynesian can say "Zimbabwe", the big bear rally from hell continued through its 9th week and there's no sign of it slowing down.

From what were the worst economic conditions in the first quarter of 2009, the latter part of March thereon has been nothing but a mindless joyride, or a joyless mind-ride, depending on your predisposition. Straight up from 12-year lows has been the order of the many days since March 9, so, with another week coming to an end, it's time to take account and see just how far the indices have advanced.

Following are the closing figures from the four main food groups, er, indices tracked here, with closing numbers from March 9 and May 8, with point and percentage gains:

Dow Jones Industrials: 6,547.05, 8,574.88, +2027.83, +31%
S&P 500: 676.53, 929.23, +252.70, +37%
NASDAQ: 1268.64, 1739.00, +470.36, +37%
NYSE Composite: 4226.31, 6000.39, +1774.08, +42%

WOW! I need say no more, but, due to the vastness of open space on the internet, I shall.

Stocks, of course, are prone to fluctuations. They are also prone to sentiment, manipulation and propaganda, such as has been devised by the Wall Street syndicate and government technocrats and tossed, chum-like, to the zombified public by the slavish mainstream and financial media, that we've turned a corner, the recession has bottomed out, etc., sounding so much like the Bush administration's assessments of progress in the Iraq war circa 2004-2008 that it's uncanny, even eerie.

Dow 8,574.65, +164.80 (1.96%)
NASDAQ 1,739.00, +22.76 (1.33%)
S&P 500 929.23, +21.84 (2.41%)
NYSE Composite 6,000.39, +200.30 (3.45%)

Advancing issues overwhelmed decliners, 5246-1335, though new lows outweighed new highs, 97-58. Volume was very high, just about the same as yesterday's level.

NYSE Volume 1,895,686,000
NASDAQ Volume 3,200,076,000

Oil went up another $1.92, to $58.56, a six-month high. Gold fell back 60 cents, to $914.90, as Central banks have begun paying agents to dump the yellow metal, as noted by negative real lease rates. Silver responded in sympathy, falling 8 cents to $13.96.

The official unemployment figure was boosted to 8.9%, while the real, unofficial unemployment figure - which includes people who have given up and those unwillingly working part-time - stands at 18%.

But, never mind those stats. Free money, dudes! Step up and make some dough!

That's all I've got this fine Friday afternoon. C YA!

Ponzi Would Be Proud On Stress Test Results

First, let's not confuse Charles Ponzi (that's him on the left) with Arthur Herbert Fonzarelli (otherwise known as actor Henry Winkler in the role of "Fonzie" or "the Fonz" on 70s hit TV show "Happy Days" - shown at right). Sure, the names sound familiar, but that's where such familiarity ends.

Charles Ponzi was a swindler extraordinaire, who paid investors outlandish profits by continually bringing in fresh capital from other investors (or "suckers" as the case may be). Ponzi never actually invested any money in anything; he simply churned what seemed to be - at the time - a never-ending supply of money from pigeons to keep the appearance of a grand investment going. Thus, the term "Ponzi scheme" became popularized for this kind of endeavor, also known as a pyramid or airplane scheme.

Alfred Fonzarelli was a fictional character who exuded the hip and cool of a 50's greaser. His trademark leather jacket and slicked-back hair were elements of his persona. But Fonzie was honest, though arguably crude. Ponzi, a real person, was a cheat, and a great one. Some believe Bernie Madoff is the present-day embodiment of Charles Ponzi.

Now that we have the introductions out of the way, let's get to the core issue: that of the government's bank stress tests, which results are finally going to be released to the public, today, at 5:00 pm EDT. After months of nail-biting anticipation, it appears that 10 or 11 of the nation's largest 19 financial institutions are actually not in very good health. Here is a nice capsule of the results. Here is a NY Times article offering some rather scathing reviews on the entire stress test process from some very well-respected economic heavyweights.

Finally, here is a story and video from Yahoo! Tech Ticker which explains how Bank of America needs $34 billion of additional capital, and how they plan to get that by converting the TARP funds ostensibly "loaned" from the government (taxpayers) from preferred stock into common stock, resulting in a surplus of $11 billion with which they can then begin paying back the TARP funds. Yes, you read that right, BofA will use TARP funds to pay back TARP funds.

Only in America can bankers and politicians steal in such plain view from taxpayers. Certainly Charles Ponzi would be proud. Fonzie, for his part, might say, "Heeey, that's no way to treat people." Naturally, the truth-loving Fonzie is right. The US taxpayers are being taken to the cleaners on this one.

Maybe there's a silver lining in all of this hanky panky. Stocks were pounded down pretty well for most of today's session, on relatively strong volume. Could it be that some of the fund managers and top investors are seeing this for what it is - outright fraud - and calling an end to Wall Street's wild rally? Could be, but, considering the length and size of said recent rally, it's going to take more than a day or two of declines to straighten out the newest mess, that of stocks being wildly overvalued again.

As I've been saying all along (and I have plenty of company in my opinions, too), the banks aer not in good health. The stress tests were just a smoke screen, the PPIP is a bad joke at best, almost none of the various illiquid assets held by these banks have been disposed of, rather, they have been revalued using mark-to-model rather then the more accurate (and honest) mark-to-mark accounting, the Fed is now monetizing the national debt in addition to taking on all sorts of toxic waste, and, to top it all off, Thursday's Treasury auction of 30-year notes was a resounding failure, poorly received, with 30-year bond yields hitting 4.309%.

It's a mess of even more gigantic proportions that before the government began its meddling nearly eight months ago. Now, stocks will have to compete with higher bond yields, as will mortgage rates, which the government hoped to keep low, while the banks try to raise a cumulative $65 billion from private sources, in direct competition with the enormous Treasury sales to finance the burgeoning US debt, which will cost more and more to service if yields continue to climb.

So, a good number of investors took today's sloppy news flow and decided it was time to take some of their quick profits off the table. Not such a bad idea, despite the growing consensus that the economy is on the upswing (maybe, but probably not) with the Labor Dept. due to release nonfarm payroll data for April on Friday - tomorrow.

While the estimate is for job losses to total only 490-590,000, certainly less than March's 663,000, it's hardly cause for celebration, in light of the fact that the US economy needs to create 150,000 jobs per month just to keep pace with population increases and new entrants into the labor force. The calculations of the Labor Dept. also do not account for the 54,000 Chrysler employees being furloughed for 30 to 60 days, nor the 200,000 GM employees who will be idled for as many as 9 weeks this summer. Nor does the government count workers who have exhausted their unemployment insurance, those who are working part time instead of full time in their estimate of the unemployment rate of 8.9%. Others, including economists at the University of Maryland, put the figure at closer to 17%.

Add to the malaise that LA Dodger Manny Ramirez has been suspended by MLB for 50 games for violating their banned substance policy. He will not be paid roughly a third of his $25 million salary. So there's another $8.5 million not being spent into the economy right there! Yikes!

So, maybe today was a good time to get out of stocks. After all the major indices have risen by more than 30% over the past 8-9 weeks.

Dow 8,409.85, -102.43 (1.20%)
NASDAQ 1,716.24, -42.86 (2.44%)
S&P 500 907.39, -12.14 (1.32%)
NYSE Composite 5,800.15, -90.40 (1.53%)

Declining issues took the advantage over advancers, 4255-2281; new lows surpassed new highs once more, 95-52, and volume was stupendous, higher even than yesterday's. There certainly is no lack of trading going on as the economic wheels turn, or, grind, whichever case you prefer.

NYSE Volume 1,969,476,000
NASDAQ Volume 3,274,508,000

Commodities were bounced around by conflicting data, but oil managed a gain of 37 cents, to $56.39. Gold rose another $4.50, to $915.50, continuing the recent trend of gains, as did silver, which crossed the $13.80 threshold - the price at which melt value of US coins equals 10X their face value - with a rush, gaining 32 cents, to $14.03.

Most of the news flow for the week complete, investors will have until tomorrow morning's opening bell to weigh all the factors, including the nonfarm payroll figures, due out at 8:30 am. It's anyone's guess which way they'll turn, but one thing's for sure: the economy is not in as rosy shape as the news and pundits would have us believe. The recent bout of "green shoots" and "semi-positive" readings were more of the nature of falling at a less-pronounced pace than earlier this year or last fall. The US economy is still weakening, though not quite as quickly as before.

It's like saying a man clawed and chewed a lion only losing one arm and one leg is good news. He's still alive and he's got one of each type of limb left. Really, how many people would call that "good" news? Seriously, folks, it's not a matter of perception. The reality is not that the glass is half full or half empty, it's that the glass has a hole in the bottom.

Wall Street's No-Stress Party Continues

Stress? What stress? Whether banks need to raise more capital to remain solvent will be revealed tomorrow. Word leaked out today that Bank of America may need as much as $35 billion to meet a capital "shortfall" but that could not deter investors from bidding it and other stocks higher.

The Dow has dazzled many over the past few weeks and today got to within shouting distance of recording a 2000-point rise from the bottom reached on March 9. The "Industrials" need to reach 8547 to mark the rally at 2000 points.

Dow 8,512.28, +101.63 (1.21%)
Nasdaq 1,759.10, +4.98 (0.28%)
S&P 500 919.53, +15.73 (1.74%)
NYSE Composite 5,890.55, +119.79 (2.08%)

Some of the enthusiasm came from the April ADP Employment Report, which estimated that 491,000 jobs were eliminated from private payrolls during the month. That news reached the street prior to the open, and, as odd as this market has been when confronted with news, caused an immediate gap up and sell-off which pushed the Dow back to break-even shortly after 10:00 am.

Confronted with the prospect of stocks actually declining, the perma-bulls made sure to just keep buying at a torrid pace throughout the rest of the day, ensuring that the rally would continue for a 9th straight week.

Advancing issues decimated decliners, 4238-2283. New highs, however, failed once more to beat new lows, with the lows ahead for the day, 110-67. Volume was straight off the charts, with both the NASDAQ and NYSE recording one of the best trading days of the year.

NYSE Volume 1,876,341,000
Nasdaq Volume 3,016,188,000

Enthusiasm was a little more contained, though not by much in the commodity trading pits, where oil for June delivery was up $2.36 closing at its highest level in months, $56.38. Gold rose $6.70, to $911.00, while silver added 29 cents to finish at $13.71 per ounce.

Enjoy the bounce. Honestly, why fight prosperity? But don't let me hear a word about high prices and inflation. On that note, the dollar was down against all major currencies. That is the price we will all pay.

The Never-Ending Rally

Stocks took a bit of a breather on Tuesday, but, in the larger scheme of things, it amounted to nothing more than a rounding error.

Dow 8,410.65, -16.09 (0.19%)
NASDAQ 1,754.12, -9.44 (0.54%)
S&P 500 903.80, -3.44 (0.38%)
NYSE Composite 5,770.76, -29.46 (0.51%)

In an environment in which the Dow Jones Industrials have gained nearly 2000 points over the past two months, today's marginal loss was about as insignificant as normal intra-day noise. Not only was the decline hardly noticeable, but the range - less than 100 points on the Dow - indicates that all volatility has been wrung out of the market. The VIX, which measures market volatility, closed today at its lowest level since September of last year, prior to the Lehman Brothers failure and various market dislocations that touched off wave after wave of selling.

It's amusing, to say the least, that investor sentiment has quieted down so much, especially with Fed Chairman Ben Bernanke testifying on Capitol Hill and the results of the bank stress tests due out on Thursday. One can credit the mainstream media for selling the government line that the economy is "bottoming out" and recovery on the horizon. In fact, Bernanke actually made comments to the congress to that effect, saying that the economy should begin to turn upwards in the second half of 2009.

That Americans still believe in Bernanke and the general wisdom of congress and the president in dealing with the economy is alarming in itself. Remember that it was Ben Bernanke, along with Treasury Secretary Hank Paulson, who said that the subprime breakdown was "well contained" in 2007, and that financial institutions and the underlying economy was strong early in 2008. Are we now supposed to put faith in his prognosis that the economy will be in better shape later this year? Americans are easily duped. The billions of dollars stolen by Bernie Madoff is proof enough of that. Also playing into the equation is the oddly-American optimism in the face of certain doom which, in its simplest forms, merely reduces all negative arguments to sheer pessimism, regardless of the veracity of such doom-and-gloom claims.

Thomas E. Woods, author of various books on economics and the markets including "Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse," offers some insight, channeling Austrian school economists Henry Hazlitt and F.A. Hayek, in his article at the Daily Reckoning, "No, the Free market Did Not Cause the Financial Crisis."

Regardless of Woods' penchant for lengthy titles, his analysis mirrors what's been said on these pages many times, that the tinkering and intervention by the government and the Fed are more likely to make matters worse, rather than better, simply because they continue to prop up failed institutions and companies, casing good money to be continually thrown down a black hole to prop up insolvent banks and failed corporations.

And, though Woods does not address the condition, it is my belief that throwing money away shortly after it is created out of thin air won't readily induce inflation, because the money just gets wasted. How could anyone believe that printing dollars and then burning them would produce anything other than some flames and smoke? It is for that reason that I have resisted the alarms of runaway inflation. The Fed has created a good deal of money, however, almost none of it has gone into productive activities. Price inflation is caused by money chasing a dwindling volume of goods, and, at this time, there seems to be more of a glut of everything - from cheeseburgers to steel girders - than scarcity.

Maybe that's the case in other countries, but here in America, there's plenty of everything for everybody. The one troubling trend that has developed from "talking up" the economy and relentless government stimulation is that there is no downward pressure on prices, as would be the case under normal circumstances. The more "free money" being thrown around, the more difficult it is to create new businesses because the ones that are broken are being kept alive via government largess. For instance, dinner at Old Country Buffet, a marginal eatery at best, is $12, hardly cheap, and two Egg McMuffins at McDonald's go for over $5.00, another example of the lack of downward price pressure.

For instance, should Burger King go out of business due to lack of demand for their morning offerings, one would expect a similar scenario at McDonald's to develop. with less demand for eggs, cheese and ham, one would expect McDonald's to lower their prices to match market conditions. However, since Burger King isn't failing, and the flow of money is being kept constant with increases to unemployment, welfare and social security recipients, plus all the other bailout and stimulus measures, the natural consequences of a free-falling economy have failed to materialize.

The problem with this scenario is that it's completely and utterly doomed to failure. The moment the government closes off the spigot to free money at 0% interest is the moment business begins to deteriorate. The Federal Reserve and the federal government have painted themselves into a debt-driven corner: they have to keep supplying cheap money or else the economy goes back into the tank. Obviously, they cannot borrow and spend their way out of this mess, though that's exactly what they're trying to do. The natural result, no matter what they believe, is deflation, until prices and actual earned wages come back into equilibrium.

The government and the Fed can pump as much money as they like into the economy, but they will not be able to spark inflation, which is their desire. Most of the money is either being wasted, saved or used in paying down debt, none of which are particularly productive uses of capital. In the interim, the economy will look like it's improving, but it's a mirage. Corporations will be profitable, but they will not be able to maintain their margins once the government cuts off the easy money. This is why stocks have rallied and why people believe the economy is improving. It feels good, but the underlying economics are a complete fraud.

It's why Ben Bernanke has seemed less than fully confident of late. One the one hand, he wants to reassure the American public that the economy isn't dead, but he knows there are more potholes and pitfalls on the road to recovery. He is not certain that his policies have been the correct ones because he's tried to keep the economy afloat without pain, when it is the actual pain - business closings, shutdowns and bankruptcies - that is at the root of real recovery. He's also been less than candid about the condition of the banks, because he knows they are nearly just as leveraged and unregulated as before the crisis that hit last fall.

Here is an article outlining why stimulus money is going unspent, underscoring the concept that the stimulus is nothing more than a band-aid and won't spur recovery.

On the day, declining issues surpassed advancing ones, 3514-2985, and there were more new lows than new highs, 81-48. Volume was average.

NYSE Volume 1,534,299,000
NASDAQ Volume 2,562,924,000

Oil closed down 63 cents, at $54.09. Gold continued its climb, gaining $2.10, to $904.30. Silver galloped ahead of the pack, picking up 31 cents, to $13.42 per ounce, approaching the melt price at which American silver coins are worth 10 times their face value ($13.81).

Tomorrow, the market will face a little bit of reality, as ADP releases it's monthly private sector employment report. The firm's numbers come as a precursor to the government's monthly nonfarm payrolls report, which is released Friday. ADP's numbers are quite reliable and are likely to show that another 610,000 jobs were lost in April. Noting the massive number of job losses since October of last last year and the extensions of unemployment insurance real misery won't being until late this year, exactly when the government mouthpieces say the economy is due to turn around.

Irony. It just isn't funny anymore.

The Grand Deception Continues as Stocks Soar

Regular readers of this blog will note that I have been completely wrong about the current stock market rally for more than a month. I apologize for any disservice I may have done to otherwise level-headed investors, but my position remains the same. This is a bear market rally, and, as such, any gains are subject to being wiped out at a moment's notice.

That said, I have and will try my level best to temper my opinion with facts and the facts should be sufficiently clear by now that the economy is far from any real recovery. It is also my opinion that the bottom reached in March was not the absolute bottom and that there are further hurdles ahead for stocks and the general economy.

One of those hurdles was pushed back a bit further, for a second or third time. I am talking about the release of the government stress test results on 19 of the nation's largest banking institutions. The release of this information has been pushed back to Thursday of this week. They were originally to be made public today.

The government's continued coddling of the banks and closeness to them is disconcerting, not only to me, but to a good number of economists and especially to Senator Dick Durbin, who last week announced that the banks "own the place," that place being the US congress.

So, just to be clear, I am mistrustful of Wall Street's ways and will continue to proclaim this rally as false. For more interesting reading on how corrupt the government and the banks have become, check out Rob Kirby's Market Observation from April 20, called "The Big Lie" in which he points out that foreign investors have already stopped buying US Treasuries and that the Federal Reserve likely has been engaged in more buying of Treasuries than the American public is being told.

With that information in hand, we may be witnessing the beginning of a great reflation of the economy. with stocks going up, commodities, and then, everything else (except wages, of course) will rise in price. Such a scenario - which the Fed is actively promoting - will signal the death knell of America as we once knew it. You will need to own more stocks at higher and higher prices just to keep up with the gallop of inflation. It is the worst of my fears. I would much rather see deflation take firm hold because at least it keeps food, fuel and other necessities of day-to-day living affordable.

Stocks were sent soaring on Monday after data showed construction spending and home sales both higher from the previous month.

While the pair of data sets were encouraging to many on Wall Street, closer inspection of the construction spending data showed that most of the increases were in commercial and government spending, not residential. The increase was likely the result of the nearly $1 Trillion federal stimulus bill, passed in February and now hitting the mainstream and Main Street. Despite the rise, construction spending - up a whopping 0.3% in March - is still 11.1% below 2008 levels.

And while more people may be buying existing homes, they are buying them for lower prices, with investors scooping up foreclosed properties as investments.

Nonetheless, investors looked the other way on any bad news, as they have for the past 8 weeks and sent stocks soaring to 4 month highs. Of the major indices, the NASDAQ and S&P 500 are now in positive territory for the year, though the dow is getting closer, having closed at 8776.39 on December 31, 2008.

Dow 8,426.74, +214.33 (2.61%)
NASDAQ 1,763.56, +44.36 (2.58%)
S&P 500 907.24, +29.72 (3.39%)
NYSE Compos 5,800.22, +231.46 (4.16%)

For the session, advancing issues far exceeded decliners, 5333-1261. New lows retained their edge over new highs, however, 101-66. Volume ticked up somewhat from last week's subdued levels, and it remains to be seen if investor interest will remain strong at such lofty levels. The odd characteristic of this rally is that there has been no significant pull-back at any juncture, somewhat difficult to believe in the current economic environment.

NYSE Volume 1,714,092,000
NASDAQ Volume 2,554,642,000

Commodities plowed ahead as well, with oil gaining $1.27, to $54.52. Gold rose $14.00, to $902.20, with silver adding 61 cents to settle at $13.11. Foodstuffs were mixed, but all energy-related commodities shot higher.

So, Wall Street has sounded the "all clear" once again and investors have responded like sheep instead of thinking, rational beings.

Here's Art Cashin on CNBC, talking about low volume rallies in bear markets and whether or not the markets are about to "roll over."