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.

Stocks Higher Six of Seven Days in September

Even though stocks seem to have shaken off the summer blahs, two issues continue to dog the market for equities.

First, the major averages are still stuck below their 200-day moving averages. Just today, the Dow reached that level, and a breakout above 10,500 could drag the other indices along with it. That's for next week, however, when a number of key economic reports are due out, including Capacity Utilization, Industrial Production, CPI, PPI, Retail Sales and the Michigan Consumer Sentiment gauge for September.

Seeing as how these data sets have been playing an increasingly larger role in the direction of stocks, next week's movement should be tied directly to those various readings.

The second - and probably more worrisome - facet of the current range-bound movement is the continuing saga of slack volume. Like seemingly everything else in the US economy, there's an overabundance of equities but a serious lack of demand. We have commented on the low volume data ad nauseam, but the issue keeps dogging the market like a bad rash.

Until there's some semblance of confidence in stocks from individual investors, no rally will be trusted, no quoted price believed.

On the topics of trust and confidence, the SEC investigation of the May "flash crash" surely isn't instilling any of either into the hearts and minds of investors. In typical bureaucratic fashion, the SEC has performed an admirable job of foot-dragging, jaw-boning and bush-beating around the actual causes of the sudden drop which sent the Dow plummeting more than 700 points and quickly recovering, all in the span of 20 minutes.

The agency has ruled out some causes, including quote stuffing (the process of flooding an exchange with orders, along the lines of an internet "denial of service" attack), which actually seem to be at the heart of what happened. The agency expects to issue a final report - which will, no doubt, come to no conclusion - by the end of September, a full four months after an event which took less than half an hour from start to finish.

Regardless, the flash crash and overwhelming suspicion that the market is rigged by insiders has kept investors away for months. Average daily volume is off by more than 30% from previous "normal" levels.

Still, investors seemed content to push prices a little higher each day this week after Monday's selloff, the net result having the indices closing marginally higher than last week's finish.

Dow 10,462.77, +47.53 (0.46%)
NASDAQ 2,242.48, +6.28 (0.28%)
S&P 500 1,109.55, +5.37 (0.49%)
NYSE Composite 7,067.51, +33.14 (0.47%)

For the third straight session, winners topped losers, though again by a diminishing margin, 3405-2232. New highs: 297; New lows: 55. Volume: Pathetic.

NASDAQ Volume 1,630,413,750
NYSE Volume 3,165,025,000

Oil got a significant boost on news of a Canadian pipeline leak, gaining $2.20, to $76.45. The metals continued to stall out, with gold losing $4.40, to $1,244.50, and silver off a penny, at $19.80

Switching Credit Cards May Prove Fruitful

Despite the downturn in the economy, most Americans are still using credit cards due to their versatility, worldwide acceptance, loyalty rewards and overall ease of use.

A handful of issuers have upped the ante on the competition, offering more competitive rates, better points systems or other inducements to get people to apply for a credit card. Balance transfers have also become important in deciding which card is the right choice.

Many people have turned to popular credit card ratings web sites to sort through the various offers, discounts and online availability. Some sites offer very basic advertisements, while others provide deeper detail, including the ability to search by FICO score, check application status and even calculate the amount of savings provided by a balance transfer.

Tools such as these can help consumers save hundreds, if not thousands of dollars over just a few years by finding the right card with the best interest rate to suit their needs.

While it's true that American consumers are paying down debt at a very rapid rate, it hasn't taken the issuers long to adjust to this shift in sentiment and respond with more competitive rates for serious savers. Naturally, one's credit score always plays a crucial role in acceptance, and lowering one's balance owed is now more important than ever. With finances in flux, however, now might be a very good time to consider switching cards or consolidating debt into one card at a lower rate.

The savings could be substantial.

Small Gains in Nowhere Market

Stocks continue their September dance, going nowhere fast, admirably marking time between Labor Day and the mid-term elections. November 2 cannot get here quickly enough for most of the remaining participants in the market. There's no upside to either the market or the economy in sight and lingering fears of a stagnation or limited growth potential in the US have investors, traders and casual players on the sidelines.

The slow pace of the market is making for some dull reporting - this blog included - and the days of "everybody's an investor" seem to be officially and permanently gone. The ownership society has given way to a nation of savers, worriers and soon-to-be-retirees.

For the second straight day, stocks ramped up at the open and sold off throughout the day. Even though the major indices have recorded gains in five of the past six sessions, there's an unmistakable, unsustainable feeling to it all.

Dow 10,415.24, +28.23 (0.27%)
NASDAQ 2,236.20, +7.33 (0.33%)
S&P 500 1,104.19, +5.32 (0.48%)
NYSE Composite 7,034.17, +34.23 (0.49%)

Advancing issues led decliners again, though the margin has narrowed, 3331-2352. New highs remained well ahead of new lows, 378-59, and volume was, again, sub-par. It's gotten to the point that reporting on the lack of volume in the markets is not even news. It is really becoming the "new normal."

NASDAQ Volume 1,602,241,250
NYSE Volume 3,365,649,250

Oil fell 42 cents, settling at $74.25. The precious metals failed to sustain their elevated levels for a day, with gold down $6.70, to $1,248.90, and silver off by 16 cents, to $19.81. There seems to be a surplus of everything except new credit unless one is a major corporation with a AAA rating, from cash to oil to homes to stocks. There's even evidence of a worldwide oil glut developing.

The effects of cheaper oil - some say as low as $40-50 per barrel would certainly fit into the deflationist argument, though the Fed and European central bankers are doing everything they can to avoid such a scenario. If deflation becomes inevitable, while a boon to middle and lower classes, the effect on paper wealth - in stocks, bonds and derivatives - could be devastating.

Despite what experts are saying about inflation running rampant, it's still a difficult concept to embrace when unemployment remains at record levels, consumers are more concerned about paying down debt than buying new things and home prices may begin a second leg lower.

Oversupply is inherently deflationary, but the force of the central banking cartel continues to push against reality.

Revisiting the Inflation-Deflation Argument

Just as there are two sides to a coin is a misstatement (What about the edge? Isn't that a side?), the inflation vs. deflation argument is simply too large and too complex, complete with changing circumstances and misguided definitions, for most people to comprehend, much less care about.

For purposes of argument, let's just assume that for most people, the manifestation of inflation will be higher prices, and of deflation, lower prices. That cuts through the stringent definition of "increase/decrease in money supply, debt, etc."

Food prices have been going up. Energy prices have been relatively stable. Housing prices have been going down if you're buying, but stable if you're renting. As is readily shown, deflation and inflation have been coexisting quite amicably. The real question is when will the Federal Reserve demand more inflation in order to keep the government's cost of borrowing and printing more money at a minimum?

Currently, the Fed is in a very accommodative phase, meaning that interest rates are as low as they can make them, ZERO, which, in most times, would cause inflation. It actually is, which is the Fed's dirty little secret, but hardly enough to satisfy the politicians, who need to see inflation ramp up enough so that companies and individuals will spend, spend, spend, because they see the no value in holding a currency declining in value.

That day, week, month, year is coming, as soon as home prices stabilize and demand ramps up. Unfortunately for the Fed and our treasured politicians, that day is still far away, as home prices will continue to fall as long as banks keep foreclosing and adding to the already-bloated inventory. That's why the biggest banks are slowing down their foreclosure processes, because they don't want to ignite an all-out depression in home values. There needs to be some balance and at least a perception that home prices aren't falling off a cliff. That scenario would cause even more homeowners to default on purpose (strategic default), figuring that their home will never again be worth what they paid for it.

Since the cost of paying off a mortgage is much larger - for most folks - than what they typically spend on food and fuel and other basic necessities, lower home prices fuel deflation, but there are few who have that advantage because just as home prices fell, banks tightened lending standards, so the overall effect isn't felt across the economy because so few people are actually benefitting from lower mortgage costs.

Meanwhile, just about everything else - besides consumer electronics - is either experiencing price stability or inflation (food, mostly), making the overall effect one of moderate inflation, which is, in Fed terms, fine for now, but not for the future. The Fed needs to see more inflation, which is absurd from a consumer perspective, but perfectly in line with the "unstated" goals of the Federal Reserve. Increased inflation will make today's federal deficits easier to pay going forward. Of course, we'll never touch the debt, another matter altogether, nor will the USA ever be able to meet its obligations for Social Security and Medicare once the baby boomers begin retiring (and getting age-related ailments) in droves.

The end-game will be within 8-12 years, when the US must either significantly restructure those entitlements or default or print amounts of money so extreme as to debase the currency entirely. The Fed and its political friends are taking the slow, "kick the can down the road" approach, leaving it for others to fix. Anyone who believes Barack Obama or any current member of congress wishes to tamper with reforming Social Security should understand that they won't touch this "third rail" of government, only because it means re-election. Maybe, if Obama is elected to a second term, he might tinker with it sometime around 2015 - after the mid-terms and before the end of his second term, though that is wishful thinking.

Generally speaking, the deflationary pressures experienced during much of 2009 have ceased to exist and inflation has begun to creep back into everyday life. The only way to keep the deflationary lid on in one's personal life is either to spend less, save more, use less, or a combination of all of the aforementioned. Of course, doing so lowers one's standard of living somewhat, though not to extremes, which is, after all, the net end result of deflation, much preferable to having one's savings and income constantly eaten away by inflation, the scourge of all savers and the major threat in coming years.

By creating massive amounts of money, the Fed managed to stave off deflation, though not necessarily the nastier aspects of a depression. Absolutely unacceptable levels of unemployment still exist and have not been contained. The underclass of American society has grown larger in recent years as unemployment benefits are morphing into welfare checks. For those at the bottom, life is surely a nasty affair. The middle class is still being squeezed while the upper class continues to enjoy the benefits of very discretionary upper-income tax breaks.

While most of us struggle for solutions and seek answers to the deflation-inflation riddle, the upper class need not worry themselves with these minor details, as they have much more than they need in terms of money and security. The situation won't correct itself, and there seems to be nobody even remotely interested of doing what's right for the "better good."

With that, we see that stocks gained modestly on Wednesday. There was little to move them, as the rhetoric of sovereign default in the Eurozone diminished rapidly into the ether overnight.

Dow 10,387.01, +46.32 (0.45%)
NASDAQ 2,228.87, +19.98 (0.90%)
S&P 500 1,098.87, +7.03 (0.64%)
NYSE Composite 6,999.94, +40.00 (0.57%)

Advancing issues held sway over decliners on the day, 3859-1849. New highs remained well ahead of new lows, 345-54. Volume was not quite as pathetic as recently, though the general volume was and is still depressed by some 30-40% over what it was prior to the implosion of 2008, a fact of life that cannot be avoided.

NASDAQ Volume 1,892,425,500
NYSE Volume 3,431,570,500

Crude oil price gained 58 cents, to $74.67, close to the mean level of the past 18 months. Gold backed down a bit, slipping $1.70, to $1,255.60. Silver pushed past $20.00 during the day, but closed just below it, up 9 cents, to $19.98.

Generally, the market was awaiting some kind of catalyst, though none appeared. Stock indices continue to trade in a fairly well-defined range, initiating thoughts of prolonged stagflation in some.

That very well may be where all of this is heading. Higher prices in a stagnant economy, something of a bland state of despair. It's not very pretty, but about the best image one can conjure considering conditions.