Central Bank Bubbles Cause Dow to Hit 2nd-Best All-Time Closing High

There's been an ongoing debate over whether there is a bond bubble and whether - and when - it will finally burst.

With the Fed carrying the water for the US Treasury to the tune of 40-45% of all new debt issuance there's abmple evidence that Chairman Bernanke and his henchmen and women have had the bubble-blowing pipes surgically implanted into their collective mouths. They've managed to keep all interest rates at historically-low, bargain basement prices for the past four years, though the net results of their efforts have been widely different depending upon one's perspective.

For the nation's largest banks, Fed largesse has meant easy money with which to rebuild their badly-damaged balance sheets after the real estate debacle which ended in the 2008 crash. This easy money has also inspired rampant speculation by those very same banks and has trickled down to hedge funds, the marginal buyer in this runaway stock market.

Whether the bond bubble will eventually burst is a matter of conjecture and even more speculation, though one can be relatively assured that if such a bubble exists and does burst, rates will escalate higher in a disorderly fashion which will make any previous stock market crash look like a summer picnic. In sum, higher interest rates would wreck the global economy. Everyone from the marginal student lender to the great sovereign nations of the world would be unable to service debt at higher - and rising - interest rates. Cue the oompah band from the days of the Weimar Republic.

Where there exists a bona fide, can't miss, no-doubt-about-it bubble is in stocks. Friday will mark the four-year anniversary of the bottom of the 2008-09 slide into the abyss. In those four short years, the major indices have embarked upon one of the longest uninterrupted stock rallies in global history. The Fed's insistence to throw $85 billion per month at the market through the purchase of Treasury and mortgage-backed securities is like traders drinking from an endless champagne fountain, drunk in the knowledge that any slight pullback will be shortly erased by the ungodly amounts of capital flowing into the markets.

Because the Fed has crushed interest rates (and with them, savers), stocks are the only financial instruments by which one can expect a return in excess of inflation, which is, after all, the key to maintaining and developing a wealth portfolio.

One method by which one can identify a bubble is by watching the dips and subsequent rebounds. In the stock market, this phenomenon is readily apparent. Just looking at today's intraday loss of 61 points and the middday reversal and eventual positive close is evidence enough that - turning an old adage on its side - what goes down will go up.

Last week's 200-plus-point drop on Monday was snuffed out and overwhelmed in the next two days of trading. The pattern is unmistakable and repeatable throughout the four years of excessive Federal Reserve easing and zero interest rate policy. To say that such extraordinary measures are unsustainable would be the understatement of the millennium. Never before in recorded history have interest rates been held so artificially low for such an extended period of time.

The problem with the Fed's policies are that they are reckless and untried in practice. Based entirely upon a groupthink methodology of Keynsian economic theory, the Fed has taken a free-market demand economy and turned it into a manipulated, command-driven socialism experiment, and the results are not and will not be understood until there is an attempt to undo whatever good or damage has been done and return to a semblance of "normalcy," a term becoming more quaint and misunderstood each passing day.

Other than stocks and bonds, the Fed has created - with ample assistance from the inept federal government apparatus - a bubble in student loans, which last year exceeded the total amount of credit crad debt outstanding, approaching a trillion dollars.

One can argue that an education is a worthwhile investment, though, comparing to credit cards, at least most people would have something tangible to show for their monthly statement of debt-slavery. For the graduates and soon-to-be grads, they have a peice of paper attesting they have some rudimentary knowledge in some broad field of endeavor. In an economy long on promise and short on actual paying jobs, those sheepskins are, and maybe become even more, worthless.

The US Federal Reserve is not alone in blowing bubbles, though one can rest assured they were cheering the Chinese all the way toward creating what now must be considered the most massive real estate bubble in the history of the world, dwarfing the sub-prime fiasco by a matter of degrees.

As mentioned by many over the year and documented by CBS' 60 Minutes on the Sunday, March 3rd broadcast, the Chinese have created at least a dozen "ghost cities" complete with high-rises, shopping malls, streets and thoroughfares, infrastructure and amenities, just no people. The simple fact is that the Chinese people were sold a bill of goods by their own versions of snake oil salesmen, buying up properties in developments on the outskirts of most major cities, even though the apartments, housing and commercial rental units are far beyond the reach of the average Chinese working-class individual or family. The 12-minute clip is embedded below.

Whether the timing of the 60 Minutes report was coincidental or just dumb luck (being of the conspiracy mind, we think it's the former), the Chinese central government has imposed new rules designed to slow down the real estate frenzy or the piercing of the bubble, which will, without a doubt, eventually burst. The question is simply a matter of how long and how well Chinese officials can lie and obfuscate the reality that they have created a bubble that has - during the buildup - resonated worldwide, and will do the same as it deflates.

The new measures, which involve higher down payments and higher interest rates on second home buyers and a 20% capital gains tax on the sale of any housing unit that is not a primary dwelling. The Shanghai Composite lost 3.7% on the day, with a number of property development firms down the maximum allowable one-day drop of 10%.

With those results in tow, US stocks began the day lower, but, thanks to our own financial fantasy-land bubble machine, ended higher.

Once again, it seems the three most basic tenets of investment practice have been ignored: buy low, sell high, and do your own due diligence. People never seem to learn.

Oh, well. It's only money.



Dow 14,127.82, +38.16 (0.27%)
NASDAQ 3,182.03, +12.29 (0.39%)
S&P 500 1,525.20, +7.00 (0.46%)
NYSE Composite 8,901.07, +26.88 (0.30%)
NASDAQ Volume 1,716,599,625
NYSE Volume 3,701,113,250
Combined NYSE & NASDAQ Advance - Decline: 3483-2956
Combined NYSE & NASDAQ New highs - New lows: 411-81
WTI crude oil: 90.12, -0.56
Gold: 1,572.40, +0.10
Silver: 28.50, +0.006

Stocks Reverse Early Losses, Close Near All-Time Highs

Does it really matter why?

The Dow was down 116 points in early trading (9:45 am ET) after the monthly report on personal income and spending showed a modest (.02%) increase in spending but a 3.6% decline in income, the worst such loss in 20 years.

Futures markets had been pointing to a lower open to the first day of March, and the data exacerbated the condition.

However, stocks began to grind higher, eventually staying positive after turning into the green at noon. The remainder of the session was fairly undramatic, with traders speculating on just when the new all-time highs would be breached.

It's inevitable, no matter how bad the news is.

Meanwhile, the top clowns in Washington - Obama, Boehner, McConnell, Reid and Pelosi (the Fumbling Five) agreed to disagree about the sequester and allowed the cuts to happen, the president taking to the podium to announce the foolishness just before the lunch hour.

The it was off to the golf course for a quick round and afterward, martinis with the "in" crowd.

Ugh. Really, it's that bad.

On the bright side, the number of new 52-week lows has been slowly but steadily rising. Nothing close to parity yet, but it is a trend worth watching. One could make a case that the Dow and S&P might make new all-time highs just in time for a market reversal. After all, the current bull market is entering its 49th week with only one correction of more than 10% (August 2001), and as bulls go, this one's getting a bit long on the hoof.

Additionally, oil finished at its lowest price of the year, hovering just above $90 per barrel. Now, if that trend continues and translates into lower fuel prices, this sequestration idea might just turn out to be OK after all.

At the end of the week, a colleague pointed out this well-researched article which points up the real US debt. And you thought it was just $16.6 trillion.

Dow 14,089.66, +35.17 (0.25%)
NASDAQ 3,169.74, +9.55 (0.30%)
S&P 500 1,518.20, +3.52 (0.23%)
NYSE Composite 8,874.19, +5.48 (0.06%)
NASDAQ Volume 1,869,785,125
NYSE Volume 4,125,383,750
Combined NYSE & NASDAQ Advance - Decline: 3447-2852
Combined NYSE & NASDAQ New highs - New lows: 250-78
WTI crude oil: 90.68, -1.37
Gold: 1,572.30, -5.80
Silver: 28.49, +0.058

Dow Comes Close to All-Time High, Turns Back

Stocks keep grinding higher, but the all-time high on the Dow Industrials - 14,164.53, set October 7, 2007 - continues to be an elusive target, maybe attainable, but hardly one which anybody believes will hold for long.

The general consensus over the past four weeks or so has been that the market was in need of a pullback, to re-test support, before moving to higher levels.

Today's midday action seemed promising, especially when the Dow shot up more than thirty points in a matter of minutes, breaking out of a dull, smallish range and eventually getting to within just 16 points of the record.

Headwinds were blowing from Washington and elsewhere, however, and the Dow, S&P, NYSE Composite and NASDAQ all lost steam in the final ninety minutes, leaving all in the red on the day, the fade from record territory a disheartening sign to traders.

In the nation's capitol, the Senate failed to approve a measure that would have staved off the sequestration cuts scheduled to kick in at midnight tonight which might have been just enough negativity to keep the markets honest - for a change. Prior to the open, there was disappointment in the second estimate of 4th quarter 2012 GDP, which improved from -0.1 to +0.1, though the restatement was hardly enough to inspire any kind of confidence. Stocks limped through the morning session without much in the way of direction.

A number of stocks also kept the market in check. Following Wednesday's close, JC Penny (JCP) posted another in a series of horrifying quarterly reports, falling nearly 17% on Thursday. The much-ballyhooed turnaround by Apple wunderkind Ron Johnson has failed to materialize, the CEO admitting that he had made mistakes along the way, surely the understatement of the day, though he should be lauded for his honesty, albeit a bit late.

Wal-Mart (WMT), the nation and the world's largest retailer, continues to show signs of struggling, hovering around 70/share as Bloomberg released a story based on minutes from an officers' meeting that said the giant is having trouble keeping stores' shelves stocked with merchandise.

Somehow, there just seems a certain disconnect between the US economy and the US stock markets. Obviously one does not equate directly to the other, but with unemployment around eight percent, an enormous federal deficit, gridlock in Washington and an all-time high in food stamp recipients there seems to be no good reason for stocks to be at all-time highs except for no other reason than the liquidity-driven rally fomented by the Federal Reserve since 2009.

Stocks may or may not reach new highs in short order, though from the looks of things on the ground, it's certainly not cause for celebration by the masses and surely does not seem a sustainable condition.

Any trader worth his or her chops should probably be shoveling in physical silver and gold by the bucketfuls, as both are hovering near five-month lows.

Dow 14,054.49, -20.88 (0.15%)
NASDAQ 3,160.19, -2.07 (0.07%)
S&P 500 1,514.68, -1.31 (0.09%)
NYSE Composite 8,868.72, -6.61 (0.07%)
NASDAQ Volume 1,909,055,500
NYSE Volume 3,801,066,000
Combined NYSE & NASDAQ Advance - Decline: 3204-3212
Combined NYSE & NASDAQ New highs - New lows: 308-46
WTI crude oil: 92.05, -0.71
Gold: 1,578.10, -17.60
Silver: 28.40, -0.548

Forget the Sequester; Bernanke Has All the Cards (and all the money)

Nothing like a couple of days in the woods - away from the Sturm und Drang of the neo-rational markets and shrieking media pundits - to offer a bit of perspective on not only the economic realities of the day, but the human condition in general.

What appeared to be the inevitable swoon the naysayers have been long-hoping-for on Monday, with markets taking their most violent downturn of the year, was quickly overruled on Tuesday and absolutely trumped and superseded with the third-best gain (on the Dow, at least) of the year on Wednesday.

Not that there wasn't a good share of associated nonsense and rationale for each of the directional market moves, but, in the end, it was a wash and a win for the erudite chairman of the Federal Reserve, Mr. Ben Bernanke, who availed himself of the opportunity to alternately receive and give both praise and chiseled criticism to both chambers of Congress in his annual Henry Hawkins testimony and the adjoining question and answer periods. We rest assured that the Chairman is content that not only are his policies of ZIRP and QEternity the correct ones for the US and global economies (because as goes the US, so goes the world at this juncture), but also that he has convinced most members of congress that they are working. Besides, there's nothing the congress nor the president nor any other person or assemblages can do about said policies, right, wrong or otherwise.

He is, for all intents and purposes, master of the financial universe. So be it.

Noting the chairman's unadulterated power to influence and control the economics of the world, skeptics still advertise their discontent, brining up the untidy details of the unwinding of his easy money regime, but this argument is a chimera, a cloak for ineptitude, a misunderstanding, a falsity, an impotent attempt to fleece power from the unbridled king of money, because the chairman and his cronies at the Fed are not at all concerned with unwinding anything. Their policies will remain in effect until the next chairman and governors are appointed/elected, and then such unwinding - if there ever is one at all - will be their problem.

For the rest of us, who do not enjoy the luxuries of appointments or elections, but rather suffer the daily slings, swings and arrows of outrageous fortune (or misfortune), a plan is a necessity, though those offered by the shysters and criminals populating the financial services industry might not always be in our own self-interest, if only because they contain the notion of conceit that markets are always optimized and correct, risk is always contained and humans always make rational decisions.

History will prove all three of those basic financial tenets absolute falsehoods. That is why we have booms and busts, successes and failures, joy and tears. Existence is not guaranteed and a fruitful existence is only attainable at some others' expense, such is the basis of capitalism.

So, a note, as the congress and the president sit upon their fattened hands awaiting the monster of their own creation - sequestration - which commences on March 1st, but in reality is more a boogie-man-in-the-closet apparition than an actual threat to the economy, especially on a local, individual, human level. It's something on the order of a two percent cut in the discretionary budget - domestic programs (not welfare, Social Security Medicare or Medicaid) and defense spending - thrown against the background of a baseline budgeting process which automatically increases the spending on these programs by three to ten percent in the upcoming continuing resolution process (which has displaced the budget process for five years now) due to commence by mid-March. In effect, the sequester is a non-sequitur - it is utterly meaningless.

Still, a plan one must have for the Ben Bernanke era, so make one, and make sure it includes not buying a new car unless you are willing and able to pay for it in cash or can get 0% interest for the life of the loan (hey, the banks get that rate, why not you?) which should be no longer than five years. Your plan should also include the paying down or clipping up (or maybe both) of all your credit cards except one for dire emergencies, unless you have $10,000 or more in cash safely hidden away in your back yard or sock drawer (though a safe would seem a more prudent place).

Those are the starting points, but check to see if you are playing more than 1/3 of your net income (after taxes) on housing. If you are, move. Downsize. There are plenty of deals available at excellent prices, even though the housing market in many places has yet to bottom.

And here's something that bugs the heck out of some people: It doesn't matter if you make $20,000, $200,000 or $2,000,000 a year. Spending four to five dollars on a cup of coffee is stupid. Stop it. Put Starbucks out of business. And stop all the other dumb, extravagant, ludicrous things like lottery tickets, day spas, dining out and "entertainment." Well, you don't have to stop them altogether, just be sensible about your spending. A very wise man (my father, RIP) once said, "it's not how much you make, but how much you spend." That kind of depression-era advice can go a long way these days (since we're in another depression but don't really know it. Shhh... the banks are faking it).

Remember at all times that financial news - even news on specific stocks - is marco-news, and, thus, will have little effect on your own personal condition.

Save. Don't invest. Save 5-10% of your gross income and put it into cash or physical gold or silver or tangible assets which will hold their value no matter what (a tough find).

Grow yourself some herbs, fruits or vegetables. Seriously. There's nothing like the taste of something you've nurtured from seed or seedling or sapling to a ripened delicacy. And, it's relatively easy. Nature does most of the work. Wall Street has nothing that compares to the return you get from a handful of seeds, sunshine and rain. Beyond that, you will be the envy of your neighbors, who aren't nearly as smart or thrifty or nature-loving as you. There's something to be said for that.

All hail the great Bernanke! Amen.

Dow 14,075.37, +175.24 (1.26%)
NASDAQ 3,162.26, +32.61 (1.04%)
S&P 500 1,515.99, +19.05 (1.27%)
NYSE Composite 8,875.33, +109.15 (1.25%)
NASDAQ Volume 1,726,024,500
NYSE Volume 3,911,747,250
Combined NYSE & NASDAQ Advance - Decline: 4528-1799
Combined NYSE & NASDAQ New highs - New lows: 252-38
WTI crude oil: 92.76, +0.13
Gold: 1,595.70, -19.80
Silver: 28.94, -0.317

Market Message: Buy the Dip

Lemmings that they are, the traders and their algo-infested computer programs did what all good followers do, they followed the lead set down by the futures market prior to the open and bought stocks all day long, erasing a good portion - more than half - of the losses incurred over the past two sessions.

It being Friday and options expiration, all the boys and girls will be out having champagne and lobster in lower Manhattan tonight.

Today's results do not imply that all's right with the market, though an amazing disparity can be seen on days in which program trading is the norm as opposed to humans actually taking a hand in making bets, as was the case on Wednesday.

The fears inspired by the release of January's minutes were quickly dispelled this morning on CNBC's Squawk Box, as Fed governor James Bullard plainly stated that the Fed was not going to change policy any time soon, as though anyone in their right mind would have believed otherwise.

So, Wall Street is saved and Main Street will continue to muddle through, making the best of customers with SNAP cards and the proceeds from trips to the Coinstar machines.

Silver and gold closed out the week still at bargain-basement prices.

Dow 14,000.57, +119.95 (0.86%)
NASDAQ 3,161.82, +30.33 (0.97%)
S&P 500 1,515.60, +13.18 (0.88%)
NYSE Composite 8,887.40, +77.11 (0.88%)
NASDAQ Volume 1,540,804,625
NYSE Volume 3,463,590,000
Combined NYSE & NASDAQ Advance - Decline: 4713-1718
Combined NYSE & NASDAQ New highs - New lows: 191-42
WTI crude oil: 93.00, +0.16
Gold: 1,572.80, -5.80
Silver: 28.46, -0.239