This page has been archived and commenting is disabled.
The ONLY Reason Stocks Have Rallied This Month
The Fed
generally claims that it stopped its first Quantitative Easing (QE) program
back in March 2010 and that there were no additional debt monetizations between
then and the announcement of its QE lite program in August.
Yet, as I’ve
proven time and again, the Fed has continued to monetize Wall Street’s debts
EVERY options expiration week since QE 1 ended… proving beyond a doubt that the
Fed’s QE program did NOT actually end in March.
Here’s the
chart of the Fed’s recent actions for those of you who haven’t seen this
before. Options expiration weeks are in bold.
|
Week |
Fed Action |
|
July 22 |
-$8 |
|
July 15 |
+$8.6 billion |
|
July 8 |
+$1 |
|
July 1 |
-$13 |
|
June 24 |
+$175 |
|
June 17 2010 |
+$12 billion |
|
June 10 |
-$4 |
|
June 3 |
+$2 |
|
May 27 |
-$16 |
|
May 20 2010 |
+$14 billion |
|
May 13 |
+$10 |
|
May 6 2010 |
-$4 |
|
April 29 |
-$1 |
|
April 15 2010 |
+$31 billion |
|
April 8 |
+$420 |
|
April 1 |
-$6 |
You’ll note
that the Fed ALWAYS made its largest capital contributions during options
expiration weeks. Heck it pumped
$31 BILLION into the system in April 2010, just ONE MONTH after it claimed QE 1
ended!
However,
since that time the Fed has pumped a total of over $65 billion into Wall Street
on options expiration weeks. On non-expiration weeks the Fed either withdraws
money or makes small money pumps.
This pattern
finally ended in August 2010 when the
Fed failed to pump the system on options expiration week. But then again, why
bother? The Fed was about to announce its QE lite program in which it would use
the interest on maturing securities to purchase Treasuries from Wall Street
Primary Dealers via its Permanent Open Market Operations (POMO).
I realize
that last sentence is a lot to take in. So let me explain how this new QE Lite
Program works before we continue.
During
Treasury auctions there are 18 banks, called Primary Dealers, who are given
unprecedented access to US Debt (Treasuries) in terms of pricing and control.
These are the BIG BOYS of finance including firms like Goldman Sachs, JP
Morgan, Bank of America, Credit Suisse, and others.
During its
QE 1 Program, the Fed bought over $1.0 trillion in securities from these firms.
Its new QE lite program consists of it using the interest and proceeds from the
securities in its portfolio that are maturing to buy Treasuries from the
Primary Dealers via Permanent Open Market Operations (POMO).
In simple
terms, the POMO actions allow the Fed to pump money into Wall Street (by buying
Treasuries from the Primary Dealers) without DIRECTLY monetizing Treasury debt
(the Treasuries had already been issued). The Primary Dealers then take this
fresh capital from the Fed and plow into stocks, forcing the sort of ramp job
we saw last week on Friday.
All told,
the Fed has bought $20 billion worth of Treasuries in this fashion, $11.15 of
which it purchased last week alone. With this kind of weekly money pumping in
place, Bernanke and pals don’t need to continue their “behind the scenes” games
(like the options expiration week money pumps).
Or do they?
Unbeknownst
to most investors, last week Ben Bernanke pumped an additional $11.05 BILLION
into the system ON TOP of the $11.15 pumped via the POMOs. In plain terms, the Fed juiced the system by $20+ billion in a
single week, bringing its liquidity pumps RIGHT BACK QE 1 LEVELS.
If you want
to know why stocks have rallied in the last month, this is THE reason. The
economy isn’t improving and the European Crisis isn’t over. Nothing has
improved. All that has happened is the Fed funneled money into the Primary
Dealers who ramped the market.
This is also
the reason why the latest rally has almost entirely consisted of gap ups: the
Primary Dealers ramp the market and then the computer trading programs take
care of the rest.
In plain
terms, the market is being juiced higher, plain and simple. There is no
fundamental reason for stocks to be rallying. Moreover, we have numerous signs
of a top forming (mutual fund cash levels, insider selling to buying ratios,
negative divergence, etc). Those who choose to buy into the farce of a rally
are going to get what’s coming to them. And when they do, it won’t be pretty.
Good
Investing!
Graham Summers
PS. If
you’re worried about the future of the stock market and have yet to take steps
to prepare for the Second Round of the Financial Crisis… I highly suggest you
download my FREE Special Report specifying exactly how to prepare for what’s to
come.
I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).
Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.
- advertisements -
I confess, I don't quite get this.
You say the dealers 'buy' stocks. You mean to say they take all the risk of the market tanking onto their books with buys at the highs? You mean to say the fed forces them to sell treasuries and then go out and buy the market? Maybe they force their clients to buy too.
How about it? Something not right about the theory.
until we clear them out and get some people who both know the truth and have the courage to act upon it, we're really in the soup.
Who are these people gonna be! Lawyers, Politicians????
By the way this 'Joe Six Pack' stuff is me sometimes. I drink a beer, but I also have much Gold!
"In simple terms, the POMO actions allow the Fed to pump money into Wall Street (by buying Treasuries from the Primary Dealers) without DIRECTLY monetizing Treasury debt (the Treasuries had already been issued)."
What's the difference? The Treasuries still end up on the Fed's balance sheet.
Minor correction. The Fed is reinvesting principal repayments but not interest on its portfolio. By law the Fed is required to pay all interest income (less the operating expenses of the federal reserve banks) back to the treasury. But as rates have dropped, there is massive refi activity within the portfolio which makes a great deal of cash available for POMO.
But when you look at the Fed's balance sheet, you will see that the total isn't rising but the composition is changing. Holdings of treasuries are rising as the holdings of MBS gently fall.
http://research.stlouisfed.org/publications/usfd/page7.pdf
BTW does anyone else here take alarm at the fact that Shalom is now buying TIPS?
Could it be that Shalom wants to reduce the supply of inflation protection available to the public?
Is the game plan to talk the stocks higher and then panic people into regular bonds, lengthen the maturity of Treasury debt, and as soon as average maturity is lengthened enough, they repudiate the federal debt through inflation?
Tips get in the way of the plan.
MrPalladium-
"Is the game plan to talk the stocks higher and then panic people into regular bonds, lengthen the maturity of Treasury debt, and as soon as average maturity is lengthened enough, they repudiate the federal debt through inflation?"
SPOT ON - The heart of the Ponzi !!
Can you imagine the amount of FRNs to pay out if the inflation rate becomes obviously larger than the bogus CPI reports? Hell to pay is an understatement!
"IF"???
When has it ever been otherwise?
OLD COVER
http://williambanzai7.blogspot.com/2010/09/pomo-old-atlantic-cover.html
Seriously, this is research? From your own figures, the net amount the Fed pumped in from April to the end of July was only $28 billion. There were 84 trading days in that period. Since the NYSE trades more than 3.5 billion shares a day, there were at least 294 billion shares traded in that time (and that doesn't include the NASDAQ). That makes an average of less than 10 cents a share. I doubt that moves markets much.
But here's the really damning news: If you do a week-by-week analysis, comparing the S&P close with the Fed's actions, there are only five of the sixteen weeks where the market moved up/down with the Fed's injection/withdrawals. Even if you account for a week's delay in getting the money into the system, there are still only five weeks where the market and the Fed moved the same way. In fact, the weeks of the two biggest Fed injections were actually down weeks for the market. So I hardly think your conclusion that the Fed money is propping up the market is warranted.
Volumes reflect nothing except the turn over of shares from JPM pump desk located in building A to JPM pump desk located in building B while harvesting a few suckers here and there along the way.
I would imagine leverage is a solution to your conundrum. It is permited to at least 10x of the numbers we are discussing. In a "closed" system, to juice stock prices, you need to sell something. Hence, something must be going down as stocks go up. I defy you to identify the assest that is not going down. Here's some help:
http://www.finviz.com/futures_charts.ashx?t=ALL&p=d1
Only thing I see is the $ going down. It's easy to make these, cost of production is low. Maybe I am missing something in those charts.
As to the second issue of timing, you likely need to be less aggressive in your direct read of the week to week action. Further, in the last several weeks it has been particularly noticeable. Yesterday's action was particularly difficult to understand with absolutely zero news (actually giant misses) to move an overbought market up, yet we see over a 1% up move intraday.
Bottomline. I'd like to see what's going down (being sold) to explain what's going up (being bought).
wait a minute... what is the source for this data? All that has been presented here is a table without citation.
I hate the Fed as much as the next bloke, but why am i the first person asking this??
That is a bit brassy on the part of Ben. Its like they think they're a ruling class which need not concern itself with the needs or views of the people., or something.
Dare I say it? If you can identify it as monetization, it is trivial.
The true monetization going on is the stealth monetization. And here is a very good example of it:
Soon, there will be a nationwide ban on home mortgage foreclosures. What I think will happen is that Obama will announce a nationwide ban and establish a United States Mortgage Authority jointly between the Justice, Treasury and HUD. It will be the permanent end of home foreclosures in the U.S.
And even if Obama doesn't do this, it is effectively happening by the states attorneys general. What it means is that the United States has decided to absorb all home mortgage indebtedness in the U.S. This new policy will be extended to renters, and there will be a permanent ban on involuntary deprivations of housing. That's just the world we live in now.
Now THAT is stealth monetization. It completely dwarfs whatever little games it is playing with stocks and Treasury notes, don't you agree?
We are completely changing legal regimes in the U.S. It's happening right under your nose. If we don't wind up with internal passports and work cards, we'll be lucky.
@davidsmith
You musta bin reading JPM's mail..... Great post
David Smith,
That is to presume they have the wit to be that fascist. I doubt it - I work for a major bank and what I can say of the people running the show is that they've haven't the foggiest notion of what they are doing. Their views are based on so many lies - lies they were told in school and which have been endlessly repeated to them over their careers - that what is real has no effect upon them. I'm confident that the people running the Fed and the financial side of the Administration are cut from the same bolt of cloth.
It should also be kept in mind that in addition to being ignorant of reality, they are an amazing pack of cowards. Greedy and self absorbed cowards, but cowards none the less. They will only make just enough decision to get them through the next week or month. Taking over and erecting a dictatorship takes long term planning and carries personal risk...even if they wanted to do it, they simply haven't got the cajones.
Our problem, though, is that they are in charge - and until we clear them out and get some people who both know the truth and have the courage to act upon it, we're really in the soup.
@ Mark Noonan
Thanks for the ballsy comment. It is a subject that has long fascinated me - having spent many years contracting to large financial services organisations for an admittedly decent living - how many complete numpties seem to end up floating to the surface. Some years ago, I stopped that kind of work, and so lost interest - just accepted the fact. However right now, I do wonder what the level of competence REALLY is among our greatest and most powerful. To read statements from our bankers that they "did not understand" the products they allowed their organisations to create seems to beg the question of just what level of dligent stewardship were they actually bringing to their organisations. Hanson, of Hanson trust, years ago used to spot operational and accounting abnormalities on a weekly basis - just by analytical review of the key reporting, and the advance of that enterprise was often said to reflect his astute and arms length management style.
Only yesterday, we hear Wall street and Paris trumpeting their sordid victory fanfare over the conviction and ridiculous, insane sentencing of Jerome Kerviel a one time trader at Societe Generale. Just HOW is it possible that the internal control systems and daily scorecards/dashboards in Soc Gen showed no abnormal concentrations of value, risk or other key metrics? The idiots with the sloping teflon coated shoulders were at the same time braying their ignorance of the unimaginably enormous crimes supposedly fraudulently undertaken by Mr Kerviel, said to be at a stroke risking MORE THAN THE BALANCE SHEET OF THE BANK!!!. Personally, I am as much convinced that he acted alone as I am convinced that the USA can service its debt.
The board should be replaced to a man, and without delay.
Mark ,
I agree with your post wholeheartedly . I see rampant incompetence in corprations and companies dealt with via e-purchases . Quailty control is non existent . I work for a major public corporation, and they seem to not be able to manage thierselves out of a tissue bag . Apathy is rampant in business . Don't even get me started on the likes of Comcast , Sirus radio, or any other business whom farms out assitance lines to India . Corporate America doesn't care . Just keep the bonuses flowing , and we'll stay dumb , no need for real talent or class management skills . Gov't fat cats the same - Keep the lobbyist payoffs coming . Patriotism ??? Whats that , its sooo 1700's. Working FOR THE PEOPLE , hA , what an idealistic joke . Now about that lobbyist payment ? 10,000 shares in "x" corporation .
+1000 You really nailed it!!
If this is true then the Federal Reserve has defrauded those who held long positions in inverse ETF's like DRV, FAZ, SKF, SRS, BGZ, TZA etc have been defrauded of billions by the Fed and those owners they are assisting. This is criminal theft os astronomical proportions
I don't get how this POMO money is getting into equities. The fed buys x-amount of treasuries from the PDs, but the PDs have to pay for the treasuries themselves so where is the extra cash for ramps coming from? Unless the PDs are marking up the bonds/bills that much?
Perhaps as boosts: sudden injections to drive the markets up. Afterwards gradually withdrawing without disturbing the market, might correspond with the sudden spikes up followed by moderate retreats as seen in the graph.
We should all just stop whining, suck it up and take our drawdowns like men. Seriously, though, I think it is becoming more obvious with each passing day of declining volume even with POMO and HFT, that the Fed has become the market. Just like all the one-sided Keynesian bullshit, this too will fail. We are approaching the point of realization where the cognition issues are no longer helping us. The Fed is not larger than the world economy. In fact it is a small and rapidly depleting subset of the also shrinking US economy. When everyone realizes that the superior troops and creative spirit are all that we will have going for us...as long as we can continue to afford the troops.
When the DOW gets back down to 8000, I'm gonna cash in my IRA and take the 38% tax haircut -- time to get outa Dodge...
I'd suggest doing that after it hits 11,000, in about a week.
That GAP UP chart is very interesting.
Thanks Graham and Phoenix CR. Eye-opening and mind-boggling.
Today spot gold really took off shortly after POMO got in gear at 10:00 effin a.m. sharp. I think Brazil and Peru (&PROC) should take notice. Gold might just be the Fed anitdote.
When other Govts start slurpin' the Gold milkshake, I think we're gonna be aware, since the price will go parabolic!
the fed sucks
corrupt bankster scumbags
I can't believe they haven't been shut down
Just a thought,
I'm surprised that China (or A.N. Other anonymous country) isn't using the futures markets to 'correct' the stick markets if they are so out-of-kilter with reality...
(posted elsewhere)
DavidC
Graham, nice work. Wondering what your best guess is to the leverage this 20 billion saw? any ideas? Keep up the good work.
I must disagree... While I don't deny the effects of the Fed's injections, I have to say that from my perspective, it seems that the economy is doing okay. (Plus, with interest rates where they are, a Stock Market PE Multiples of 15+ aren't illogical). Companies are making Good Dough... Lastly, Retail Investors and Corps are sitting on Trillions of cash; Some of that has to seep into the market.
Well, when your choice of beverage is Pabst Blue Ribbon, this is the kind of thinking that shows up after about 8 of them.
Huh...
How do your input costs go up and your customers ability to pay go down (or simply go away) and you are making more "dough". This is the fly in the ointment. All Joe and Jane, ie. the customer, are seeing at the moment are their basics prices going up (commodities being juiced) and their incomes stagnating or going down. POMO is delivering no benefit to >95% of the public.
These "Companies are making Good Dough", making that "dough" in the USA, or are they overseas? I'm thinking a lot of corporate HQs in Delaware are gonna need to triple-up on their security personnel!
wowza. if jane and joe sixpack were net buyers I would cite this as evidence of how they know not what they are doing, but they ain't buyin'. so that just leaves me at wowza.
WTF are you reading? A CNBS press release from 2007?
"Some of that has to seep into the market".
Did something like "acid" seep into your brain?
When did he figure this out? Last week he shorted so if he knew this is the game, what the hell is he doing?
The extent of the corruption in our markets and financial system is mind-boggling, and this article only reinforces my desire to keep my involvment with them to its current level, which is near zero.
I hope we can get more pomo schedules. They are Tyler's best and valuable work for us. Did I say ***k the Fed?
They Fed announces these things...
http://www.newyorkfed.org/markets/tot_operation_schedule.html
The note at the bottom also shows they are not finished:
Gold bitchez - I miss Johnny Bravo
I'm afraid PM's will get hit hard when the market rolls over. Some of this Fed juice must be going into PM's since stocks, bonds and PMs are all moving higher.
Absolutely. A big zag may be in the way of the zig ...
The "end game" is getting a little too easy...
Buying opportunity
Bite your toungue!
I miss JohnnyBravo about as much as I miss my last kidney stone attack, or a good hemmorhoidal flareup.
Have your gall bladder checked as well, pancreatitus hurts too!