"So what else have we got--well, there's always the Christmas rally and people were getting in ahead of the crowd. The trouble with that reason is that we've had people jumping on board this rally for quite a while now so that's not a likely reason for today's rally.
There's opex and all the related antics around that. That one's actually not a bad reason since we've seen time and again an effort to drive the market down before opex week, typically the Thursday prior, and even the first or second day of opex week, so that the mega banks' trading teams (those reporting the unbelievably high profits, which put the oil companies' profits to shame) can reap the rewards of buying cheap front-month call options.
As an example of what these guys can do, the SPX 1420 call options could be had for $1.30 on Tuesday. Today they could have been sold for $8.00 for a 6X increase. Not a bad trade, especially if you lay millions on the line knowing you have the buying power to drive the market higher to ensure you'll make a profit (this is part of their "risk-free" trading). And how is it they can be sure they'll be able to drive the market higher? You can thank your friendly Fed for that.
The Fed is stuffing money into the pipeline at a furious rate and the money is given to these primary dealers to "invest". These are the banks like GS, LEH, and BSC who are making the obscene profits and this whole system was set up for the banks back in 2002 out of fear the major banks were in severe financial trouble (JP Morgan was rumored to be close to insolvency at the time). The Fed and SEC certainly took care of that problem. If it sounds like I'm a tad annoyed at this gross redistribution of wealth (with huge bonuses being paid to these guys for being in the right place at the right time), you're right. At any rate, take a look at this chart of M3:
M3 Money Supply, calculated, courtesy nowandfutures.com
You've seen this chart before and it just keeps getting worse--this is updated as of last Friday. The bold line shows the money supply and you can see that it's increasing at a parabolic rate. Just this year we've seen an increase of one trillion dollars. That's some serious money that's making it into our economy and who knows how much of that has been coming through the primary dealers directly into our markets. The light blue line on the chart shows the annual rate of change and it has been going nearly straight up since about August. When did the monster straight-up rally in the stock market start? I report, you decide. Money is being created at a hyperinflationary rate. This can't end well. Still think the Fed is going to cut interest rates? Don't bet on it.
The Fed jawbones the market about their inflation concerns and you can see why. They're creating the problem. We've got massive bonuses being paid to guys who are playing with the Fed's money in can't-lose trading, and we have a Fed who in my opinion has lost it. They are trying to keep the economy's pump primed in hopes it will alleviate the problem with a coming housing collapse. I don't think it will work and then we'll have all this liquidity sloshing around in the system that will have to be drained at some point. And when the draining starts, especially if the economy is still slowing, our stock market will be in serious trouble and that's an understatement.
I said in today's Market Monitor and I'll say it again, I think it's criminal what the Fed is doing and we will all pay the price for their supreme arrogance. They and our major banks make Enron look like child's play. And now they're all laughing on the way to the bank to deposit their million dollar bonuses. Grrr...
OK, I've vented, thanks for listening."
From Keene Little over at OptionInvestor.com
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