What's Fueling The Stock Market?

(Hint: It isn't fundamentals)

The run-up in the stock market (the SPX for purposes of this article) has been nothing short of stunning. Since hitting a sell-off bottom on October 4, 2011, the SPX has run-up a nearly non-stop 47.8%. In just the last month, the SPX has run up 7.5%. This is in the face of deteriorating economic indicators and declining corporate revenues. The stock market has for sure taken most observers and professionals by surprise, except for maybe the most passionate "perma-bulls."

Given this incredible move higher in stocks, I wanted to investigate a couple of possibilities for what is fueling this near-parabolic stock rally. Based on what I've been able to come up with, it's pretty clear that stocks are rocketing higher on Fed fuel and not fundamentals. But don't take it from me, it seems that some high profile billionaire investors are unloading their big positions, especially anything related to consumption:  Billionaires Are Dumping Stocks.  Let's take a look "under the hood" of the economic and financial system and see if we can figure out why.

While Bernanke was giving his report on the economy and monetary policy to the Joint Economic Committee of Congress today, in which he pretty much laid to rest any fears that the Fed would "taper" its monetary policy and bond purchase program anytime soon, I decided to look into some of the Fed's monetary data as reported on the  St. Louis Fed website.  Specifically I wanted to look at the Adjusted Monetary Base, which is the sum of the currency in circulation plus the commercial bank reserves held at the Fed, because this monetary account is the one directly affected by the QE program.

Here's the most current snap-shot of the Monetary Base going to back to 1984, when the data-series began:

 (click to enlarge)

Close to $2.8 trillion in money has been printed and used to purchase assets from the banking system, ranging from highly distressed toxic waste to short-term Treasury notes.

Next I decided to "blow up" the chart above and look at just the last twelve months and compare it to the same time period for a chart of the S&P 500:

(click to enlarge)
(click to enlarge)

As you can see, there is nearly a 1:1 correlation between the near-parabolic growth in the Monetary Base since the end of November 2012 and the near-parabolic trajectory of the SPX since mid-November (marked by the vertical red lines). I don't have time to run the data, but my University of Chicago B-School training visually tells me that the correlation is probably around .8, if not higher, meaning 80% of the move in stocks since November can be attributed to the increase in the Fed's Monetary Base.

Without doing a data dump of recent corporate earnings reports, we know that regardless of the net income being reported (net income being potentially subjected to many forms of GAAP accounting manipulations), that the revenues being reported by the largest of the SPX companies are flat to down. This is not the sign of an economy that is capable of growth and true earnings expansion. To give one example, Caterpillar (CAT) recently reported its April revenues. Globally sales were down 9% from March, but they were down a shocking 18% in North America:  CAT April revenues.  This is primarily heavy machinery related to construction and homebuilding. If CAT's sales are plunging like this, it means that construction and homebuilding are likely getting ready to drop pretty hard.

My point here is that economic and corporate fundamentals are not supporting the rapid move higher in the stock market and the concomitant rapid expansion in the market values of individual companies. To reinforce this point, I wanted to show a chart that I sourced from Zerohedge, which maps out the accelerating decline in the per share operating income of the S&P 500 over the last 12 months:
(click to enlarge)

In other words, based on economic and corporate earnings reports which are suggestive of a slow down in the economy, combined with the fact that corporate operating income is plunging, there can be no doubt that the run-up in the stock market is unequivocally not supported by fundamental factors.

That leaves only the money being printed by the Fed. Wall Street analysts can crow all they want about how the economy is improving and corporate earnings will improve, but the proof so far is in the numbers, which show that just the opposite is occurring.

Moreover, Fed officials can talk all they want about tapering QE, but if you look at their actions based on the recent move in the trailing twelve month Monetary Base above, not only are they not tapering, they are actually increasing the rate at which they are injecting liquidity into the banking system. In my mind, at least, there can be no doubt that the money being printed by the Fed is what is fueling the stock market.

Now we can debate whether or not the Fed is serious about "tapering" its printing. But I have no doubt based on the evidence I presented today that if the Fed were indeed to "taper," the stock market suffer a serious and rapid decline.

The real question now is for how long can this stock market "melt up" last?  No one can possibly know that answer for certain, but at this point buying stocks right now is not about analyzing fundamentals and value, but more akin to playing stock market roulette. Anyone who has been fortunate enough to take advantage of being long the stock market should seriously consider hedging or taking a significant portion of their investment off the table.

Need I Say More...

Lois "I'm Not Good At Math" Lerner - the IRS official who was in charge of the IRS' Tax-Exempt Division - will plead the 5th tomorrow at her Congressional investigative hearing tomorrow (not that this investigation will amount to anything of substance anyway, other than to provide a forum for the Republicans to  grandstand boisterously for the benefit of voters).  Here's the report:  LINK

Good luck to you if you think this country can be saved...

Plausible Deniability

From Wikipedia:  "Plausible deniability is a term coined by the CIA during the Kennedy administration to describe the withholding of information from senior officials in order to protect them from repercussions in the event that illegal or unpopular activities by the CIA became public knowledge."

Now, as it applies to Obama, also from Wikipedia:  "The term most often refers to the denial of blame in (formal or informal) chains of command, where senior figures assign responsibility to the lower ranks, and records of instructions given do not exist or are inaccessible, meaning independent confirmation of responsibility for the action is nearly impossible. In the case that illegal or otherwise disreputable and unpopular activities become public, high-ranking officials may deny any awareness of such act or any connection to the agents used to carry out such acts. The lack of evidence to the contrary ostensibly makes the denial plausible, that is, credible. The term typically implies forethought, such as intentionally setting up the conditions to plausibly avoid responsibility for one's (future) actions or knowledge."   LINK

I work everyday with some very bright people.  Many of them have a higher IQ than me and most of them are more "book smart."  But sometimes it seems like I'm the only person out there who truly understands and sees just how thoroughly and irreparably corrupt this whole system is.

The people running this country in DC and NYC have made a complete mockery of freedom, free markets, Rule of Law and justice. There is no such thing as those principles as they apply to the United States. None. Gone. For anyone to have even a sliver of hope that I'm wrong is just sheer stupidity. There is no hope for this country. Period. It's in 5,000 years of history.  It's not my idea or original view. It's just a fact. All you have to do is think about how you would operate if you were in their shoes and you could basically do whatever you wanted without fear of being arrested or prosecuted. That's it.  I would do exactly what they are doing.

I can understand why people who have kids need to have some denial/hope, but it's just that. Nothing more. They are going to let Obama skate away from these scandals using the good old "plausible deniability." "They" refers to Congress and the public.  And then he'll have to endure a week or two of intense criticism for being "too detached."   And then it will be back to corruption as usual.

And I'm not just bashing Obama.  There are plenty of instances during W's term and during Bubba's term that the same concept applies.  It's not about Democrats vs. Republicans.  There's really not much difference between the two parties in terms of the degree of corruption allowed, enabled and committed.  It is "US" vs. "THEM" - with "THEM" being the people running DC and Wall Street. But then again, I guess it  depends upon what the meaning of the word "is," is.

Ultimate Contrarian Indicator: Gold Is Most-Hated Asset Class

                             
By now everyone who follows the metals pretty closely is aware of the stunning reversal the metals made today after the blatant smash in the silver market at yesterday evening's commencement of global electronic paper futures trading.  A massive number of silver contracts were sold into the Globex electronic trading system, taking the entire market by surprise and wiping out a whole series of stop-loss orders there set below the market.  The silver market was driven down $2.10 (9.5%) in less than 4 minutes.  It was without a doubt  the motivated, premeditated operation of someone who was trying to completely disrupt the silver market.  It was someone who was operating without any fear of being investigated by the market regulatory branch of the Government.

But a funny thing happened.  Once the initial shock had quickly worn off.  The market slowly moved higher the rest of the night.  By 10:00 a.m. Denver time, about 18 hours later, the price of silver was even with its Friday close.  Once that occurred, the market started to quickly run higher in frenzied short-covering.  As I write this, silver is up 2.4% from Friday's close and gold is up 2%.

So what happened?  To begin with, the enormous appetite for physical gold and silver was fueled even more by last night's lower prices.  Large premiums for gold bars, something rarely seen, are now being paid in Asia and India.  We are getting reports of up to 3-week delays for delivery.  But don't take that from me, if you go the Shanghai Gold Exchange website, you'll see for  yourself that no deliveries of gold have been reported for at least 2 weeks.  Unprecedented.  The deliveries are not being reported because the gold is not available to be delivered. Therefore there's nothing to report. This is going to end badly for anyone riding the coat tails of the manipulating banks by shorting this market, because I can guarantee you that they are covering their tracks and likely have shifted to the long side of the trade by getting long physical metal.  Certainly the net short position of the banks on the Comex is as low as its been in many years.

At any rate, I wanted to link an article written by the proprietor of the Acting-Man blog.  This guy lays out the contrarian indicator case for gold and explains why the western Central Banks are so desperate to try and discredit gold and discourage anyone from converting their fiat paper money into gold and silver: 

It is a good bet that if gold had continued to rise in the face of money printing being accelerated all over the world, the inevitable loss of faith in central banks would have happened sooner rather than later. That it will eventually happen is unavoidable – the modern monetary system was fated to self-destruct the moment it was conceived. This is so because central planning and price controls cannot work in the long run, even though central banks are socialistic institutions adrift in a capitalist sea, so to speak.

Here's the LINK.  I highly recommend taking the time to read this short, well-written and documented commentary, as it will shine a bright light on the truth for anyone who was equivocating about fact vs. fiction.

The Sell-Off In The Precious Metals and Mining Stocks Is Just Plain Silly Now

Currently, I don't think it's possible for the media reporting and investor sentiment to get any more negative toward gold. But quite frankly, given the extreme negative sentiment, in addition to the numerous other contrarian indicators I've outlined in previous articles, I have never in my life seen a market set up technically for a big bull move as gold/silver and the mining stocks are now.  - Dave Kranzler, Seeking Alpha:  LINK

Let's be clear here, if I thought the fundamentals of the global financial system were improving in a way that was negative for gold, I would go short gold and load up on stocks and junk bonds.  No question about that.  When I came out of business school in 1991, I was one of two top-10 b-school grads who went into junk bonds. That's 2 people out of about 5000 grads.  No one was interested in junk bonds in 1991.  But I had examined the fundamentals and determined that it was still a valid form of corporate finance.  Recall, Drexel had just collapsed and everyone was screaming that junk bonds were dead.  In fact, 1992 marked the start of a new bull market in junk bonds.

The key to understanding relative value is not found in charts, "technical" indicators, CNBC, Bloomberg News, any Wall Street research, Barron's, chat board, etc.  Realistic and honest assessment and study of fundamentals is nowhere to be found in any of those sources.  None.  Zero.

The key to understanding value is doing your own research, which includes knowing where to look to find the best possible information available.  Since 2002, when I first really understood just how corrupted and doomed the U.S. financial and political system is, I have yet to run into anyone, and I mean anyone, who can answer this simple proposition:

Please tell me - I'm all ears and open mind - how the U.S. Government can possibly start reducing and eventually balance the amount of money of that it takes in vs. the amount of money that it spends - not just on a cash-in/cash-out basis but include the rapidly growing future liability payments connected with Federal pensions, social security and all the legacy entitlement programs.  Then tell me how it can accomplish this feat plus start to reduce the enormous load of Government debt.

Remember, back in 2002 the U.S. Treasury debt outstanding was only about $6 trillion, about 60% of GDP.   Now, it's close to $17 trillion now - about 108% of GDP -  and the economy, inflation-adjusted, has not grown at all since then, especially in relation to the amount of growth in overall debt in system and in relation to the trillions in wealth being consumed by the Government.  Furthermore, the spending deficits were measured in the low $100's of billions.  Every year since and including 2009 the deficit has been over one trillion dollars.  See any trend here?  And notwithstanding the deceptive headlines recently proclaiming that the deficit will smaller this year, the truth is - the cold hard fact - that the Treasury has issued $100 billion of new debt for the first 7 months of this fiscal year - $700 billion.  The trend is still the friend of my fundamental analysis.

Every single time I've presented anyone with that proposition, I get nothing but blank stares.  No can map a solution.  Not only that, but since 2002, the systemic predicament in the U.S. has gotten inexorably worse every single year, especially when you peel away all the deceitful reporting designed to hide the interminably growing problem.   When someone can tell me how the above proposition will not only be accomplished but will be put into definitive action, then I will sell all my gold, silver and mining stocks, go short gold and load up on real estate, stocks and risky bonds.

For this reason - the reason that the fundamentals supporting a significantly higher price of gold than the current manipulated price - gold remains not only the best store of wealth but also, because it is tremendously undervalued in relation to the fundamentals, but the best possible investment.

Have a great weekend and remember:  sit tight and be right.

Obama Is Destroying What's Left Of The First Amendment

     
No need for commentary - in reference to Obama's response to the illegal Press taps that it's his job to "balance" national security and the 1st Amendment:

"That's what every president says. Every president, whether it's Nixon with the Pentagon Papers or George W. Bush with the NSA wiretapping story, every president exerts, 'I'm doing this to keep you safe.' A lot of people in the public, they say that's enough, and they believe it, but the truth of the matter is that it's not enough of an answer in and of itself. That's why there is Congressional oversight of the executive branch. It's not enough just to say we're doing it to keep you safe, because the moment the American people cede that territory, then presidents can do whatever they want."

Here's the CNN video:  LINK

"Give me liberty or give me death"  - Patrick Henry, a Founding Father
   and signor of the Declaration of Independence

Top Constitutional Law Experts: Obama Makes Nixon Look Like An Amateur

                            
For all you die-hard Obama defenders, please note the experts cited in this article are primarily liberally oriented in their views.  Here's some golden truth:  Obama Considered Worse Than Nixon