The S&P500 continued to march upward, posting an increase of 2.5% for the week. The VIX, or fear, index failed to confirm the rise in prices; instead it is continuing its gradual turn up suggesting that traders are still nervous.
The economic data for the week were mixed, with most of the improvements easily explained by government support programs. Retail sales jumped up 2.7%, but most of the increase was due to the government cash for clunkers program, which has ended. Core producer prices and consumer prices were up modestly higher month-over-month, as expected. Industrial production and capacity utilization–both still dismally low on a year-over-year basis–came in slightly stronger from the prior month. Again, these were pushed up by the government auto credit. Housing starts were slightly below expectations, but improving over the last few months because of the government’s $8,000 home purchase credit. This is set to expire at the end of November. Initial claims came in at 545,000 still stuck at a disturbingly high level.
Technically, the equity market is extremely overbought–and overbought at levels not seen very frequently.
So what’s driving the stocks higher?
David Rosenberg, of Gluskin Sheff and formerly with Merrill Lynch, recently asked the same questions, and this is what he had to say.
Is it the private client? Nope. Stock funds are losing funds while bond funds are enjoying inflows.
Is it the corporate insider? Nope. Insiders have been dumping shares at ratios last seen in October 2007. In fact, last week the ratio of sellers to buyers approached 80 to 1.
Is it corporate buybacks? Nope. Per Standard & Poor’s, stock repurchases were down 72% from a year ago. At $24 billion in Q2, this is the lowest level in recorded history.
David did suggest who might be buying: computers trading with each other, short sellers closing out their losing positions, and some portfolio managers desperately trying to make up for last year’s disastrous losses.
The other possibility? Our government, of course. Paling in comparison to the few $ billion spent on clunkers and first time home buyers is the Fed’s quantitative easing program.
How large is it? Between straight treasuries, agency debt and agency mortgage backed securities, the Fed has committed to printing and spending over $1.5 trillion.
Given that consumers are losing income and credit to spend on buying goods and services, and given that corporations are still cutting capital expenditures, corporate buybacks and dividends, much of these Fed purchases are spilling into the markets–into stocks and bonds and commodities.
And when did quantitative easing begin? Mid March, almost exactly when stocks began their meteoric rise.
In the 1990’s, the Fed’s easy money policy helped fuel the tech bubble. In the early 2000’s, the Fed’s easy money blew the housing bubble to enormous proportions. Today, the Fed is busy blowing another bubble, the last bubble–if this one ends badly, the U.S. dollar and the U.S. government debt market could implode.
Charles Ponzi would be proud.