They are just pumping the market again, the S&P is now only 16% below what it was before the Lehman Brothers meltdown!

http://money.cnn.com/2009/08/11/news/economy/bubbly.fortune/index.htm?postversion=2009081203

Stocks: The latest Fed bubble

Are the government programs supporting the financial sector reinflating global stock markets even as economies stumble?

NEW YORK (Fortune) -- The Federal Reserve has spent the past year cleaning up after a housing bubble it helped create. But along the way it may have pumped up another bubble, this time in stocks.

To head off the worst downturn since the Great Depression, the central bank has slashed interest rates while funneling money to banks.

The Fed has mostly won praise for its efforts. The pace of job losses has slowed, and there has been a modest recovery in output.

At the same time, stocks have bounced back with startling speed. Since global markets hit their bottom in March, the S&P 500 has jumped 51% -- even as the outlook for economic recovery remains dim.

"This is the most speculative momentum-driven equity market since the early 1930s," Gluskin Sheff economist David Rosenberg wrote in a note to clients Monday.

Of course, stocks have rallied in part because investors perceive the worst-case scenario -- a 1930s-style Depression -- is off the table. And while the gains have been remarkable, they come after an even bigger decline. The S&P is still down 16% since Lehman Brothers collapsed in September.
But while most people take the rise in stocks as a hopeful sign for the economy, some see evidence that the Fed has been financing a speculative mania that could end in another damaging rout.

Recent weeks have brought huge rallies (http://money.cnn.com/2009/08/06/news/companies/aig.runup.fortune/index.htm?postversion=2009080613) in some of the lowest-quality stocks -- including firms such as AIG (AIG (http://money.cnn.com/quote/quote.html?symb=AIG&source=story_quote_link), Fortune 500 (http://money.cnn.com/magazines/fortune/fortune500/2009/snapshots/2469.html?source=story_f500_link)), Fannie Mae (FNM (http://money.cnn.com/quote/quote.html?symb=FNM&source=story_quote_link), Fortune 500 (http://money.cnn.com/magazines/fortune/fortune500/2009/snapshots/2434.html?source=story_f500_link)) and Freddie Mac (FRE (http://money.cnn.com/quote/quote.html?symb=FRE&source=story_quote_link), Fortune 500 (http://money.cnn.com/magazines/fortune/fortune500/2009/snapshots/3018.html?source=story_f500_link)) that are being propped up by the government and are unlikely to return to health any time soon.

What's more, this year has brought an 80% surge in emerging market stocks, while the dollar has posted a 10% decline since March. A declining dollar and surging emerging markets were the hallmarks of the credit-fueled bull run earlier this decade.

"We have put the band back together on a lot of this," said Howard Simons, a strategist at Bianco Research in Chicago. "That couldn't have happened without liquidity."

Though liquidity is admittedly a nebulous concept, there's no question that central bankers around the globe have poured huge amounts of money into the markets to ease the financial crisis. Given free money, investors' appetite for risk shoots higher and they gobble up stocks.

That's good, except when the outlook for economic growth doesn't seem to support the higher stock values.

"Many observers are wondering whether the strong stock market rebound since mid-March is already a forerunner of the next recovery or simply driven by a reflux of liquidity into riskier asset markets," Deutsche Bank Research analyst Sebastian Becker wrote in a report last month.

Rosenberg, who notes that consumer credit has dropped an unprecedented five straight months, said it's far from clear the recession is over. He says the risk of a market relapse later this year is high.

Simons said another factor that could work against recovery is that short-term interest rates could soon head higher, judging by action in futures markets. That could raise companies' borrowing costs at a time when policymakers have committed to holding rates near zero to restore economic growth.

Fed officials have stressed that they will start to unwind their financial support programs at the earliest sign of inflation. Given the cost of cleaning up after the last bubble, Becker writes that "this time, policymakers are unlikely to remain inactive should they suspect the formation of another asset price bubble."

But it's clear that bankers are loath to pull back on their support for the financial system before it's clear the economy has staged a stronger recovery. And the Fed has a long and painful history of ignoring asset price inflation.

"The central bankers have this textbook belief that the only inflation is the kind that appears in consumer price indexes," said Simons. "They don't believe what they're doing could cause an asset price bubble."
For now, Fed chief Ben Bernanke and other central bankers can console themselves for now with stable consumer price inflation readings in major economies.

But comparing the bankers with a driver pulled over for speeding for the umpteenth time, Simons said, "At some point, you have to say maybe your speedometer's broken."

Sooner, or later the artifiicial buying of stocks, and pumping up value will end.

This is all fluff, and will not go anywhere but down.

They did the exact same thing in the 20's and the result was the great depression, just wait kiddies this ones gonna be better, so buy lots of ammo, and supplies, your gonna need em.

http://www.ft.com/cms/s/0/2559e768-88f0-11de-b50f-00144feabdc0.html

A rally with troubling aspects

US stocks have risen almost 50 per cent from their lows in March, a turbo-charged performance that ranks as the best post-war market rebound.

Five months and counting since the lows in March has the S&P up 49 per cent, eclipsing the 43 per cent rally reached 105 trading days after the lows of August 1982.

Investors in other established equity markets have also enjoyed big rallies from their March lows.

Japan’s Nikkei 225 index has bounced 50 per cent, London’s FTSE 100 climbing 36 per cent and the FTSE Eurofirst 300 as much as 45 per cent.

Emerging market equities have recorded bigger rises with investors banking on stronger growth outside the US and particularly in Asia.

Hong Kong is up 85 per cent from its March low while Brazil has rallied 57 per cent.
The nature of the US economic recovery and the behaviour of the consumer hold the key as to whether the 2009 rally continues.

By June 1983, 10 months after the market bottomed, the S&P was sitting on a gain of 67 per cent and it would keep climbing until the great bull run of that era peaked in August 1987.

Based on data compiled by Mizuho Securities, the S&P’s current rise is more than double the average 22 per cent gain seen during the first 105 days of a post-war bull run.

That has left the S&P 500 valued at 18.6 times the profit of its companies – the highest valuation since 2004. The index is now up 11.7 per cent so far this year but remains 35 per cent below its record high in October 2007.

There have been signs of consolidation this week with sentiment taking a hit from poor retail sales data and weak consumer sentiment. Some warn the rally may have run its course for the time being as it is already pricing in a lot of good news.

“An analysis of past US recessions and recoveries suggests the rally could run out of steam soon,” says John Higgins, senior market economist at Capital Economics. “Most of the re-rating of the stock market that we would usually see prior to – and in the early stages of – an economic recovery has already taken place.”

One troubling aspect of the rally is that, from a historical perspective, equity volatility remains elevated, with the CBOE’s Vix volatility index showing a reading of about 25. Before the credit squeeze in the summer of 2007, the Vix rarely rose to more than 20.

There is also concern that the strong run has largely reflected short sellers reversing bearish bets on stocks.

According to Bespoke Investment Group, the average stock in the S&P 500 had 4.97 per cent of its float sold short as of the end of July, the lowest level since January 30.

“It’s not just a short squeeze, when the market goes to 1,000 from 660,” says Bill Strazzullo, chief market strategist at Bell Curve Trading. “There has been some sign of improvement in the economic data and overall sentiment while investors have also started chasing the rally.”

Low summer trading volumes are a cause for concern. Daily share volume on NYSE Euronext has not been above 2bn since June 25 and, in recent weeks, is behind April and May.

“I would like to see better volumes – it’s hard to put faith in this rally when volumes are low,” says Jim Paulsen, chief investment strategist at Wells Capital Management. “It’s the missing ingredient – and I think buyers are waiting for a bigger correction before they enter the market.”
Others reply that retail investors have not yet joined the rally.

Carmine Grigoli, chief investment strategist at Mizuho Securities, says equity inflows since the market bottomed in March total $47.3bn, less than the $60bn liquidated during the three weeks before the stock market turnround: “We have yet to see the widespread optimism and the high levels of public participation that usually occur in the early stages of new bull markets.”
For that to occur, bulls are waiting for economic expansion to flow directly into company earnings. Mr Grigoli says: “The profit turnaround may be at hand.”
Based on the bank’s calculations, quarter-to-quarter earnings and revenue growth turned positive during the second quarter.

As the second-quarter earnings season fades, cost-cutting helped many companies exceed lowered estimates. Almost three-quarters of S&P companies beat estimates but many recorded revenue shortfalls.

That disturbed some analysts but the market appears to be betting that lean and mean companies will prosper when the economy rebounds.

Economists forecast expansion in the third quarter, the economy having fallen in the previous four quarters and enduring its longest decline since 1947 when records began.

The rebound is based on restocking of inventories but, once that is complete, there are concerns about sustainability of growth in 2010 as the consumer remains burdened by high debt, rising job losses and sharply lower housing prices. This week, the Federal Reserve highlighted the expectation of “sluggish income growth” in its latest policy statement.

For the time being, the equity market bets on the strength of the recovery – but Mr Strazzullo says technical factors are driving stocks. “The money trade right now is the March rally, it’s a momentum play and not based on a fundamental change ... Between 1,100 and 1,150 [on the S&P] is where we think this rally will top itself out.”