Tuesday, November 30, 2010

POMO


With all the market openings in negative territory which then seems to change course, do you wonder if the stock market is being manipulated?

Do you know about POMO?

POMO (Permanent Open Market Operations) is an action by the Fed to buy Treasury bonds from, in this case, their Primary Dealer network. As a result, stocks immediately ramp higher... even when there is bad news, or bad financial reports, etc., in which a non-manipulated stock market would normally tank. (read more at TheStreet)

The bottom line here is that it appears that the markets are in full financial engineering mode whether it's via the Fed or companies with high cash balances buying back shares. Stock prices are also inflating. It is said that retailers won't be doing any great things until housing issues are resolved (foreclosures and such) and employment conditions improve. Until then, businesses are mainly just cutting costs and beating their estimates without growing measurably.

Take a peek at what the Fed is buying...
POMOs: Treasury
The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

Are you aware of how many people have already gotten out of the market? Many small investors have already cashed out - either because they needed the money or because they don't want to get burned from another huge stock market downturn (which many are expecting). Some people are withdrawing their money from their IRAs, and paying the penalties and taxes, because they believe that taxes will increase so much more in the coming years that withdrawing now could actually preserve their assets in the long run. Some are taking their dollars and buying gold and silver, and even land, as a hedge against the expected inflation. Certainly there are many different financial strategies being executed, but bottomline is that folks are trying to preserve their assets and their future buying power in any way they can.

Mutual funds have the lowest cash level on record, and have experienced 29 consecutive weekly outflows. (The graphs in the link are worth a look)


Question is ... how long can the Fed prop up the stock market?
It could very well, get very ugly, very soon.

1 comment:

Eric Holcombe said...

"Some people are withdrawing their money from their IRAs,..."

Check.

"...and paying the penalties and taxes, because they believe that taxes will increase so much more in the coming years that withdrawing now could actually preserve their assets in the long run."

Check.

"Some are taking their dollars and buying gold and silver..."

Check.

"...and even land..."

Soon to be checked. Land with it's own water supply, timber, pasture. Now if only Conservative Republicans like Lamar Alexander weren't working to make being self-sufficient illegal...