Zombie Markets Kept Alive by Fed Black Magic

So says Scott Bleier, president of CreateCapital.com, in a scary, fascinating and enraging read.

What's keeping up the stock market? Voodoo monetary policy that we cannot see or perhaps comprehend.

The Federal Reserve practices behind-the-scenes conjuring that keeps alive the malevolent zombie-dead who take fed money artificially keeping them alive and then instead of lending it to small businesses and living people, they invest it and make $millions as they maniacally laugh their way to the banks.

From TechTicker:

Stocks Rally Again But ‘Zombie Market’ Faces ‘Major Risks,’ Bleier Says

by Aaron Task in Investing

Stocks were higher midday Wednesday, putting the Dow on track for a seventh-straight gain while the S&P 500 moved to its highest level in 17 months.

In what's become a familiar pattern, the rally is occurring on low volume and without any of the drama investors have become accustomed to in the past two years. That's good news but it's also a sign of what Scott Bleier, president of CreateCapital.com, calls a ‘zombie market,’ where the vast majority of trading volume is computer driven and occurs at the open and during the last 10 minutes of the session.

Bleier's theory -- which definitely has some ‘conspiracy’ elements -- is that policymakers at the highest levels of government have come to the realization that ‘it's the capital market tail that wags the economy's dog.’

While there's no way to prove the ‘plunge protection team’ is in the market buying futures to make sure major averages stay above ‘critical’ levels, what is true is the Federal Reserve has taken extraordinary measures to aid the financial markets.

By keeping rates at zero for an ‘extended period,’ the Fed has allowed the banks to repair their balance sheets by earning the spread between the fed funds rate (effectively zero) and the ‘risk-free’ rate of return on 10-year Treasuries, which is hovering around 3%. This ‘free money’ trade is a big reason why banks have been sitting on TARP funds, rather than lending them out.

But the Fed's comments about buying mortgage-backed securities are at least as important as the comments about rates, Bleier says. The Fed has pledged to purchase $1.25 trillion of agency mortgage-backed securities. In effect, the Fed is allowing banks and brokers to park their ‘toxic’ assets on the Fed's balance sheet and given the investment community cash equivalents in exchange. ‘They then turn that into investable dollars. They leverage it up and buy stocks, bonds and commodities,’ Bleier says.

While one of many factors, the Fed's MBS purchase program is the single-most important reason why the financial markets have risen so dramatically in the past year, Bleier suggests.

That being the case, the critical question is what happens if, as currently planned, the Fed winds down the program at the end of the month?

Along with raised earnings expectations, this ‘hand-off between a government-supported market and a market that can stand on its own two feet’ is the ‘major risk’ facing the bulls, Bleier says. ‘We have not see any technical signs to bail from this current rally [but] we have got our finger on the trigger.’

Rest assured he is not alone in that pose, another reason the recent move higher is lacking volume and conviction.