This rally is getting to the ridiculous stage. There was a net loss for the week when I last wrote, but that has been overtaken for the markets to reach new highs for the year.  We have the expiry of the September futures and options tomorrow and we could see the start of a correction next week, but don’t hold your breath.

So what is causing this irrational exuberance in the face of the highest unemployment rate since 1982, falling house prices, record foreclosures etc,etc?

Everyone is talking up the market.  Bernanke came out this week and said that the recession is “very likely” over, so of course the market went up.  The US dollar is tanking, gold is soaring, CPI is increasing, wages reducing, yet all is well!  It is the old story, you can fool some of the people some of the time, but you can’t fool all the people all the time.  Lets look below the “robust figures”.

This week retail sales surprised to the up side, increasing 2.7%.  But how much of this was due to the FED’s various stimulus packages?  One commentator says 100% of the increase is due to the FED.  The two biggest factors have been the “cash for clunkers” and the “first home owners grant”.  I was reading an article this morning where a couple received their $8,000 grant and went out and bought a new leather couch, table and chairs, a new bed for their new apartment.  Would they have even bought the place without the grant, if they did it is unlikely they would have spent that extra $8,000.

The cash for clunkers has ended, the first home owners grant is due to finish in November, but already there are calls for it to be extended for another six months. Forty percent of home sales are going to first home owners. The big question is how many people would have bought a new car or house without the FED giving them money to do it?  It will be interesting to see the vehicle sales figures now the cash for clunkers has ended.

From Bloomberg this week Joseph Stiglitz, the Nobel Prize winning economist, said that the US had failed to fix the underlying problems of its banking system, and that the problems at the banks are worse than they were in the 2007 before the crisis. This comment is reinforced by three more banks failing this week bringing the total to 92 for the year.

I am a bear in my outlook, but I am not alone.  This rally is caused but all this cash from various stimulus packages and bailouts being parked in the market. Plus smoke and mirrors to lure the small investor back into the market.  It is working though, I just hope they are nimble enough when the market turns again.