Oh yeah....forgot that today is POMO day

That means we are almost assured of a ramp in stock prices going into the close.  If you're day-trading, going long the SPY, or ES E-Mini contracts should be like taking candy from a baby, but keep your stops tight in case someone fat fingers a $100 Million sell order instead of a $100 k sell order.... or wasn't that someone's explanation of the flash crash?  :-)

For those of you who aren't familiar with what I'm talking about, POMO stands for Permanent Open Market Operation.  It is conducted by the Fed, and it has been their primary tool for injecting "liquidity" into the system since March 2009.  In very simply terms, on a POMO day, the Fed buys Treasuries, Agency debt and Mortgage Backed Securities from our friends, the banksters.  They usually do this in pre-determined fixed amounts....anywhere from $2 or $3 Billion, to $40, $50, even $70 billion at a pop.  Pretty cool, huh?

Where does the Fed get this money, you ask?  Well, they simply print it.  That is how the Fed creates money, and POMO's are how they get that money into the system.  The other word for this activity is called Quantitative Easing, and if you've been following my posts, you've seen this term before.  The banks are happy....they've either sold off some of their Treasuries inventory, or they've unloaded some of that toxic crap from their balance sheet, and put it onto the the taxpayer's balance sheet.  The Fed is happy....they've just devalued the dollar a little more, which is Bernanke's overall M.O.  But anyone else holding Treasury bills is getting decidedly unhappier, because their investment is getting devalued right along with the US dollar...this is anyone from the Widows and Orphans fund, to other major Governments like China, Japan and many European countries.

Okay, so now what happens?  Well, our friends at the banks have all of this new cash on their hands, and what do they do with it?  Maybe loosen up their credit facilities and loan it to individuals and small businesses? Oh heavens no....that's too risky.  Nah, we're going to take all of this new money and jam the stock market.  Don't believe me?  Well take a look at this graphic, put together by Chris Martenson over one year ago, as it provides the perfect visual for how Fed POMO activities directly correlate to the meteoric rise seen in the stock markets during the same time frame.  For more from Chris on this topic, please click on the following link - http://www.chrismartenson.com    

-click to enlarge-

The above chart only shows the Fed POMO activity through August 2009, but POMO's continued through March/April of this year, and this is what I was talking about in a previous post when I said that the Govt. tit had been taken away.  Once the Fed stopped printing money ahem, injecting liquidity, the markets started to fall.

Just recently however, Bernanke and the Fed came back out and said that they would be recommencing POMO activities, now through the end of November, but on a limited basis - only buying Treasuries.   Though not nearly as much liquidity as was provided last year (some call it QE Lite), POMO days like this are still putting enough money in the bankers hands for a probable last hour ramp to close stocks green on the day.   Dave Fry at TheStreet.com recently posted on the phenomenon as well [click here for more], and guys at Zerohedge.com have been highlighting this for over a year as well.  See here [http://www.zerohedge.com/article/feds-ust-pomo-pyramid-scheme-exposed and here http://www.zerohedge.com/article/tradition-mindless-stock-ramping-fed-pomo-days-back lest you think that ol' SingleMalt has been taking a mid-day nip. 

For those of you who really have some free time on your hands, the Fed is required to make public all of their POMO activity, and you can view it in all of its glory by clicking here: http://www.newyorkfed.org/markets/pomo/display/index.cfm

Oh, one final note - more POMO fun to come on Thurs.  Enjoy!!

Good luck trading.