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Tuesday, October 5, 2010

What is POMO & what does it mean?

So, why did the S&P and Dow recently have its best September in 70 years?

Answer:  POMO  (Permanent Open Market Operations)

What happens in simple terms, is the Fed pushes treasuries onto the banks. The Banks then put money into the market.  When the Fed does this, they pump about $6billion a day into the markets.  This pushes the market algorythms up and all the algorythmic trading then hits the market, spurring an artificial rally.  Real life human investors are not doing this buying.  But the psychological affect is to steer mom & pop investors into the market as ranchers would steer cattle or sheep into pens.  Everyday people investors are called 'fresh money'  If and when enough fresh money enters the markets, the Fed can pump money back out of the markets.

Think of it this way-  You sit at a poker table with 4 other people (banks) who appear to be strangers.  You play many hands.. first you win some hands, then eventually you lose all your money.  Not only were you the mark- the other 4 people (banks) knew each other beforehand and played you for a fool, but none of them had risk - they weren't playing their own money...  they were bankrolled by another entity (the Fed).

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