PPT? You lost me.
http://www.fallstreet.com/
July 22, 2002
Plunge Protecting Like Its 1929?
Many American's are dumping their mutual funds, financial 'experts' are
(once again) using the phrase 'don't panic', and seemingly everyone is
hoping that the worst will soon be over. Cue the Plunge Protection Team...
"The Federal Reserve is accountable to no one; it has no budget; it is
subject to no audit; and no Congressional committee knows of, or can truly
supervise, its operations. The Federal Reserve, virtually in total control
of the nations vital monetary system, is accountable to nobody - and this
strange situation, if acknowledged at all, is invariably trumpeted as a
virtue"
M. Rothbard. The Case Against the Fed
What the PPT does (in theory)
Since the Federal Reserve Board is accountable to no one there is very
little hard evidence that the PPT exists. Rather, following the formation of
the Working Group on Financial Markets the SEC created a 'red book' to help
it deal with financial crisis's, and there have been instances when rule
changes rig the futures markets. However, whether or not the SEC is ready to
change rules to prop up the markets (as they did following 9/11) or futures
exchanges are prepared to alleviate the squeeze on some key players are
incidental points compared to that of the larger question: does the Fed buy
stocks?
The story goes that the PPT (Fed) funnels money through different channels
(GS, ML) to buy baskets of Dow stocks and/or S&P/Nas futures. Further,
'unquotable' and 'off the record' insiders insist that the actions of the
PPT are sometimes ridiculously obvious - when the markets are collapsing
with seemingly no hope of a turnaround, suddenly huge buy orders appear.
Plunge Protecting Success (common): The PPT buys stocks and helps create an
illusionary market bottom.
Plunge Protecting Failure (rare): The PPT buys stocks and prices continue to
crumble.
Has The PPT Been Buying?
Even though the markets have dropped during the last 2 months it is unlikely
that the PPT has been overly active. Why? Because the drop has been
methodical and orderly. The last thing the PPT wants is to haphazardly buy
futures only to be 'hung' in a few weeks time.
With this in mind, what The Team tries to do, in theory, is ensure that
panic selling is undertaken in an orderly fashion (as absurd as this
contradiction may sound). As such, last Friday's bout of semi-panic selling
could have been the wake up call for napping PPT members who last helped
orchestrate a bottom in the markets following 9/11.
The 1929 'Protectors'
"In the very midst of the collapse five of the country's most influential
bankers hurried to the office of J.P. Morgan & Co., and, after a brief
conference, gave out word that they believed the foundations of the market
to be sound, and the market smash has been caused by technical, rather than
fundamental considerations, and that many sound stocks are selling too low."
October 24, 1929. New York Times
As the markets crumbled in October 1929 J.P. Morgan and others began to meet
in secret quarters and make daily announcements that stocks were cheap and
that they were buying. One could argue that J.P. Morgan, the so-called
'lender of the last resort' before the Fed was created, was the ringleader
of the 1929 version of the PPT:
"So confident were leading bankers that prices were reaching bottom that
they reduced margin requirements for demand loans to brokers from 40 to 25
percent. Members of the banking pool formed last Thursday, when the selling
movement reached alarming proportions, again met at the offices of J.P.
Morgan & Company, and it was learned that huge buying orders were thrown
into the market to absorb selling on the way down and keep the decline
orderly."
October 30, 1929. New York Times.
Realizing that the stock market fallout lasted through 1932 the investor is
reminded of one truism: no team of Plunge Protectors is infallible. For
certain, there comes a point when intelligent and powerful would be
'protectors' begin buying stocks based upon the notion that falling stock
prices represent an unacceptable risk to the financial system -- not
necessarily because current market prices reflect immediate
'undervaluation'. It is at such a point when the delusion takes full hold -
or when the protectors become active investors in falling stock markets.
"Neither assets nor earnings, large as the earnings have been in many
instances, warrant the market valuations of hundreds of stock issues. There
has been an inflation not free from the charge of criminality, and which has
been brought about by misrepresentation, and in many instances dishonest
salesmanship. Many corporations have responded to the hysteria and
inflationary spirit, and have increased their stocks issues without reason
and without justification, expecting to unload them, as unfortunately has
been done, upon a credulous, hysterical, if not intoxicated public. It was
inevitable that a day of reckoning would come.
.brokers and some bankers and credit organizations have joined in the credit
"joy ride" of speculation. They and others must beware lest the catastrophe
continue and the limits of the graveyard require enlargement."
Senator King, October 25, 1929, New York Times
The above quote sums up the dangers the PPT faces when they decide it is
time to stop stock prices from falling. Indeed, there comes a point when
saving a stock market for the sake of saving the stock market is the wrong
choice to make. Rather, the more prudent alternative for protectors is to
sometimes allow supposedly free markets to fall free of intervention, and to
force stockholders who hold nothing more than blind faith to exit
ungraciously. After all, the PPT's mandate is to help create an illusionary
market bottom - the illusion only becomes real if others join in and buy.
Conclusion
If the Dow crashes the PPT will try to brace the fall. If they are
successful life will go on and a new near term bear market 'bottom' will be
formed. However, if they fail the PPT will have only have prolonged, in
Senator King's words, 'the inevitable'.
Will the PPT be buried alive? To be continued...
"Plunge Protectors must beware lest the catastrophe continue and the limits
of the graveyard require enlargement."