"Mlsoft – wonder what reaction you have to this article by Saville regarding the PPT."
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pstuartb.....
Ah, a discussion about the unknown and unknowable <g>.
"He acknowledges the PPT exists, and that the government intervenes in the bond, currency and gold markets, but he doesn’t think the PPT has been manipulating the equities markets."
I find it interesting that Saville admits to PPT intervention in the currency, bond, and gold markets, yet denies that it ever intervenes in the equities markets when it was the 1987 crash of the equities markets that led to the very creation of the PPT. The Working Group on Financial Markets (better known as the PPT) was established by executive order by President Regan in 1988 to seek ways to prevent financial meltdowns as occurred in the 1987 stock market crash. Most crashes (including 1929) are begun in the equities markets, not the currency, bond or gold markets. For me, logic dictates that their primary focus would be on the equities markets, and I believe that to be the case. When looking for historical precedents prior to the current bear market, it should be remembered that since the formation of the PPT, the period following 09/11 is the first time that the spectre of financial meltdown has occurred.
Saville's wording implies an ongoing "manipulation" in the markets, but I do not believe that has been the case. Instead, I think they have entered the markets on relatively few occasions, usually when a meltdown of sorts appeared possible. Their interventions, with really only one exception, were very brief and lasted only a day or slightly more - the object was to prevent a meltdown by stopping the downside momentum, not to stay in and continue to drive the markets up.
The exception was in the rally following the low of July 24th, which was the only time other than following 09/11 that I felt intervention was truly justified, due to the extreme pressure on the money center banks caused by loan defaults and the Brazilian crisis. The intervention following the 07/24 bottom was different in that the successful initial intervention was followed the next week by a deluge of negative economic news that turned the markets sharply back to the downside before the stocks of the money center banks could recover and before the rescue package for Brazil could be worked out. The PPT intervened yet again to forestall another crisis but this time continued to intervene even after the resulting rally was well underway, presumably to prevent another rapid collapse. This time it worked, and the markets stabilized.
I do not really argue against the interventions by the PPT, as long as its goals remain nothing more than to prevent financial meltdowns and keep market declines orderly. They should never be used as a tool to artificially hold the markets up as part of a political or economic policy, and it worries me that the temptation is great to do just that.
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To answer some of Saville's other points:
"He says “we have seen absolutely no evidence that such intervention has occurred. In our view, those who are pointing fingers at the PPT are misreading the market.”
I disagree, and find far more evidence of PPT equity market intervention than in either the bond or currency markets (the gold market is easily subject to manipulation, and the intervention there has been so obvious as to be ludicrous.) Currencies have been subject to government intervention for as long as currencies have been floating - long before the PPT. That has always been part of the function of the Treasury Department and continues to be so, but since the Treasury Dept. is also part of the PPT, the actions of both are now coordinated. The Treasury Dept. and the Fed both can move the bond market, and again, they did so long before the PPT was formed. The only reason for the existence of the PPT is to intervene in equity markets, not the bonds or currencies, which have always been manipulated when deemed necessary.
Evidence of equity market intervention has been the simultaneous entry of very large buy orders "at the market" in the index futures, the QQQ, and the most important individual index stocks. These orders come in waves, always simultaneous, with the obvious intent of driving prices up, not just owning the securities. The waves always continue until short covering, bargain buying, and the mo-mo traders turn it into a self sustaining rally. It has always been coordinated with an exaggerated ramping of the $USD, and usually with a very obvious take down of gold. It should also not be put off as mere coincidence that each time it has occurred, CNBC talking heads were scratching their collective brains, wondering about the "extremely large, but unknown buyer of futures and option contracts that came in to start the turn around today." Let me think.....
Saville's main points:
"1) during the 70s bear market, stock indexes often rallied in the face of bad news, but there was no PPT back then. Therefore, current bear market rallies are not necessarily attributable to the PPT."
The key words are "not necessarily", and with that I agree. PPT interventions have been relatively few, and most of the rallies have been normal market rallies. There have been times though, where intervention is the only rational explanation for what was happening. I was a broker during the 70's bear market - it was no fun, but the comparison is not compelling. This market is more akin to that of 1929 than the '73-'74 bear.
"2) Even though the PPT has the power to move equity markets, it apparently chose not to after 9/11 because the indexes were allowed to drop to extremely oversold conditions, which was naturally followed by a sizeable rally."
Again, I disagree, and think the PPT entered in full force when the market turned, providing the needed spark at the right time from both a fundamental and a technical standpoint. Had they intervened any earlier, it would not have worked. These folks are not idiots, and many years of currency intervention has given them valuable knowledge about when and how to intervene.
3) The market recently recovered after the worldcom news (the article was written a few weeks ago), not because the PPT intervened, but because the market had already priced in most of worldcom’s problems.
I tend to agree if we are talking about the same time. The WCOM bankruptcy was already priced in and little PPT intervention was required to stabilize the market.
"He also suggests that fund managers routinely manipulate the market in the short term, and I suppose he attributes most defenses of critical inflection points to private funds."
Private funds (hedge funds, institutions, mutual funds) do manipulate the markets short term, but remember they are there to make money, not to commit financial suicide by stepping into a meltdown. They also do not have the financial ability to make such a move, even acting in concert, because their risks would be catastrophic. With the exception of the 07/24 bottom when intervention was easily foreseeable, the funds were probably burned at the turn, but quick response to it allowed should have allowed them to make money.
Sorry for the exceptionally long post, but I hope that explains why I disagree with Saville.
mlsoft
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