Zeev's Turnips Patch-No Politics (ZEEV)

[Joe Stocks]

"One of my subscribers emailed me after last week’s brief on the government’s Plunge Protection Team (PPT),{Excerpt:http://www.centrexnews.com/columnists/skousen/2002/0726.html) with the plaintiff cry, "Where is the Plunge Protection Team when I need it?" His stocks were falling like everyone else’s and the usual government manipulation of future contracts to buoy up sagging index stocks seemed no where in sight. This is to be expected from time to time, even when the Fed intends to keep the market up--as is currently the case. With a falling dollar, and trillions in national debt and entitlement obligations, even the all-powerful US Treasury has certain constraints. They cannot intervene at will all of the time, but have to save their shots for moments in the markets when their injections of funds will produce a follow-on affect of some magnitude. The Plunge Protection Team can’t carry the market on its own for more than a day or two. At best, they can make it appear as if a rally is happening, hoping that others will jump on the buying bandwagon.

This week, we observed government intervention in a major way. On Wednesday, the market rebounded sharply and gained nearly 500 points (DJIA). Then it fell back on Thursday (almost 250 points) until the PPT intervene during the closing hours in a desperate drive to keep the illusion of an upturn alive. Let’s look at the mechanisms used and why they aren’t working.

The government and its cronies at insider-connected brokerage firms have access to computers at the various stock exchanges and have implemented sophisticated tracking software to monitor the pace of large blocks of futures contracts, derivatives, and shorts. Only a minority of daily transactions are trades by individual investors--the little guy. The majority are done by fund managers, foreign traders, speculators, and the big brokerage houses. The PPT uses its insider knowledge of who is buying and selling large blocks of stock (which normal investors don’t have access to) to track pressure points within the market, such as building margin calls or short contract due dates. When pressures build within a market, relief is sought in a predictable direction, and the manipulators can take advantage of such short-term moves to induce a market reaction either up or down.

For example, in a falling market, numerous hedge players short the market by making an agreement to sell stock to a buyer at the price at which the shares are valued on the date the contract is executed, but with a deferred time of delivery--betting that by the time the delivery is scheduled the price will have fallen and the shorter can buy low and sell at the price already agreed upon. Short players will delay their stock purchases until the last moment if prices are falling (to maximize profits), but if a rally begins, they can be counted on to buy immediately so as to cover their stock position and lock in profits (or minimize losses) before they are left in the dust in the upturn of the market.

I think that is what we saw on Wednesday. With thousands of short contracts coming due from prior week’s betting, all the PPT had to do was start the market upward, and the shorts had to move quickly in order to buy while the price still provided a margin of profit. However, the move failed to engender an overall broad-based rally. It was only a technical rally. The majority of honest players still held onto their suspicions that the economy has more bad news hidden inside.

In addition, there are millions of investors who have already lost a lot of value in their stocks, but have not yet sold. After two years of hearing the financial media hyping the recovery, they don’t believe it anymore. So whenever the market takes a brief jump, a lot of the little guys step in to sell, hoping to salvage some lost profits. Thus, on Thursday, the markets started weak and dropped heavily in the afternoon. Big institutional buyers (working for the PPT) stepped in to buy Dow stock futures in the final two hours of trading in order to force an upturn. The Dow finished the day with a small loss, but other stocks were much further down. One of the signs of manipulation is when the rise in the indexes are not matched by corresponding moves in other non-indexed stocks, in aggregate.

I don’t think this weak recovery will inspire any confidence, despite the constant media barrage of propaganda, selectively quoting only the market optimists. The bloom is off the stock market, and few believe it will return to its glory days for several years. Indeed, the downward forces of excess debt and internal corruption may be too strong for the manipulators to overcome. But these insiders certainly do still have the power to slow down the fall.