IS UNCLE SAM MANIPULATING THE STOCK MARKET?

ARE A FEW LARGE INVESTMENT FIRMS FRONTING FOR GOVERNMENT INTERVENTION?

The Author came across a very fascinating report prepared by Sprott Asset Management, a Canadian investment firm. The report is entitled “Move Over, Adam Smith: The Visible Hand of Uncle Sam”. The report was written by John Embry and Andrew Hepburn and is dated August 2005.[i]

The thesis of the article is that since the October 1987 stock market plunge, the US government has intervened in the stock market on several occasions to prevent a large stock market drop. The article cites several situations where a shadowy group called the “Plunge Prevention Team” has interfered with the stock markets and intervened to prop up prices. The article addresses incidences of market manipulation in 1987, 1989, 19992, 1998, 2001 and 2003.

The existence of the Plunge Protection Team (PPT), comprised of government agencies, stock markets and large investment firms, was first publicly revealed by former Clinton aide Gorge Stephanopoulos on Good Morning America in 1998. Stephanopolous also stated that the mission of the PPT went beyond the equity markets and that in response to a potential global currency crisis, the Federal Reserve directed large banks to prop up currency markets.[ii]

THE PPT TO THE “RESCUE”?

The first indications of the PPT came back in October of 1987. On “Black Monday” (October 19th), the Dow Jones Industrial Average fell 22%, from 2246 to 1738, 508 points. The following day, a morning rally of 200 points reversed and by 12:30pm, the market has fallen to 1711. And then a strange thing happened on the Chicago Board of Trade.

“In the space of about five or six minutes, the Major Market Index futures
contract, the only viable surrogate for the Dow Jones Industrial Average
and the only major index still trading, staged the most powerful rally in its
history. The MMI rose on the Chicago Board of Trade from a discount of
nearly 60 points to a premium of about 12 points. Because each point
represents about five in the industrial average, the rally was the
equivalent of a lightning-like 360-point rise in the Dow. Some believe that
this extraordinary move set the stage for the salvation of the world’s
markets.

How it happened is a matter of much conjecture on Wall Street. Some
attribute it to a mysterious burst of bullish sentiment that suddenly swept
the markets. Some knowledgeable traders have a different interpretation:
They think that the MMI futures contract was deliberately manipulated by a few major firms as part of a desperate attempt to boost the Dow and
save the markets.

According to this theory, the rally in the MMI futures contract was caused
by a relatively small amount of concerted buying by one or more major
firms at a time when it was so thinly traded that the orders had an
enormous and disproportionate upward thrust. By forcing the futures
contract to a premium to the underlying cash value of the index, the buyers
of the futures could trigger immediate buying of the stocks in the index
and selling of the futures by index arbitragers. Because so many of the
MMI stocks are in the Dow, this would enable the NYSE to reopen many
of these stocks at higher prices, leading to an upturn in this
psychologically important index. At the very least, the buyers could flash
a powerful bullish signal to the markets.”[iii]

THE VISIBLE HAND OF UNCLE SAM MAY BE IN THE BEARS’ POCKET

The Sprott Report details other activity of the PPT. And it speculates that such manipulation is frequent and ongoing, according to the following quote:

“Displaying markedly low volatility, the Dow hovers comfortably above the 10,000 mark. Yet with severe trade and budget deficits, rising interest rates and stubbornly high oil prices, the reasons to be bearish on U.S. equities are numerous. Strangely, the market has an uncanny ability to maintain its footing when serious declines threaten. Given the historical backdrop of U.S. government activity in the market, this curious trading that market intervention
continues and has actually increased in intensity.”[iv]

DESPITE LIVING IN A “CLASSLESS SOCIETY”, THE POLITICALLY POTENT ALWAYS “OUTCLASS” THE AVERAGE INVESTOR

The Sprott report authors conclude by stating that while there may be situations that require intervention, the PPT, operating without public oversight, is an inappropriate method for intervention or interference. The authors also note that the Wall Street firms that front this manipulation have an unfair advantage over competitors. The PPT is compensating these firms in some manner, whether it be indemnification for losses or with non-public information, or both. And with the rampant crony capitalism in the current Republican government, the rewards will be handsome and the kickback political donations bountiful.

The Author believes that markets must operate fairly, freely and transparently. The existence of the PPT undermines these basic market preconditions, and as so often in the current political environment, perpetuates the existence of a privileged class.

YOYOMF in the Desert of the Real!




[i] The Report is available at: http://www.sprott.com/pdf/pressrelease/TheVisibleHand.pdf
[ii] Sprott Report, pps. 29, 31.
[iii] The Sprott Report, quoting: James B. Stewart and Daniel Hertzberg, “Terrible Tuesday: How the Stock Market Almost Disintegrated A Day After the Crash – Credit Dried Up for Brokers And Especially Specialists Until Fed Came to Rescue – Most Perilous Day in 50 Years,” The Wall Street Journal (November 20, 1987).

[iv] Sprott Report, p. 36.