Thursday, June 01, 2006

REMEMBER THE “PLUNGE PROTECTION TEAM”?

RIGHT NOW THEY ARE MONITORING THIS WEBSITE FOR SINISTER AND UNSTATED REASONS.

In the fall of 2005, the Author discussed an article on the secretive “Plunge Protection Team”. This shadowy group made an odd appearance at a most unlikely place yesterday. (Well, not the Plunge Protection Team members themselves, but a reference to it in friendly, market-related conversation.)

The Author spends many afternoons at the Sandia Heights Four Seasons swimming pool in Albuquerque. It is in an amazing location, about 7,000 feet up, at the base of the Sandia Mountains. It is a pleasant place, not unlike the lakes in Northeast Indiana where the Author spent wonderful afternoons in more Halcyon times.

The Author, always the gregarious sort, has made acquaintance with a few people at the pool. Sometimes we talk about investments. Yesterday, someone stated, and a commodity trader concurred, that the “Plunge Protection Team” would step in to stop a market (or Dollar?) freefall. The Author then stated that he did a post on the “Plunge Protection Team” in 2005 on his blog.

Weird, isn’t it, the Plunge Protection Team popping up in polite poolside chatter? The existence of the Plunge Protection Team is akin to that of Area 51. Evidence demonstrates it existence, but the US government and large financial institutions deny it like they deny the fact that campaign contributions influence legislative outcomes.

The Author has reprinted the post from last autumn and did a quick Google search on the Plunge Protection Team to see if there is anything new. The team has a Wikipedia article, http://en.wikipedia.org/wiki/Plunge_Protection_Team. Here is a link to an article called “Cornered Rats and the PPT”, http://www.eldoradogold.net/cornered_rats_030326.html.

Some question even the existence of the Plunge Protection Team. John Mauldin, a frequently cited author in this Blog, does not believe that the team exists. But the next link would seem to settle that question. http://www.plungeprotectionteam.com/.

Without further delay, below is the earlier post on the Plunge Protection Team.


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 is 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.


[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.

UH, JUST KIDDING ABOUT THE PPT, FOLKS…

Hope you enjoyed this peek into the shadowy world of the PPT. But now you must excuse the Author. There are men in black suits at his door. A helicopter hovers overhead. They tell me that they will gang rape my cats and waterboard my dog in the toilet if the Author does not make a videotaped denial of the existence of the Plunge Protection Team.

IN THE DESERT OF THE REAL, WE DO NOT LIKE OUR GIRLFRIENDS TO HAVE HUSBANDS. IF THEY CAN FOOL THEIR HUSBANDS, THEY CAN FOOL US. (Paraphrasing Michael O’Hara (Orson Welles) in “The Lady from Shanghai”.)

1 Comments:

At 12:47 PM , Blogger lawrence said...

It sure is a good thing that we have a "honest" government populated by "honest" people that just want the best for every American - hey and if you can make a few million while you are being "honest" and playing the game by the inner circle set of rules then so what if small investors are left holding an empty money bag!

 

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