August 6, 2009
As of today (Wednesday night) the current “bear market rally” continues to surprise people with its longevity. On the other hand, many news outlets, including The Washington Times and CNBC are declaring a “New Bull Market”. There seems to be no shortage of commentators proclaiming that the market indices will continue to climb forever.
Back on planet earth, there is a good deal of commentary about the suspicious activity behind this rally. In my last posting, I discussed the “Plunge Protection Team” or PPT. Rather than repeat all that, for the benefit of those unfamiliar with the PPT, I will quote the handy definition at the Hamzei Analytics website:
Plunge Protection Team has been the “Working Group” established by law in 1988 to buy the markets should declines get out of control. It is suspected by many market watchers that PPT has become far more interventionist than was originally intended under the law. There are no minutes of meetings, no recorded phone conversations, no reports of activities, no announcements of intentions. It is a secret group including the Chairman of the Federal Reserve, the Secretary of the Treasury, the Head of the SEC, and their surrogates which include some of the large Wall Street firms. The original objective was to prevent disastrous market crashes. Lately it seems, they buy the markets when they decide the markets need to be bought, including the equity markets. Their main resource is the money the Fed prints. The money is injected into markets via the New York Fed’s Repo desk, which easily shows up in the M-3 numbers, warning intervention was near. As of April 2006, M-3 is longer reported.
Many of us have looked to the PPT as the driving force behind this rally. News sources have claimed that the rally is the result of money “coming into the markets from the sidelines” — implying that crisis-wary investors had finally thrown caution to the wind and jumped into the equities markets to partake in the orgy of newfound wealth. The cash accumulating in the investors’ money market accounts was supposedly being invested in stocks. This propaganda was quickly debunked by the folks at the Zero Hedge website, with the following revelation:
Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!
Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S.banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer whose net equity was almost negative on March 31, could have some semblance of confidence back and would go ahead and max out his credit card.
Similar skepticism was voiced by Karl Denninger of The Market Ticker website:
So once again we have The Fed blowing bubbles, this time in the equity markets, with (another) wink and a nod from Congress. This explains why there has been no “great rush” for individual investors to “get back in”, and it explains why the money market accounts aren’t being drained by individuals “hopping on the bus”, despite the screeching of CNBC and others that you better “buy now or be priced out”, with Larry Kudlow’s “New Bull Market” claim being particularly offensive.
Unfortunately the banksters on Wall Street and the NY Fed did their job too well – by engineering a 50% rally off the bottom in March while revenues continue to tank, personal income is in the toilet and tax receipts are in freefall they have exposed the equity markets for what they have (unfortunately) turned into — a computer-trading rigged casino with the grand lever-meister being housed at the NY Fed.
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No, real buying is just that – real buying from real retail investors who believe in the forward prospects for the economy and business, not funny-money Treasury and MBS buying by The Fed from “newly created bank reserves” funneled back into the market via high-speed computers. The latter is nothing more than a manufactured ramp job that will last only until “the boyz” get to the end of their rope (and yes,that rope does have an end) as the fractional creation machine does run just as well in reverse, and as such “the boyz” cannot allow the trade to run the wrong way lest it literally destroy them (10:1 or more leverage is a real bitch when its working against you!)
Is it coming to an end now? Nobody can be certain when, but what is certain is that over the last week or so there have been signs of heavy distribution – that is, the selling off of big blocks of stock into the market by these very same “boyz.” This is not proof that the floor is about to disappear, but it is an absolute certainty that these “players” are protecting themselves from the possibility and making sure that if there is to be a bagholder, it will be you.
Many commentators, including Joseph Saluzzi of Themis Trading, have explained how the practice of computer-driven “High-Frequency Trading” has added approximately 70 percent of “volume” to the equities markets. This is accomplished because the exchanges pay a quarter-of-a-penny rebate to High-Frequency Trading firms for each order they place, waiving all transaction fees. As a result, the “big boy” firms, such as J.P. Morgan and Goldman Sachs, will make trades with their own money, buying and selling shares at the same price, simply for the rebates. Those pennies can add up to hundreds of millions of dollars.
I recently came across a very interesting paper (just over eight pages in length) entitled: A Grand Unified Theory of Market Manipulation, published by Precision Capital Management. The paper describes a tug of war between Treasury Secretary Ben Bernanke and the New York Fed, that is playing out in the equities and Treasury securities markets. The authors suggest that if Bernanke’s biggest threat is high long-term Treasury yields (interest rates), the easiest way to prevent or postpone a yield ramp would be to kill the stock market rally and create a “flight to safety in Treasuries” – situation that lowers long-term yields. The paper describes how the New York Fed facilitates “painting the tape” in the stock markets to keep the rally alive. For those of you who don’t know what that expression means, here’s a definition:
An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.
After causing a movement in the security, the manipulators hope to sell at a profit.
Instead of accusations that the PPT is the culprit doing the tape painting during the final minutes of the trading day, we again see a focus on the New York Fed as the facilitator of this practice. Here’s the explanation given in the paper by Precision Capital Management:
The theory for which we have the greatest supporting evidence of manipulation surrounds the fact that the Federal Reserve Bank of New York (FRNY) began conducting permanent open market operations (POMO) on March 25, 2009 and has conducted 42 to date. Thanks to Thanassis Strathopoulos and Billy O’Nair for alerting us to the POMO Effect discovery and the development of associated trading edges. These auctions are conducted from about 10:30 a.m. to 11:00 a.m. on pre-announced days. In such auctions, the FRNY permanently purchases Treasury securities from selected dealers, with the total purchase amount for a day ranging from about $1.5 B to $7.5 B. These days are highly correlated with strong paint-the-tape closes, with the theory being that the large institutions that receive the capital interjections are able to leverage this money by 100 to 500 times and then use it to ramp equities.
As for the all-important question of how the authors expect this to play out, they focus on what might happen at the market close on August 5:
And, while it is a bit early to favor one side or the other, we are currently leaning toward a nervous Bernanke and the need to ramp Treasuries at the expense of equities into August 9. Equities have had more than a nice run and can suffer a bit of a correction. Key will be watching the close on Wednesday. A failed POMO paint the tape close could signal that an equities correction of at least a few weeks has gotten underway.
What we saw on Wednesday afternoon was just that. At approximately 3 p.m. there was an effort to push the S&P 500 index into positive territory for the first time that day, which succeeded for just a few minutes. The index then dropped back down, closing .29 percent lower than the previous close. Does this mean that a market correction is underway? Time will tell. With the S&P 500 index at 1002 as I write this, many experts consider the market to be “overbought”. Fund manager Jeremy Grantham, who has been entrusted to invest over $89 billion of his customers’ hard-inherited money, is of the opinion that the current fair value for the S&P 500 should be just below 880. Thus, there is plenty of room for a correction. The answer to the question of whether that correction is now underway should be something we will learn rather quickly.