Does Washington Know Something We Don't?

The thing we like most about the markets is the multitude of dynamics that come into play. Economic, monetary, political, global, fiscal, technical, are just a few of the broad based categories that then have several sub-categories to them. We tend to look at it as a Rubik’s Cube that just when you think you have it solved, certain squares change colors.

Today’s investment landscape is as complex as ever. We believe the powers in Washington are a little concerned about opposing dynamics facing them. A slowing economy, falling dollar, and rising inflation are the main suspects that tug at their purse strings from opposite directions. We tend to look at the geopolitical, economic, and social issues facing our nation and think that winner of next November’s election will end up being the loser.

Last week those players rushed to the aid of our anemic stock market/economy and by the end of the week it appeared to have a positive impact. Although the S&P 500 was down 6% for the month of January, the worst since July 2002, it ended up nearly 5% for the week after the Fed cut another 1/2% and the White House agreed to a stimulus package. Recessions have become politically incorrect in these days and times.

These cross currents can leave investors caught in the middle of their own Rubik’s Cube conundrum. Many are staring at retirement around the corner and have watched the price of their home and 401k drop 10%+ in relatively short order. Putting unrequited faith with the crew in Washington seems like a leap?

One of the tools Washington has at its disposal is the Working Group on the Financial Markets, which many investors are unaware of. Better known as the Plunge Protection Team (PPT), the group was created after the stock market crash in 1987. The initial intent was to create a group that would prevent a crisis in the financial markets, like the Long Term Capital meltdown of 1998. Some now believe they also attempt to massage consumer/investor sentiment from a political standpoint.

A Financial Times report indicated that for the first time the Group met in the Oval Office earlier in January. The next week Bank of America announced a $4 billion + buy out of Countrywide Financial. Some did not call that a coincidence. Some also believe that the PPT will step in at opportune times and buy S&P futures to stop the market from falling. They think that their effort forces the investors that are short the market have to cover their shorts quickly pushing the market even higher. Those conspiracists believe that is what may have occurred last week.

So the PPT is just another factor to consider when appraising the markets. With the issues that the Credit Bubble may have manifested this group has their work cut out for them. Balancing the markets, the economy, the currency, and global politics during an election year will sure test the mettle of those leading our economy. Wonder why Greenspan retired when he did? These are the times heroes or scapegoats emerge.