Earlier this summer we mentioned the Working Group on Financial Markets, better know as the Plunge Protection Team. We received several requests for information regarding this group and thought we would write about this “conspiratorial” topic in some detail today.
The PPT, we will refer to them by that acronym as many financial professionals do, was created in March 1988 in direct response to the October 19, 1987 stock market crash. That day the stock market lost over 20% of its value and many orders went unfilled because of the break down in market mechanisms. Layer on the S&L crisis that unfolded in the late eighties and fears of another market dislocation was on the minds of many through the early nineties.
Executive Order 12631 dictates that the Working Group be made up of the highest profile money types in the government, explicitly naming: the Secretary of the Treasury, the chairman of the Board of Governors of the Federal Reserve, the chairman of the SEC and the chairman of the Commodity Futures Trading Commission. To make sure this group has the resources to carry out its will, the order further made the Treasury responsible for providing the “support service” it needs-but only “to the extent permitted by law and subject to the availability of funds.”
The PPT received notoriety in the fall of 1998 when the hedge fund Long Term Capital had levered their portfolio to the bond market so extensively there was fear that the financial system might fracture. According to Bloomberg then Fed head Alan Greenspan called the top people in all the major banks and brokerage firms and explained that unless they all assisted by taking on some of the assets that were underwater the markets could be adversely affected. Interestingly Bear Stearns declined to join the 14 other firms in bailing out LTC and that investment bank went away when the government chose not to bail them out in 2008. We wonder if that was a coincidence? We are guessing Goldman Sachs was a contributor to the LTC dilemma as several of their top honchos migrated to influential government jobs this past decade.
It is well known that a buoyant stock market can have a significant impact on investor/consumer confidence and some say that confidence can have an impact on the economy. This is where the conspiracy side of the story comes in for the PPT as they are accused by some of propping up the market and hence confidence levels. It is illegal for even the government to manipulate the markets. With the start of a Secular Bear Market in 2000 the number of conspiracy theorists crying foul has increased.
If you Google Plunge Protection Team you will see a host of folks who will share their “anecdotal” evidence of the finger prints the PPT has left on the stock market. Our anecdotal evidence goes something like this – A key stock market support level is broken and this is often where short sellers will begin to intensify their short sell thinking that stocks are headed much lower. Once the PPT feels enough shorting has been done they come in and buy S&P futures pushing stocks back above the support levels and forcing the shorts to cover. Covering for the shorts means buying stocks and that buying pushes the market even higher which validates the support level as important and to be respected. In essence they have used the short sellers as an effective tool in their work bench. Remember this is all anecdotal.
The “conspiracy theory” gets thicker when you bring politics into the equation. Historically the third year of the Presidential Cycle (the year prior to the election) is the best year of the four for the stock market. The theory goes that the administration attempts to get the economy and hence the markets firing on all cylinders when the campaigning for the next election begins. Obviously the PPT is at the disposal of the incumbent administration and with the importance of this years mid-term election some say they will be put to work. We believe several Democrats have taken bullets for the administration and a buoyant stock market could help their cause at the election booths.
This might sound somewhat stretched especially for those unfamiliar with Washington and Wall St., but is definitely water cooler talk amongst investment professionals. Again there has been no empirical evidence provided by anyone that the government is interfering with the stock market. That certainly would be considered a “moral hazard.” We personally believe the Washington landscape has evolved into one large moral hazard the last couple of decades, but that is another newsletter. We have to admit that with over thirty years of existence that you would think someone with the PPT would have spilled the beans about any illegal actions occurring, but no one has. So it remains a conspiracy theory. Hope this sheds a little light on a topic that we have found few outside the investment arena to be aware of. Again if you Google Plunge Protection Team you will have dozens of other takes on this topic. We personally give it a better than 50/50 chance the Fed is propping up the market when they feel it is for the betterment of the country. The problem is they think it is better for the country if they get re-elected.
Chart Spotlight
If you have been following along this year you will remember we recently mentioned the many cross currents that plague the financial markets. The recent economic reports have been weak at best, while corporate earnings on the whole have been positive. Many of the traditional relationships between asset classes have become blurred or non-existent as evidenced by recent parallel action in gold and the US Dollar. Even chart patterns and their dependable indicators appear to have chosen to play hide and seek as well. We also mentioned the Head and Shoulders pattern being one of the more historically dependable bearish patterns technicians follow. On the flip side an inverted H&S pattern tends to be bullish. Interestingly enough the current S&P 500 chart reveals a short term bullish inverted H&S pattern within a broader bearish H&S pattern. In the chart below we have depicted the upright H&S pattern with red font and the inverted pattern with green font.
We cannot recall ever seeing two similar patterns at such odds with each other. Without getting too technical (we know that train may have left already), using the traditional method of measurement the bullish H&S points to the 1250 area which would be a new recovery high for the S&P 500. Conversely the larger bearish H&S pattern points to the 860 level. If the index takes out the bigger patterns right shoulder (1130) that would negate the bigger pattern and maybe we do get to new highs. We imagine the PPT is rooting for that also. We have now given up making predictions and will just let the bull and bear fight it out for now.
Did You Know
When Do We Pay The Piper? - The 6 largest monthly deficits ever in the history of the United States have occurred since February 2009, including the all-time monthly record deficit of $221 billion from February 2010. The government’s $165 billion deficit from July 2010 (last month) ranks 9th all-time. With 2 months remaining in fiscal year 2010 (i.e., 10/01/09 to 9/30/10), the government is projecting spending of $3.6 trillion for the 12-month period. During fiscal year 2001 (i.e., the first fiscal year during the presidency of George Bush # 43), total government spending was $1.9 trillion (source: Treasury Department).
Final Thought
"All I ask is the chance to prove that money cannot make me happy” – Spike Milligan
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