Friday, November 14, 2008

The Trader of Last Resort

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Yesterday, a spectacular market rally took place once again. This is the third time in approximately a month that the Dow has had close to a 1000 point intraday rally. The last such rally took place on October 28th and conveniently rallied the market right into election day. That rally fell apart the moment the voting was over, with the market experiencing the biggest two-day back to back price drop since 1987. While the Fed rate cut was allegedly the reason for the late October move up, the motivation for yesterday's out of the blue rally is not immediately evident.

The economic news was bad before the market opened and only got worse during the day. Big caps Intel and Walmart had already lowered earnings expectations. The weekly unemployment report showed a way above expectations 516,000 new claims for unemployment, which matched the post-911 figures when the U.S. economy briefly ground to a halt. Continuing claims hit a level last seen during the deep recessionary early 1980s. Next came the Trade Deficit. Its figures showed that even though there was a drop in imports last month, the drop in exports was even bigger. The drop in the price of oil was a major cause of the import drop, while the export drop seemed to be more the consequence of a declining global economy. The impact of the rising U.S. dollar, already reflected in oil prices seems to have yet to have fully impacted U.S. exports. Expect that it will be doing so in the not too distant future. Finally, the Budget Deficit numbers for October were released and there was a record monthly deficit of $237 billion (actually $662 billion or 55% of GDP if you exclude the money looted from the social security and other trust funds). For fiscal year 2008, which ended on September 30th, the entire yearly deficit was only $455 billion.

It is not surprising in the least that the market sold off on this news and that a rally attempt in the morning failed. By the beginning of the afternoon, the Nasdaq, S&P 500, and the Russell 2000 all hit new yearly lows and the Dow was getting close to doing so. Market stalwarts, like Citigroup, General Electric and Goldman Sachs were in collapse mode, falling to 8.27, 14.58, and 61.02 respectively. The technical picture was breaking down. Suddenly at 1:00 o'clock the market turned around. Was major support hit? No. Was there release of some good news? No. Could things have become much worse if something wasn't done? Yes. Was the PPT involved? In all likelihood.

The quasi-secret Plunge Protection Team (PPT), officially known as the Working Group on Capital Markets, was created by a presidential executive order from Ronald Regan shortly after the 1987 market meltdown. It's purpose was originally to prevent similar crashes in the future. This Regan/Greenspan effort expanded the Fed's role as the lender of last resort to include 'trader of last resort'. It should be assumed that a lot of seemingly illogical trading behavior that has taken place since the credit crisis began can be traced to the efforts of the PPT. Yesterday's rally has many of the earmarks of recent PPT behavior. Timing in the afternoon at 1:00, 2:00, 2:15, 2:30. Rallies starting for no reason or for reasons that are already known. Rallies starting after chart support is broken with the market becoming vulnerable to a much bigger drop. Rallies taking place at politically convenient times. While there are major ethical problems with the government interfering with free-market trading, there is also the problem that it only works short-term. Any PPT generated rally will inevitably lead to lower lows as the Japanese have discovered over time with their government based market interference. Their stock market has taken 18 years so far to hit bottom - and the U.S. may be setting itself up for a similar future.

NEXT: T & A and the GS-20 Summit

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.










1 comment:

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