Friday, August 10, 2007

Plunge Protection Team

The Working Group on Financial Markets (also, President's Working Group on Financial Markets or the Working Group) was created by Executive Order 12631, signed on March 18, 1988 by the then President Ronal Reagan. The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 (Black Monday) to give recommendations for legislative and private sector solutions for "enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence. One theory regarding the Working Group refers to it as the Plunge Protection Team. This theory claims that the Working Group is a scheme to manipulate US stock markets in the event of a market crash by using government funds to buy stocks, or other instruments such as stock index futures. The term "Plunge Protection Team" was originally the headline for an article in The Washington Post by staff writer Brett D. Fromson, published on Sunday, February 23, 1997.

This PPT is supposedly run by a team 4 only. They include the Fed Chairman, the Secretary of the Treasury, and the heads of the SEC and the Commodity Futures Trading Association. Following the 1987 crash, the most talked about "market intervention was the US markets surrounding the 9-11 incident: a confounding and puzzling rise for the 4 months proceeding 9-11. The US media dubbed it a "patriotic rally". The European Press called it a "PPT rally". Obviously, the U.S. markets were manipulated and rigged to an inflated value in advance of the 911 disaster. Was this a coordinated measure in anticipation of what was to come?

An event that should have sent markets spiraling downward was the Enron, et al, unprecedented corporate accounting scandals. Yet despite this, an unprecedented accross-the-board markets rally began on July 24, 2002. Once again, the European Press called it a "PPT rally". In November 2005, the Fed announced with little comment and no palatable explanation that it would no longer report the M-3 number after March 2006. Without the useful resource of M-3, we need to find other tools to monitor when the PPT is likely to intervene, and kill shorts. The M-3 factor would allow the PPT to eliminate shorts without he rest of the markets knowing when they are acting.

The chart above was a model devised by Robert Mc Hugh Phd called a Plunge Protection Team Risk Indicator. This indicator is based upon the premise that the most effective PPT intervention requires an extreme Bearish sentiment as measured by short interest. This indicator measures short interest from the level of CBOE put options outstanding. It simply compares a 10 day moving average of CBOE puts with a 30 day moving average of CBOE puts. Whenever the ratio of the 10 Day to the 30 Day rises above 1.18, we are at great risk of a short covering rally of some sort, probably PPT induced. In other words, whenever the 10 Day MA is more than 18 percent above the 30 Day MA, if you are holding short-term puts, or a short position of some other form, you may want to think about getting out with whatever profits or losses you have.

On August 8th, 2007, President Bush hinted at government intervention in the US stock market. “Treasury secretary Paulson and his advisors are paying close attention, as the market begins to readjust its assessment of risks and are watchful for any downturn,” he said. “There is a lot of liquidity in our system and liquidity will provide the capacity for our system to adjust,” Bush added, alluding to the Fed’s tolerance of double digit M3 money supply growth. The big question is whether US Treasury chief Henry Paulson and Fed chief Bernanke are pursuing a more active interventionist policy than what was originally mandated for the PPT? The turnover of interest rate, currency and stock index derivatives rose 24% to US$533 trillion in the first quarter, and that’s a big time bomb that can blow-up at anytime. It requires constant surveillance and “vigilance” over the world’s greatest casinos. Warren Buffett calls derivatives “weapons of mass destruction.” If correct, then the PPT is “watching the markets closely”, (Japanese code words for intervention) and Paulson and Bernanke aim to prevent a 10% correction at all costs. So far we have edged past the 6%-7% as at time of writing. Are we close to the end of the horror movie?

I have to state that I favour the existence of a PPT to eliminate any one group cmpounding he correction effects to the detriment of global welfare and recovery. I do not favour ecessive intervention by PPT (if they do exist) that only ensures a uptrending market place for long players.

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