This is a long article, but worth reading: 6/27/2002 Roger Bentley Arnold General Comments Yesterday was a very bad day. The run in the market through the closing rally to bring the equity markets back to even for the day was the result of market manipulation; in my opinion. As a rational human being, understanding the guidelines within which markets interact I can draw no other conclusion; although I can not prove it. There was a coordinated effort on the part of several investors to prop the equity markets in the US up at the open of yesterdays market by buying into the futures markets. This lets the equity traders know that there is willing money on the sidelines ready to buy in should the market fall. That signal in itself is usually all it takes to keep the short sellers out and calm the nerves of the traders considering selling. In other words it caps what could be a capitulation event. It removes the question of whether or not there are buyers by creating buyers. The futures buyers are in essence saying don't worry be happy we are here if you need us. The question has to be asked however, who would do this? The WCOM news broke after the equity exchanges in the US had closed for the day on Tuesday. Asian and European markets were down dramatically over the course of the next 16 hours. There was the largest single day flight into 2 year treasury notes by the opening in New York on Wednesday that I can ever recall experiencing, down 1/4% in yield. Gold had spiked up $5 in Hong Kong. The dollar was plunging against gold, euro and yen. But, the buying interest in the equity futures in the US was inordinately large prior to the open, stayed relatively high all day and then spiked up again right at 2:15 eastern time. That is when the FED made its announcement of no move on rates. Apparently some of the traders had been speculating that the FED would lower rates. For whatever reason, the sell off began to accelerate dramatically at 2:15 and so did the futures buying. This isn't trying to catch a falling knife this standing in front of a freight train; you can't win. This makes no sense at all. There is no legitimate trading model anywhere I am aware of that would have made this call. I can not create a model that would validate that as a strategy. There is an old saying in the equity markets; don't try to catch a falling knife. In this case they weren't just trying to catch the falling knife, gamble on a market bottom and turn around, they were literally containing the negative momentum by promising to buy stock that was plunging in price before it started plunging but after it became apparent that it would. This is the anti-investment model. This is the kind of model you build when determining the most efficient way of disposing of your wealth in the fastest way possible if your only choice was to do so through the equity markets. Am I making sense? So, the question has to be asked who would do this? The most logical scenario would require some sort of government intervention or government induced intervention. In 1988, following the October 1987 Dow plunge, an organization called the Working Group on Financial Markets was created by the President of the US. Since then it has become known as the Plunge Protection Team. There are links below for more information so I won't go into detail about how it works here. The communications platform that creates the formal relationship the between the public sector, US Treasury, and private sector, US Federal Reserve, as well as equity, bond and commodities exchanges is the "Working Group". It is important to understand the nuance here. A predetermined way of disseminating the Executive Administrations interests in the financial markets to those markets was created. In other words this group was not simply created to allow for an orderly collection of information for delivery to the administration. This is a working group, with workers on both sides. The group is designed to collect information from the private sector as well as deliver requests to the private sector. The group required an executive order to be created in order to provide everyone working within its framework an appearance of legitimacy while manipulating the markets. This is generally how it would work: WCOM announces fraud and the world wide markets begin to sell off. The members of the "Working Group" don't have to wait for somebody to call them to tell them what to do. The creation of the group itself has already created the expectation of action to contain the crisis and the intended cooperation between public and private authorities to ensure its success. The exchange of phone calls I will now list need not happen as everyone involved would know what was expected of them. Treasury Secretary O'Neill calls Fed Chairman Greenspan and says you better get your banks to start buying stock or anything else to support this market if you expect the tax payer to come in with a bail out package later. The implication is clear. The private sector banks had better put some of their capital at risk and even guarantee its loss in order to try to hold back the collapse if these banks are going to come to the Treasury if it doesn't work and ask for a tax payer bail out. So Dr. Greenspan calls the member banks of the FED and other private institutions, JP Morgan, Merrill Lynch, Goldman Sachs, etc.; and says you guys better do what ever is necessary to support the markets. The cheapest and easiest way to support the markets without putting a lot of money at risk is to buy futures. In essence, make a promise to buy the stock should it begin to fall. The idea being that the stock won't fall because the sellers know there are buyers and won't panic trying to get out because of it. Ideally the crisis is then averted and no real money had to be exchanged. The problem is that it was still manipulation. The treasury secretary just sold a tax payer bail out to the FED should it be necessary. The FED just bought a tax payer bail out in the future by putting capital at risk today. The point being that the futures buying was manipulated and not driven by market fundamentals. Put another way : Imagine you get together with 3 of your buddies to play poker and the four of you are sitting around playing 5 card stud. One player is called the Treasury. one the FED, one a professional card player (trader) and one just a plain old once a week with the boys card player (typical "long term" investor) As the night wears on the FED is beginning to lose more than the others. So, the dealer (treasury) tells the player (FED) that he'll give him 6 cards if agrees to split the pot with him should the player getting the 6 cards win and that if he continues to lose anyway the treasury will step in and give him money to keep playing. But stepping in to give the FED money to keep playing is a last resort. The rationale is that the FED is the richest guy at the table and as long as he can be kept in the game the game can continue. Now there is no guarantee the player (FED) getting 6 cards will win every hand but the probability he will win an inordinate number of hands has increased dramatically versus the players only getting 5 cards. If the players getting 5 cards know this is happening they would be fools to keep playing a game that is clearly manipulated. So, the key is to do this without the other players knowing this happening. But, as the players keep playing the game it becomes apparent that something is wrong as one player (FED) begins winning consistently. So, the treasury only gives the FED 6 cards at those times during the evening that it looks like the FED may be losing too much. The goal being to keep the game going but not let the other players know this is happening. But of course the other players figure it out and begin to leave the game. The first player to figure it out of course is the professional. As soon as he sees the game is rigged his choice is to call the treasury out for a gun battle but the professional knows there is no upside in this and so he simply takes his money and leaves to find another game somewhere else in the world that isn't rigged. This leaves behind 3 players now. Two of them have rigged the game and the third one can't figure out why he keeps losing. As the third guy wants to leave the FED and Treasury conveniently let him win a couple of hands to keep him in the game and keep the game going. But the bottom line is that the there is no way the third player is ever going to win against the FED and Treasury and the question is how long does it take him to figure it out. The goal is to take the third players money without the third player knowing he was just had. When he is broke room is made at the table for the next sucker and the game continues. But, the professionals are now nowhere to be seen. You see it was the professionals that were the real counterbalance to the Treasury and FED manipulation and when the losses the professional was incurring to the them became greater than what he could gain from the novice player he walks. That is where we are today in the markets. I hope that made sense. The real private sector job creating professional wealth is leaving the game. That is the real reason the dollar is falling. The US game is rigged and the professionals are cashing in their chips to play in a game denominated in another currency, gold or euro. They won't play in the Yen denominated game because it is even more corrupt than the dollar denominated game. Many of them will take a break from the game completely by taking their cash and parking it in gold or by buying waterfront property and lying on the beach waiting for the Treasury and FED to realize they over manipulated the markets.
OK so I was thinking that in order to prove your point, the futures would have to lead the cash most of the day. If this were true then the Prem would have to average above Fair Value. Yesterdays Fair Value was about 1.55 (or 1.56?). Yesterday's average Prem from 10am-close was 0.82. I took out the 9:30-10 data because it was so skewed at the open. So what does this mean? Unless I am wrong (which could be the case) this means that the cash market led the futures, which would disprove your point altogether. Would like comments. Does this make sense?
We have done a lot of work on this. He is on the right track, but his motives are a little crossed. The FED supplies these companies with money, primary way is repo money. 2.9 bill. T-backed for thursday, the treasury backed is the good stuff and the longer term repos. HOWEVER, In MOST circumstances they will wait for a decline and an obvious base and SUPPORT that, they try not to catch knives. Or add power to a rally. So instead of calling it a Plunge Protection Team I prefer to call it a Slow Death Team. They are powerless to stop an eventual decline and can only make it worse in the end. Continual OUTRIGHT lies about economic data, ALLOWING/CREATING a war are all part of the big picture (i.e. lame attempts to get the US back on track and continue the power for a few big groups). Still VERY strong ODDS on they will fail. A good site to get started on this (repo market) for an individual is The Monetary Letter at www.piraz.com
Dustin in reply, Yes this does happen. It is called bootstrapping. You will see the premium rise, and the futures pull up the the index. Its a simple as watching a SP/SPX spread on an intraday chart. You can often watch to the minute the repo money hits the market. Many of those "10 pt" rises into the close are done this way. Gotta let the Doctors and Dentists see the DOW on the 'high side' of a round number
Dustin: regarding the premium to fair value question...I am not certain as to how, what or why this might seem to balance out, but what I am constantly watching is a combination of tick, tiki and dow levels and if/how "they" defend price off of key support levels...There is absolutely no question that each break lower is defended, either by a combination of hedge fund covering into the lows or a concerted effort to bid the market strongly on each break lower thru longer term price support...The market then registers a combination of 5,10,15 tiki highs and tick readings well over 1000...All of this buying appears out of nowhere and is never defended for more than 1-2 trading sessions...Going back to the initial break lower last March, we have really only had one week of trading where buyers stepped in and were able to hold the market above price support for more than 1-2 days...And this was prior to the major decline in the dollar... Monday was another day of absolutely wicked spike action higher...From the lows at 971 to the highs at 1005, there were several short term price bars with 6-8 tick runs higher that never dropped back...That 34 handle rally took less than one hour to complete...And in hindsight market another swing high...I also think part of the manipulation game is to run these stealth rallies to ensure that pullback longs enter the market and "cushion" each ensuing swing thrust lower...By staging very sharp rallies higher, it almost guarantees liquidity as systems trigger covers, long entries and the retail joe steps in to buy the pullbacks... Some might call all of this non-sense, so be it...My observation and interaction with the markets tell me otherwise...These rallies higher are quicksand and the game is starting to get very old...
is PROGRAM RELATED. Other participants in the US stock market have devised strategies which buy futures and hedging with something else??? Their strategy is based on squeezing the shorts. So, its a strategy that is being AMPLIFIED, regardless of whether the govt. strikes first or not at all. THE ONLY OBVIOUS CONCLUSION IS THAT FUTURES CARRY ALOT OF CLOUT BECAUSE A LARGE % OF THE TRADERS FEEL THAT FUTURES ARE A FORWARD INDICATOR. THE NAME IS MISLEADING. I have noticed that sometimes the futures get knocked down when the market doesn't follow. However, during the open and after hours (when panic is more prevalent), FUTURES are making an impact.
someone else created a thread about the fed manipulation of the markets. He was claiming that the fed was actually buying stock, and he was ridiculed by everyone, and I didn't believe him either. Now I have looked into this a lot more and I see that he was onto something. I strongly suspected manipulation after the big drop post 9/11. It didnt' suprise me that there was some short covering in the following week of trading. But, the tremendous follow through all the way into this year was crazy. I chalked it up to the FOMC pumping money into the banking system, blind patriotism, and totally irrational optimism about the economy. Now I know that there was also massive futures buying to light the fire. It scares me that they have that much power, we just have to hope that they have enough restraint to only do it a few times a year to prevent a crash, and not all the time to become tremendously rich at the expense of everybody else.
I printed that article to read later. The timing of this 'disclosure' gives me the impresson that it's leaked as a warning to the shorts, and a comfort to investors.