How to Profit from Market Manipulation

by: Golden Economizer

It has been nearly a week since the FOMC announced they would buy US treasury long bonds in the open market on Wednesday March 18th, a stunning development that some had predicted, and many others predicted would never happen.

click to enlarge

As the above chart shows, the increase in gold prices (as represented by GLD, the gold ETF) and the increase in US treasury long bond prices (as represented by TLT, the iShares Barclays 20+ Year Treasury Bond ETF) have leveled off at exactly the level of the decline in the dollar (as represented by the Deutsche Bank Short US Dollar Futures index). At first, the price of gold increased by more than the decrease in the dollar, as investors reacted to the perceived inflation that the direct monetization of government debt will inevitably cause. But by Tuesday, March 24, gold investors/speculators and treasury bond investors/speculators had apparently calmed down, having realized that the inflation wouldn’t be immediate, since the bond purchases will occur over the next six months.

Here is another chart of the exact same thing using UDN, the PowerShares DB US Dollar Index Bearish ETF, which is designed to track the Deutche Bank index in the previous chart. The result is the same. It shows the increase in gold prices and treasury bond prices converging with the decrease in the dollar index, essentially unchanged in real terms from a week earlier. The reality was that gold and treasuries didn’t increase 2%, the dollar lost 2% of its value.

But now I want to focus in more closely on just Monday and Tuesday’s trading. On Monday the S&P 500 index increased by 7.1%, its fourth largest single day gain in history. It was driven by huge gains in the financial and real estate sectors, most of which happened during the last hour of trading. IYR, the iShares Dow Jones US Real Estate ETF which tracks the real estate sector closed up 15.0% on Monday, and XLF, the Financial Select Sector SPDR ETF closed up 16.5%. But more than half of the gain occurred in the last hour of trading.

Monday morning the existing home sales figures were announced, and they were much better than expectations. As you can see in the above chart, real estate stocks were largely unchanged for the first half of the trading day, while the overall market (NYSEARCA:SPY) was up 2% or 3%, and the financial sector opened up 5% and slowly climbed during the morning.

Then, Monday afternoon, the real estate sector and the finance sector soared. What caused this late afternoon wave of buying? The positive announcement of existing home sales was already hours old, and should have been done exerting its effect on the market by then. But then Tim Geithner went on television, CSpan and all the financial channels, and announced the details of his plan to enlist private hedge funds to buy the so called “toxic” assets from the balance sheets of our troubled banks. If you were the PPT, or the big banks, it would certainly be in your interest to make it look like Geithner’s announcement was well received by investors and the general public. So buying massive amounts of financial and real estate sector stocks could accomplish this objective.

On Tuesday morning at 10am, in a rare simultaneous appearance, both the chairman of the Federal Reserve and the secretary of the Treasury were set to be grilled on the AIG bonus mess among other things in front of the House Financial Services Committee. It would certainly not look good for the stock market to sell off during this piece of theater for the masses conducted by chairman Barney Frank, so the PPT and the big money interests would want to buy financials and real estate equities in support of their standard bearers while making their high profile televised appearance, and the following chart of Tuesday, March 24th trading shows that this is exactly what happened.

Banking and real estate stocks opened down about 4% on profit taking from the previous day’s runup, but in the first half hour of trading, a large volume of buying came in and had driven the two sectors back to nearly unchanged by 10am when the hearing began. SPY, the proxy for the S&P 500, opened down about 1% and stayed down about 1%. The hearing broke up around 1:15pm, and then the two sectors came crashing down on a large volume of selling. There is a certain logic to this. The large buyers did not want to be holding stocks in these two troubled sectors any longer than necessary, especially after a ten day runup in price since March 13th. So just one hour after Bernanke and Geithner were no longer in the public eye, they began dumping bigtime.

Here is one more chart showing what some big banking stocks did on Tuesday compared to the S&P:

Citicorp (NYSE:C), B of A (NYSE:BAC), JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) opened sharply down on Tuesday morning, but half an hour later were back to nearly unchanged, just in time for the meeting of the House Financial Services Committee to convene. They closed down from 5% to 10% on Tuesday, and the decline began exactly one hour after Bernanke and Geithner left the television screen. It seems fairly obvious that their stock prices were supported all day long, starting before the hearing began, and ending one hour after adjournment, just leaving enough time for the big buyers (manipulators) to unload.

If you believe that our stock markets are sometimes manipulated, then the last hour of trading is the logical time for several reasons. First, it allows the manipulators to affect the closing price, which is the price that everyone remembers, and is the price most of the working folks check when they get home from work. Second, the closing price is used to calculate margin calls, and if you are trying to force weak hands to sell their holdings, those who use margin are vulnerable to forced sales if you can get the closing price down low enough. Also, if you are short a stock, by driving down the closing price, you can prevent a margin call on your own holdings.

In retrospect, it is easy to see that the banking sector stocks were propped up all day Tuesday, March 24th, and in the last hours of March 23rd, while our Treasury Secretary was being nationally televised. But if you had some big losers in your portfolio such as B of A, or Citicorp, this would have been an excellent time to dump them, while the insiders were buying for the public effect.

The Working Group on Financial Markets, generally known as the Plunge Protection Team (PPT) was created by Executive Order 12631, signed into law on March 18, 1988 by then President Ronald Reagan. The Chairman of the Working Group is the Secretary of the Treasury, and other members include the Chairman of the Board of Governors of the Federal Reserve, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission.

The Group was established in response to Black Monday, October 19, 1987 for "enhancing the integrity, efficiency, orderliness, and competitiveness of financial markets and maintaining investor confidence".

There are many that claim it is an orchestrated mechanism that manipulates U.S. stock markets in an attempt to avoid a market crash by using government funds, or complicit banks to buy stocks, or other instruments such as stock index futures—acts which are forbidden by law. It is said they intervene to put a floor under stocks whenever they are at risk of penetrating certain technical support levels, such as when the 50-day moving average slips under the 200-day moving average, known as the Death Cross, which can trigger programmed selling, leading to even more panic selling.

Congressman Ron Paul has charged the Working Group with going beyond their legal mandate. On October 6, 2008, the Working Group issued a statement indicating that it was taking multiple actions available to it in order to attempt to stabilize the financial system, although purchase of stock shares was not part of that statement.

Another major source of manipulation is hedge funds, which are largely unregulated, and off shore hedge funds which are completely unregulated. Some of the tactics that these funds use to manipulate stocks are to gang up on a particular stock and short it en masse, naked shorting (shorting shares that don’t exist, counterfeiting shares of stock), and they also sell US stocks on foreign stock exchanges where they are not even listed. I have personal knowledge of one US stock listed only on the NYSE being sold on the Munich stock exchange to drive down the price, and also on the Pacific stock exchange. If these were legitimate sales and they wanted to get the best price, the clear choice would be to sell on the NYSE, but they didn’t want the best price, they were short in their offshore accounts and wanted to drive down the price.

Knowledge is power. Use this knowledge to protect your assets by getting them out of the stock markets, and to time your buying and selling when the big money is doing the opposite.

Disclosure: I am long SRS and SKF