Is Someone Manipulating This Rally?

Is there a government conspiracy to prop up the U.S. stock market? Many people are convinced of it.

Believers claim the interventions are orchestrated by a secretive, high-level government committee called the President's Working Group on Financial Markets (popularly known as the Plunge Protection Team). It was created shortly after the Crash of 1987; members include the Treasury Secretary and chairmen of the Federal Reserve, Securities and Exchange Commission, and Commodity Futures Trading Commission.

When the stock market is at risk of plunging, it is alleged that this committee will dip into the Treasury Department’s $40-billion (U.S.) Exchange Stabilization Fund to buy S&P 500 index futures and cause spreads to widen between the futures and cash markets for equities. This then gives arbitrageurs a chance to reap risk-free profits by shorting the futures contracts and buying the stocks in the S&P 500 basket.

Some of the most visible conspiracy theorists are at Canadian hedge-fund firm Sprott Asset Management. Their 41-page study, Move Over, Adam Smith: The Visible Hand of Uncle Sam (.pdf), is perhaps the most substantive attempt at offering a proof.

Concerning the recent rally in the stock market, the Sprott team states in its latest Markets at a Glance that they are having “a hard time believing it is a pure coincidence that the stock market rallies on the eve of U.S. mid-term elections where the incumbent party is at risk of defeat.” They suggest that it's politics: according to a report by the chief strategist at Raymond James, “market analysts and traders have noticed a mysterious ‘bid’ in the futures market since the July lows.”

Personally, I can see some intervention occurring should the market crash like in 1987. The motivation would be to prevent it from snowballing into a financial collapse or depression. But I’m not quite convinced yet that it would be anything much more frequent. Nor am I yet cynical enough to think the interventions are influenced by partisan politics.

Comments

[Panskeptic:]

If I remember correctly, Robert McHugh of Mainline Investors did a widely circulated study, publicized by Jerry Saut of Raymond James, showing that the market rise in the three months starting in July occurred on only 10 days of trading, the other days being flabby and directionless. This is apparently not how rallies are normally structured. If I've got any of this wrong, I hope someone will correct me.

But assuming it's possible, does anyone think this administration would not take advantage of it?

2006 Dec 10 05:40 PM

[Daniel Houston:]

McHugh's work has always seemed beyond nutty to me. Some people can't accept what's happening. He's always looking the markets to tank - except the gold market.

2006 Dec 10 11:26 PM

[Panskeptic:]

I would accept that as one valid personal reaction to much of McHugh's work, which can also leave me vaguely horrified. That doesn't mean that every stat he turns up is wrong, nor does it address the validity of the actual question.

Furthermore, Jerry Saut is not beyond nutty or he wouldn't have kept his job at Raymond James. I don't think he can be so easily dismissed. Shall we brush off Sprott's work, too? On what grounds?

The problem with cynicism, especially if it's well-founded, is that it makes much of our activity futile. If the house is really that crooked, what are our chances and why are we playing at all? A lot of resistance to this explanation for market behavior is simply based on the reaction that if it's true, we're suckers to try to beat it.

2006 Dec 11 04:05 AM

[FIG trader_:]

When asked to judge the merits of a case about meaningful intervention, one should evaluate the evidence. In the case of Sprott Asset Management's case, this is easy; There is no evidence, and this case would be thrown out instantaneously by any judge. I pretty much knew right at the beginning when " George Stephanopolous was being quoted (Good Morning America; Come on.) that this would be a rather easy case to dismiss. Trying to attribute causality to these type of short term events just seems wasteful of any smart person's time. Of course we know the system is rigged in many ways, by the structure of the Federal Reserve, the overlapping interests of investment and commercial banks, corporate interests, and those in the ruling circles generally. All institutions that form the foundation of capitalism are by default beneficiaries of the economic structure. Contrary to the WSJ editorial page, the US government is there to see that the future of profitmaking is secured (here and overseas), That is why the important government agencies (Lets take Treasury for example) is staffed with Goldman bankers, and not union rank and file. Just because someone (Sprott perhaps) is on the wrong side of a trade doesn't make his "evidence" any more credible. (Jeff Saut from RJF may be correct that there are patterns, but that doesn't include him in this camp.)

2006 Dec 11 08:23 AM

[Panskeptic:]

Well, here we are one day later, and the "put-up-or-shut-up" prize goes to the pro-conspiracy camp. They offered statistics, times and prices, and charts. OTOH, the anti's resorted to broadbrush ad hominem attacks, some of them quite wild, and nothing remotely in the nature of evidence.

Jerry Saut of Raymond James managed to dodge commenters bullets, as the anti's pretended he hadn't already chosen up sides, and his newly posted piece for this week on Minyanville raises the question and answers it yet again.

I also found a lovely Mark Rostenko editorial from the Sovereign Strategist now archived on financialsense.com, entitled "Remember Free Markets?" It seems to fit today's markets quite nicely, even if it is from May, 2005.

2006 Dec 11 09:49 PM