The Plunge Protection Team Exposed

Tonight I am pleased to announce the first ever telepathic thought line two way conversation [TTL2] with an inquiring reader. It was about the Plunge Protection Team [PPT]. Here is the startling telepathic conversation in entirety with Bob:

Bob: Mish, did you see the PPT in action today?
Mish: You mean the late day bounce on 2007-08-01?

Bob: What else could I mean?
Mish: Was that the PPT?

Bob: Of course it was. Look at the chart.
Mish: A bounce on the 200 EMA was the PPT? Was this expected?

Bob: Heck yes it was expected. The PPT always shows up when expected.
Mish: Always? That's interesting. Did you play for it?

Bob: Are you kidding? Of course I did. Who wants to stand in front of the PPT?
Mish: So you bought right on the 200 MA?

Bob: Damn straight. I knew the PPT was waiting there.
Mish: What else has the PPT been buying?

Bob: Homebuilders. Isn't it obvious?
Mish: Homebuilders?

Bob: Yep. They have been buying homebuilders for months. And lenders like Countrywide Financial too.
Mish: Wow. That's stunning news. But it does not seem to be working very well does it? Look at BZH and AHM and CFC.

Bob: Don't get me started. Of course it's working. Share prices would be much lower if the PPT was not propping them up daily.
Mish: AHM would be lower than $1 if it was not propped up by the PPT? That's amazing. By the way, when was the last time the PPT was in serious action?

Bob: When the S&P hit 1520.
Mish: 1520? Wasn't that the 50 MA? And aren't we at 1460?

Bob: Don't get cute. They fail on purpose from time to time.
Mish: The PPT fails on purpose?

Bob: Of course they do. The PPT has to make it look like they don't exist. It's all part of the plan.
Mish: Wow. That's quite an elaborate plan. Did you buy at 1520?

Bob: Don't be silly Mish. Of course I did. You would have to be nuts not to buy where the PPT is buying?
Mish: What happened?

Bob: The PPT stepped aside so I had to bail. I figured the PPT would try again.
Mish: How unfortunate that the PPT would step aside right when everyone depended on them. Where did you figure the PPT would make another stand?

Bob: Mish you really don't get this PPT stuff at all do you? I bought right at the 200 MA where the PPT and 8,263 hedge funds were all waiting. Who wouldn't want to buy there?
Mish: Uh.. Thanks Bob for exposing the PPT.

I was hoping for additional proof about the PPT's actions. That proof was supposedly on its way but simply never made it through. I think sunspots must have been acting up because the telepathic connection quickly went into complete disarray. Nonetheless I am pleased to show the very last telepathic transmission that did make it through before the lines of communication were disrupted. The last message from Bob was this chart of the PPT in action.

Signature Actions of the PPT
(click on chart for a crisper image)

A tip of the hat goes to Bob for that stunning chart of the PPT in action, complete with planned failures.

Earlier this week I had been discussing the PPT with Caroline Baum. The discussion centered around her article Rubin Should Teach Paulson Secret PPT Handshake. She sent me a few priceless reader comments about that article. It seems Caroline and I are basically in violent agreement. I do not think the PPT intervenes on a day to day basis. In fact I think they only intervene under severe distress but I could only give one example.

That however was enough to be jokingly labeled a CT (conspiracy theorist) by Caroline Baum. She has a point, however, a very solid point. And if I had to choose between picking between an activist PPT and one that has never acted to date, I say this: Believe Baum.

I could only name a single instance in which I actually thought the PPT was involved (Spring 2000 on an enormous Nasdaq plunge that rectified itself). It was the nature of the rally (indiscriminate and massive buying of futures ridiculously above the market price of the underlying equities for a very considerable length of time). That is what I would expect from a PPT attempting to stabilize the market. I am open to being wrong about that instance.

Conspiracies Theories in General are Bunk

I think nearly all conspiracy theories are total bunk. I do not really want to drag politics into this debate but the Kennedy assassination CTs are absurd. Supposedly we are to believe there was someone firing from the grassy knoll, from an overpass, out of a manhole, and from a building to Kill Kennedy. In addition the plot was hatched by the CIA, the FBI, Russia, Cuba, and the US treasury. "Proof" was that Oswald could not have fired off all those shots in the timeframe allotted and could not have walked to the building in time in the first place.

I have met people that can fire those rounds in the allotted time, and it has been proven time and time again that Oswald could easily have walked the distance (in the allotted time) to the building where he fired shots. On the other hand, many of the suggested angles from the overpass, manhole, and even grassy knoll are virtually impossible.

The theories that the US government blew a hole in the Pentagon with a missile on 911 are so absurd that I refuse to even rebut them.

GATA Conspiracy Theories

But people believe what they want to believe. The fact remains that people like to believe conspiracy theories. This will not win kudos with much of the gold crowd but I feel the same way about GATA (Gold Anti Trust Action Committee) theories as well as various silver conspiracies I hear literally every week.

I have rebutted them in the past and so has "Trotsky". Speaking about GATA in Misconceptions about Gold Trotsky had this to say:

Many gold analysts, from the mainstream to fringe groups such as the Gold Anti-Trust Action Committee (GATA) claim that they can predict what the gold price will do by adding up annual fabrication and investment demand (as well as dehedging demand by miners) and contrasting the resulting total with annual supply (mine supply, central bank selling, disinvestment and scrap). In short, they analyze the gold market in the same manner as they would analyze the copper market.

It should be immediately obvious that this can't be correct. After all, nearly the entire gold ever mined (approximately 150,000-160,000 tons) is still here. In short, the total potential supply of gold is some 97-98% greater than the gold produced every year (approximately 2,600 tons).

On that basis it makes no sense to apply traditional commodity supply/demand analysis based on annualized trends in the gold market.

Simply put, there is a big difference between commodities that are effectively used up (aside from scrap residual returning to the market every year) and a commodity the indestructibility and durability of which inter alia made gold the 'money commodity' in the first place.

I would like to add that with futures there is a short for every long. It is impossible for there to be record long interest without there being record short interest. When prices are extended and delivery is not taken, corrections occur as part of normal market action during futures rollovers. But I think the best indicator of the conspiracy nonsense is the price of gold itself. Gold has little industrial demand yet its price has gone from $250 to over $650. If there was a conspiracy to hold down the price of gold, it sure as hell isn't working very well is it?

Occam's Razor

When confronted with issues like these I often turn to Occam's Razor which states that the explanation of any phenomenon should make as few assumptions as possible, eliminating, or "shaving off," those that make no difference in the observable predictions of the explanatory hypothesis or theory. In short, when given two equally valid explanations for a phenomenon, one should embrace the less complicated formulation.

I did not expect to be talking about conspiracy theories toady. Heck I never know what I am going to be talking about. But let's Compare Kennedy assassination theories.

Kennedy Conspiracy Theory

Kennedy was killed in a massive conspiracy by someone on the grassy knoll, someone from a manhole, someone on an overpass, and Oswald from a building window, all directed by orders from the CIA, FBI, Cuba, Russia, and the Treasury department, and perhaps even LBJ. Doctors that did the autopsy covered up the results as did the FBI and CIA with their bullet analysis. To dispose of Oswald before he talked, Jack Ruby was hired to kill Oswald by the same set of conspirators that hired Oswald to kill Kennedy. Everyone else involved in the conspiracy kept their mouths shut forever and ever.

Kennedy Nutcase Theory

Some nutcase (Oswald) with some unknown grudge killed Kennedy. Another nutcase (Ruby) seeking fame killed Oswald.

PPT Conspiracy Theory

• The government created a good working plan to frequently stabilize the markets.
• The government kept that plan quiet.
• The government implemented that plan with the help of others (market makers, order takers, etc).
• The participants in the plan all keep quiet about it.
• The government plan is carried out to perfection.
• The plan works so well that no one can even prove the existence of the plan.
• The results mysteriously happen right near moving averages.

Massive Sheep Herding Theory

• A 8,263+ hedge funds all have been trained over time to buy breakdowns especially at or near moving averages.
• Loose monetary policy by the Fed has been supportive of that action.

So which is it? To believe the former you have to believe that this administration and/or this Fed can routinely carry out such a plan to perfection for 6 years running with no one willing to expose it. Making the problem even more difficult is the fact that most CTs think this administration and this Fed are both completely incompetent. It's time to face the facts. The PPT is simply not operating on a day to day or even a routine basis. In fact it's entirely possible, perhaps even likely, that it has never acted ever.

Comments

[Sr. Pessimist:]

I'll believe corruptible, unaccountable incompetence over shrewd, tight conspiracy in government any day.

I don't think Kennedy was under any conspiracy. I think Oswald was homosexual and wanted to make it look like he hated Kennedy instead of liked him.

Explaining the market behavior with incompetence, if there is no such thing as a PPT, which seems to be the case as outlined here, then nobody's in charge of watching the ball. Instead, this was just an urban legend/rumor invented by market day traders and owners of hedge funds to publicize on the Internet so people would think they can bet on the stock market without ever losing a dime. It's just propaganda that people want to believe so they invest in easy money returns from the market and hedge funds.

And the Kennedy conspiracy theories were probably highly publicized as a propaganda ploy to make it look like the system has its own way of killing off anybody who's more liberal than the others. That way more conservative Christians are fear-ridden not to speak against the norm. "Rank and file, nothing too liberal, or you'll get shot." That's the message analogous to "invest in easy money returns."

Applying the same chain of thought to 9/11, which makes more sense to me in general, the Middle East perceived weakness in George Bush, and so employed terrorists to strike buildings, which provoked the incompetence of government to somehow respond on a gut feeling, trying to make sense out of pictures from satellites, and the US attacked the wrong country in a war frenzy to avenge the symbolic strikes, and now the Middle East can more easily claim oil interests from the US gunpower and finally kick Israel out of the Holy Land after 60 years.

So where's the stock market really at? Dow at 7K?

2007 Aug 03 03:10 AM

[Jim Glazen:]

mish, haven't you been calling for deflation for about 3 years now? You and Bob Prechter have a lot in common. You have both been wrong for a very long time but keep on writing profusely.

2007 Aug 03 09:18 AM

[akapital:]

If a Conspiracy Theory is by definition the paranoid positing of an over-elaborate scheme in order to explain a phenomenon or event then it is pure tautotology to say that CTs are bunk and we would by definition agree with one another and so this would all be very uninteresting. But that purely pejorative definition excludes the possibility that there could actually be an over-elaborate scheme or mechanism behind a phenomenon or event.

Therefore we must use a less exclusive pejorative use of the term which allows for the possibility that intentional actors are capable of planning an event, because we know that there are of course many such planned events. Thus, if we allow for the possibility (and experience teaches that we must) we must also admit that the principle of parsimony or Ockham’s razor is not always correct.

In the case of the markets, there are of course a plethora of intentional actors with investing plans. Some of these may have critical impact others not. Sometimes the net effect of these plans are foreseeable and predictable, other times not (at best, explanations are retrospective).

We live in an anti-speculative, homogenous culture where the mere positing of an opposing theory in popular culture generates accusations of "Conspiracy Theory." In academia and research circles such speculation is more welcome. We do not posit, we speculate….hmmm, do you think markets can relate to such a thing as speculation?

2007 Aug 03 01:36 PM

[akindman:]

The difference between using Occam's razor to explain natural phenomena (where it is sometimes useful) and using it to explain subversive human action is volition.

Not to speak to the believability of the PPT, but people often fallaciously invoke Occam's razor to dismiss complex facts beyond their comprehension or personal experience. e.g., when trying to explain a lack of concern with security protocols when it comes to online activities (strong passwords, encryption, etc), it's easy for the uninitiated to claim that comprehensive attacks would take so much effort to plan, execute and conceal that their very existence is preposterous and unlikely... while any hacker will tell you that this sort of abject complacency is the basis of social engineering and a majority of exploits.

I'm sure it's the same with any good crime or successful conspiracy. Otherwise, you might as well be arguing that any complex crime is impossible to execute without being detected.

2007 Aug 03 07:24 PM

[siddharth_l...:]

I like the PPT team theory. My theory about the PPT team is, that major (really big) players in the market have their computers programmed to buy at certain levels. So when there is a plunge to 200 MA, the computer programs go into buy mode. The market rises 100-200 points next day, and managers/adminstrators view the data If they don't like the overall picture, they sell whatever the computers boiught the previous day. Market plunges 100-200 points. Short-sellers panic thinking market has reached bottom because of the bounce, so they hurry in and cover their positions. Market raises again 50-100 points. Big players view the data. Overall conditions are still bad. Sell some more. Market plunges again. Meanwhile, their computers prepare the buying list. While everyone sells out, they come back to buy, buy in huge quantities. Make the market go up 500-1000 points within 2 weeks.

2007 Aug 05 05:04 PM

[Eric Balkan:]

I can agree that most conspiracy theories don't pan out, but they probably wouldn't start if there wasn't some unexplainable event that provides the seed for the theory. In the case of the Kennedy assassination, the Warren Commission was given the job of coming up with the simplest explanation, so as to avoid a crisis. E.g., before they did in-depth interviews with people on the scene, they asked these potential witnesses where they heard the shots coming from. If they said the Texas Book Deposity, they were interviewed. The 50 or so people who said the grassy knoll were never interviewed. That's how you start a conspiracy theory.

During the late Feb-Mar drop, someone noted that late on the day of the drop, the Fed loaned a couple of brokerage houses $40B. These brokers then went into the thinly traded overnight market and bought DJI futures. Then, when traders saw this "bullish" activity the following morning, they figured the drop was largely over. This was reported by at least two regular contributors to Seeking Alpha, one of whom reproduced a copy of the Fed loan record in his article. So, make of that what you will.

2007 Aug 05 06:38 PM

[info1234:]

Aug 10
The European Central Bank released nearly €100bn (£68bn) in emergency funds into the banking system yesterday in an effort to kick-start the crippled credit markets ...


... the US Federal Reserve released $24bn (£12bn) in temporary reserves to the banking system, the most since April and at least $9bn more than had been expected.

2007 Aug 10 03:35 AM

[Darren996:]

The "Plunge Protection Team" was created by executive order 12631 March 18, 1998 by then president Ronald Reagan. The actual name of the group is "Working Group on Financial Markets." The term "Plunge Protection Team" was the headline for a Washington Post article about the "Working Group."

www.archives.gov/feder...

2008 Jan 16 11:41 AM

[John O'Neill:]

I'm wasting my time posting a response to a blog written almost a year and a half ago, but Shedlock either drank too much fluoride in his lifetime or he's a government spook. Government sponsored terrorism is the oldest trick in the book, Shedlock. Blow me.

2008 Nov 17 04:46 PM

[sether:]

I beg anyone who dismisses conspiracy theories to watch this video of "Building 7" collapsing at WTC

www.youtube.com/watch?...

It is an obvious demo. OBVIOUS. It would take weeks to wire that building for a demo as successful as this. This implies fore-knowledge by someone, or maybe all buildings are wired for demo at all times in lower manhattan.
Once you've seen this, go back and look at all the other collapse video at the WTC. Face facts, people.

Jan 30 05:33 PM

[DerekNJND:]

Nobody accuses the PPT of causing 500 or 1000 point moves over a few weeks. What doesn't add up are moves that violate natural laws of supply and demand. For markets to operate freely, big investors MUST, absolutely MUST, buy low and sell high. If large quantities are bought above the price levels set by supply and demand, that causes market disruption. Now will one isolated mistake by an institution or mutual fund cause disruption? Of course not, maybe some day trader takes them behind the shed on a deal, but the market goes on.

Now, if you have some "player" continuously delaying natural market corrections, you will eventually see a chain of unprecedented panic corrections (2007, 2008, ring a bell?) once macroeconomic conditions force that player to stop.

Think of it this way, correction is like a natural rest in demand in markets. Demand becomes exhausted at any price, its natural for sellers to dominate the price action sometimes. This is even more true after intense steep rallies-and the longer the rally, and the more intense, the more the market needs this natural pause or pullback to allow some owners to "shake out" and create opportunities for those who missed the original run to get in. If this doesn't happen, large blocks of institutional money will either be forced to overpay (again, not healthy for supply and demand--continues this cycle I'm describing) or demand is lost as investors seek those returns at cheaper costs in other equities markets or different markets altogether.

What we've seen this entire rally here in 2009 is a pattern of two things which concern me:

1.) large blocks buying during the day then dumping after hours as to inflate price without being detected, and without allowing markets to move properly by then selling those back onto an open market with more participants.

2.) Futures contracts for US indices, mainly the S&P 500, are being bought at prices that don't make sense. For example, last Friday 5/29, 5,000 S&P futures above the 930 mark were purchased with 2 minutes left in trading. Friday was a slow moving, more down than up day, until about 3pm/3:30, when things includng the S&P started to move. The buyer, who we assume is a pro or pros, paid almost $2 million more for these contracts at 3:58 than they would have cost at 3:30 or earlier. So why would a market move purposely overpay? Do they not want to make the maximum returns? No, not it. They wanted to boost the cash market right at or after the bell, and do it so late in the day that shorts would get stopped out all the way into this week and the cash market wouldn't react until Monday--basically this move assured of a rally Monday 6/1, and we did, with the S&P going to its highest level since last october and the DOW going to 8750. Ironically, these moves put us over the 200 day moving average for both indeces--a VERY POPULAR buy signal for money on the sidelines and bears turning bullish.

Combine that with this fact: if you look at every huge selloff in the last few years, you'll always see spikes right in the days before, and a lot of lower tails on candlestick charts, suggesting late bullish movement through the market close. Also, these moves correlate with large purchases in the futures market, just as we saw Friday. What institution ignores technical signals that a reversal is coming and pounds money into a market right before the close, and right after a vicious selloff at S&P 1500? Dow 16,000? Those aren't exactly ideal buying opportunities.

Even more suspiciously, this rally started just as intensity and fear in our banking industry started to really escalate. Rumors of careless spending of TARP money on bonuses and securing up toxic assets which would end up worthless anyway in time dominated our headlines as this rally emerged. A month or two after people were selling Bank of America at $3, every bank in the country is raising billions and billions of dollars in capital. NO BANK has fallen more than $1 or $2 most below the price point of the secondary offering. In fact, many like Wells Fargo (priced at $24) continue to see no demand from institutions, heavy heavy put buying every day, but can't seem to trade below the level needed to attract new buyers. Seems somebody is afraid that this demand doesn't exist, and it would instead cause fear and a selloff, so they repeatedly take shares off the market every time Wells Fargo chart looks ready to dive under $24. Same with Goldman Sachs. Same with JP Morgan. Same with Bank of America.

Why am I saying this? Because we've all been played into believing how our banks are now "OK" and going to "be profitable" very soon. Well, it takes a lot of work to actually make those statements true, especially for a Bank of Am or Citi. Billions of dollars in bailouts wasn't enough, TARP funding is "empty" all of a sudden, but now the equities markets seem to be absorbing BILLIONS of shares in dillution at prices outrageous to PE ratios and double, triple, often much much much more than 10 X the price at which these banks traded just two or three months ago. again, does this sound like natural supply and demand to you? A market of large and small buyers, the large always buying at the lowest prices and distributing to small buyers? No, because once a floor is placed in a security, free markets cease working. The reason markets correct is because smart money lets price fall to new lows every correction to get the best price. Why keep buying at price X when you could wait for it to fall to price Y? But this cant happen now, because if large buyers want in, they're forced to pay price X because of the mystery price protector who steps in before natural supply and demand occur.

Finally, this will eventually create a bubble (already has) and lock buyers out, while increasing odds of a selloff ANYWAY because lets face it, every price floor breaks. Nobody can save it every single time. But now your floor created has held up so many times that there are a LOT OF ITCHY SELLING FINGERS as soon as that floor breaks. So instead of buyers naturally moving in and out of the market, some are locked out, most will be more aggressive in selling at higher prices than usual, and the market ends up a very leveraged, walking on eggshells "waiting for the world to end" type of place. Those places are often ghost towns on the first whispers of trouble.


On 2007 Aug 05 05:04 PM siddharth_lodaya wrote:

> I like the PPT team theory. My theory about the PPT team is, that
> major (really big) players in the market have their computers programmed
> to buy at certain levels. So when there is a plunge to 200 MA, the
> computer programs go into buy mode. The market rises 100-200 points
> next day, and managers/adminstrators view the data If they don't
> like the overall picture, they sell whatever the computers boiught
> the previous day. Market plunges 100-200 points. Short-sellers panic
> thinking market has reached bottom because of the bounce, so they
> hurry in and cover their positions. Market raises again 50-100 points.
> Big players view the data. Overall conditions are still bad. Sell
> some more. Market plunges again. Meanwhile, their computers prepare
> the buying list. While everyone sells out, they come back to buy,
> buy in huge quantities. Make the market go up 500-1000 points within
> 2 weeks.

Jun 04 12:08 PM