Coping with Government Sponsored Market Manipulation


RCM Comment: We live in a world where markets are manipulated by governments. To argue this point is to howl at the moon. We are not conspiracy theorists; we are realists. In order to successfully manage a portfolio in this environment one must understand the playing field and the rules. There is no point in complaining about the manipulation or pointing fingers. This type of behavior is an exercise in futility. No, we must accept the situation and turn it to our advantage.
The weekly Railfax Rail Carloading Report still looks grim.
A report from the real world

We must recognize that markets are not free to trade and therefore do not react as we would expect to certain news events. Sometimes this manipulation is a good thing. Take for example the market reaction to 9/11. After being closed for four days the equity markets surged higher with the help of massive PPT buying of S&P futures contracts. Unfortunately, governments tend to bastardize a good thing and we are now faced with a market that is rigged to suit government needs in the short term. However, you can rest assured that true market direction will prevail over the longer term.

So, our struggle is to understand the long term view but not allow the government manipulated markets to cut up our capital in the short term. We must not allow the government manipulations to cloud our judgement and sucker us into investments that have no hope of success over time. Example: the government-sponsored rally in the financials over the last 3+ months was clearly created to help the banking sector raise capital. Again, if you wish to argue this point I suggest you go down to the water’s edge and scream at the tide. Massive amounts of capital were raised through the secondary markets for financial companies in the last 30 days. This is a simple fact. Now that this manipulation is complete and private capital has been sucked in where will the equity markets go? Only time will tell, but I will offer this thought process:

The economy is not in good shape.

The Fed must work to keep rates low.

The stock and bond markets have been trading in opposite directions for months.

Therefore, if the Fed focuses on supporting the bond market going forward then the equity markets may be in for trouble.

The economy is not in good shape: Proof

Moody’s: “Sellers Beginning To Capitulate To Realities Of CRE Markets.”Read more…

Moody’s has released its April Moody’s/REAL Commercial Property Price Indices (CPPI) update and it is a doozy: -8.6%, after what many had expected was a shooting green reading of just -1.7% in March. The problem that many don’t grasp, that even Moody’s has finally caught on, is that once capitulation in CRE sets in, the bottom will be torn out.

Redbook Retail Index Plunges AgainRead more…

The Johnson Redbook Index is a sales-weighted year-over-year same-store sales growth in a sample of large US general merchandise retailers representing about 9,000 stores. Same-store sales are sales in stores continuously open for 12 months or longer.

I have included the story below simply for your own edification. The explanation below illustrates how the manipulation works and I hope it helps you understand and cope with seemingly incongruous market volatility.

Market Understanding the PPT and market manipulation

The PPT operation has access to unlimited funds because it was formed by the Treasury which can create money out of thin air. My guess is that the organization is structured through an offshore hedge fund established by the ESF as a front group. They do their buying and selling from perhaps the Bahamas or the Cayman Islands.

One thing we know is that they place their orders through several of the big brokerages in New York such as Goldman Sachs, JP Morgan, or Merrill Lynch. This way no one at the brokerage houses or on the exchange floors actually sees any massive buy orders from Washington bureaucracies.

The way they work the scheme is whenever the market is going too low and threatening to crash, the PPT initiates buy programs on margin for S&P futures contracts in large enough volume to check the market fall and panic short sellers into covering their short positions. This creates a “short squeeze” and explodes prices upward. Hedge funds and institutional buyers then rush into the market to buy in order to catch the rally. This extends the rally and effectively ends the potential market crash as investor mood shifts from bearish to bullish.

The rally is created in the way that lighting a match to kindling ignites a roaring fire. The S&P futures contracts are so highly leveraged that a $200 million buy can be initiated for $10 million in the PPT account with JP Morgan. A $500 million buy can be initiated for $25 million. These margins are chump change for the Treasury-ESFPPT operatives. As the rally proceeds, the PPT then sells their contracts back to the hedge funds and institutional buyers that follow after them. The PPT then goes to the sidelines to await the next crisis when they will need to stem a potential crash.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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