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The "Plunge Protection Team" working OvertimeBy Gary Dorsch "Imagination is more important than knowledge", the brilliant Albert Einstein used to say. Imagine for just a moment, that the Dow Jones Industrials has become a key instrument of national economic policy, and that by "actively managing" its direction, the government could impact the wealth of tens of millions of US households, and by extension, influence consumer confidence and spending. Since the appointment of Henry Paulson to the helm at the US Treasury, the US stock market has always found a way to defy the law of gravity. During Paulson's short reign, the Dow Jones Industrials (DJI-30) broke an 80-year old record for the longest streak of gains with only three declining days in between. During the first seven months of his tenure, the S&P 500 did not decline by 2%, the second longest-period without a 2% correction since 1964. The market savvy Treasury chief, who built a $730 million fortune at Goldman Sachs, is also the chairman of the Working Group on Financial Markets, commonly known as the Plunge Protection Team (PPT), created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987. The PPT is empowered to intervene in stock index futures and the foreign currency markets in the event of a crash. Paulson and his Plunge Protection Team are dealing with another tough challenge, trying to extend the S&P 500's all-time record for avoiding a 10% correction. It's been 52-months since the S&P 500's last slide of 10% or more, which took place from January 14 to March 11, 2003, when it lost 14 percent. Since then, the benchmark index has more than doubled without a similar drop. "It's my job to be vigilant," Paulson said on July 26th. "I've made this statement when the markets looked very good, and I've made it during times of volatility, but I will say that on global financial shocks, it's very hard to predict them. I am comforted by the fact that we have a strong global economy and very healthy economy in the US, but it's my job to be vigilant," Paulson said. Federal Reserve chief Ben "helicopter" Bernanke is the US Treasury chief's right hand man, a key player controlling the US money supply. Since Paulsen's confirmation in July 2006, the broad M3 money supply has expanded at a 13% annualized clip, its fastest in 30-years, in a brazen effort to inflate the US stock markets, and keep the cost of borrowing low for corporate takeover artists.  The PPT's strategy is to offset weakness in the US housing market, with increased household wealth in the stock market, in order to avoid a recession. However, the weakness in housing has gone on longer and deeper than the PPT would like. Existing US single-family homes marked their eighteenth consecutive monthly price decline in May, bringing the annual loss to 3.4 percent. US homebuilder sentiment slid in July to its lowest since January 1991, the National Association of Home Builders said on July 17th, as fallout from the housing slump and sub-prime mortgage crisis caused a glut of new homes. US home foreclosure filings rose 58% in the first six months of the year and could surpass 2 million this year as the housing market continues to deteriorate, RealtyTrac, said on July 30th. The escalating foreclosure rate on US homes has badly shaken the $2 trillion sub-prime mortgage market, and the riskiest BBB- segment, has lost 65% of its market value to 35-cents on the dollar. The sudden aversion for risk spilled over into the high-yield junk bond market, where yields jumped 120 basis points, putting speculators on edge about the outlook for corporate takeovers and share buybacks, the two key catalysts of the market's rally to record highs.  The US junk bond market lost another source of liquidity, via the "yen carry" trade, after the dollar tumbled from 124-yen in June to as low as 118-yen. It was against this backdrop, that the skittish S&P 500 retreated 1.8% to close at 1433 on August 3rd, bringing its string of losses since July 13th to 7.7%, it's third largest since May-June 2006, when it fell 8%, and from March 2004 to August 2004, when it fell by 8.7%. The fickle stock market switched its focus away from second-quarter profit growth of 11% for the S&P 500, or 2.5 times more than estimated in June. But the PPT cannot afford to sit back and watch both the US housing market and the stock market sinking at the same time. That might spell the dreaded "R" word, - Recession. Recognizing the huge risks to the US economy, President Bush called for a special meeting of his economic advisors on July 27th, to discuss the stock market, which had plunged as much as 456-points the previous day. Speaking from the Roosevelt Room, just 20-minutes after the opening bell of the NYSE on July 27th, President Bush said the US and world economy were strong after American gross domestic product jumped 3.4% in the second quarter. "The world economy is strong and I happen to believe one of the main reasons why is because we remain strong. The US economy is large, flexible and resilient."
Did President Bush give the "Plunge Protection Team" the green light to intervene in the marketplace to prevent a stock market crash on July 27th? After another volatile trading session on July 31st, when the Dow Jones Industrials gyrated within a 300-point range, from its early morning high of 13,500 to close sharply lower at its worst level at 13,185, PPT skeptics were asking, "Where is the mythical PPT now, with the stock market is teetering on the verge of collapse? Just 24-hours earlier, shares of American Home Mortgage AHM.N, had plunged 87% to $1 per share, after the mortgage lender said it was unable to fund home loans and would have to liquidate its assets. The company commanded a 2.5% share of the US mortgage market, and specialized in prime and near-prime loans, otherwise known as Alt-A loans, which are now trading close to 63 cents on the dollar. The meltdown in AHM.N shares was largely blamed for the DJI's 240-point plunge on July 31st. Later that evening, Dow Jones Industrial futures were unusually volatile during Asian trading hours, extending their losses by 110-points, and the US dollar slumped to as low as 117.60-yen. The next morning, the US government reported that crude oil stocks had declined by 6.5 million barrels to 344.5 million, and Venezuela's mercurial kingpin Hugo Chavez was loudly telling his audience in Caracas, that "crude oil prices were headed straight to $100 per barrel." To read the rest of the article, click on the hyperlink below, http://www.sirchartsalot.com/article.php?id=65 Aug 9, 2007 321gold Ltd |
Before
his meeting with Bush, PPT chief Paulson spoke about the 381-point
plunge of the Dow Jones Industrials on July 26th. "We're
always going to have volatility. What we see going on right now
is risk being re-priced and as we get a broad reassessment of
risk we're getting volatility. We've had volatility as long as
I've watched the markets," he added.