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Stock Market Gyrations and the "Yen Carry" TradeBy Gary Dorsch For long-term buy and hold investors in the US stock market, who simply sit through wild market gyrations, it's good to know that you have "Plunge Protection Insurance." The dynamic duo of US Treasury chief Henry Paulson and Federal Reserve chief Ben "B-52" Bernanke are working overtime these days, and using all the weapons in their arsenal to prevent a bear market from materializing, while Wall Street faces its worst financial crisis in many decades. "I asked Chairman Bernanke if he would use all the tools available to him and he said, Absolutely," said US Senator Christopher Dodd on Aug 21st, after a meeting with Paulson and Bernanke, the top commanders of the "Plunge Protection Team" (PPT). "Historically the federal funds rate has tended to follow movements in the discount rate," Dodd added, alluding to the PPT's most potent weapon. In today's world of extreme market volatility and information overload, the memory span of the average hedge fund trader has been reduced to about 24-hours. Yet just two weeks ago, the global stock markets went into a mini meltdown, after BNP Paribas, France's biggest bank, froze 2 billion euros in three hedge funds it manages, because they contained toxic US sub-prime mortgage debt that couldn't be sold. It was the second time that the American sub-prime debt bomb exploded in Europe. Earlier, Germany's IKB Bank, said it expected to lose a fifth of its 17.5 billion euro ($24 billion) stake in US sub-prime mortgages. To stop IKB from un-raveling, the Bundesbank cobbled together several banks to provide 3.5 billion euros to cover the bank's losses, and prevented Germany's biggest banking crisis in 75 years. In July, Bear Stearns declared that two of its hedge funds that owned toxic US sub-prime slime were headed for bankruptcy. Ahead of the next round of quarterly earnings reports in October, traders are wondering if other banks and investment firms that are exposed to billions of dollars of the toxic sub-prime mortgages, will come clean and show the full extent of their losses.  Looking at the big picture, the Dow Jones Industrials is a key instrument of national economic policy, and that by "actively managing" its direction, the US Treasury and the Federal Reserve aim to impact the wealth of tens of millions of US households, and by extension, influence consumer confidence and spending. The PPT's strategy is to offset weakness in the US housing market, with increased household wealth in the stock market, to avoid the dreaded "R" word - Recession. The Plunge Protection Team (PPT) has several weapons in its arsenal to "influence the direction" (rigging) of the stock market. The first line of intervention is "Jawboning" or propaganda spewed to the media, designed to influence market psychology and trader behavior. For instance on July 23rd, PPT commander in chief Paulson told CNBC television, "There has been a very significant housing correction. I think we're at or near a bottom. There's a problem with sub-prime mortgages but it's quite containable. The economy is very, very healthy," he said. But when verbal intervention or "Jawboning" begins to wear thin, or is seen as misleading and not backed up by the facts, the PPT can turn to its next weapon, active intervention in the stock index futures markets. In July, the PPT tried to draw a line in the sand for the Dow Jones Industrials at 13,250, by purchasing stock index futures contracts after big market plunges, and squeezing short sellers. But the shocking revelations at BNP Paribas and Germany's IKB, and reports that Citibank, the largest US bank, might own $35 billion of sub-prime home loans, overwhelmed the PPT's intervention efforts at the 13,250 defense line.  Once the PPT's defense line at 13,250 was broken, the Dow Jones Industrials fell sharply, and went into a panic free-fall on August 16th, when Countrywide Financial tapped an emergency $11.5 billion line of credit from its bankers to stave off bankruptcy. Countrywide's 5.8% notes maturing in 2012 fell 8.4 cents on the dollar to 81.6 cents, yielding 10.81%. Moody's downgraded the senior debt ratings of Countrywide Financial to Baa3, the lowest investment-grade rating, from A3. It was looking very bleak for the S&P 500 Index on August 16th, which was teetering on its first 10% correction in 53-months. But then suddenly, the PPT began its most impressive rescue operation this year. First, the Fed injected $12 billion into the hands of Wall Street dealers in the last hour of trading, who in turn, pumped DJI-30 futures from a 330-point loss to break-even by the closing bell. The next morning, the Plunge Protection Team unleashed its second most powerful weapon, by lowering the discount rate on loans to major banks by 0.50% to 5.75% just minutes before the expiration of put option contracts on US stock indexes. The Dow Jones Industrial futures market vaulted sharply higher from a 120-point loss in European dealings to a stunning 257-point gain, within a five minute span, after the Fed pledged to drive interest rates as low as necessary to drive the stock market higher. "The FOMC judges that the downside risks to growth have increased appreciably, and is prepared to act as needed, to mitigate the adverse effects on the economy arising from the disruptions in financial markets," the Fed said on Aug 17.  To read the rest of this article, click on the hyperlink below http://www.sirchartsalot.com/article.php?id=66 Aug 23, 2007 321gold Ltd |
