Angels from on high drag markets to safer ground
By BRIAN HALE in New York
October 13, 2000 - Sydney Morning Herald
Nervousness hasn't cleared from Wall Street despite the
bounceback from Wall Street's near disaster mid-week after
IBM's result gave the short sellers a long start in their hunt for a
Red October.
The question, though, is whether Big Al (Greenspan) is pulling on
the end of the bungee cord. Uncertainty over the answer means
there still is almost as much red as green on the stock tickers,
showing that whatever the direction of the indices, lots of stocks
are going down rather than up and the shorts are keen for another
big down day.
There seem to be more of them around, too. It's not surprising.
Selling (shorting) stocks you don't own with the intention of buying
them back at a lower price and pocketing the difference has been
the best way to make money on Wall Street for two months.
At the moment it even seems like a lay-down misère because
there's a horde of margin investors who bought on borrowed
money and are now forced sellers, depressing share prices further
whenever stocks start to tumble.
At last count, which was at the end of September, margin debt had
edged higher again by $US3.2 billion to $US250.8 billion ($475
billion) - just 10 per cent down on the peak of margin debt in
March at $US278.5 billion.
It's a fair bet that every borrowed dollar was punted on technology
stocks. Almost everything else tanked long ago and no-one gears
up to buy shares in General Electric or General Motors. It is the
tech stocks that now are leading the way down, so when the techs
tumble, the margin calls multiply and the forced-seller "longs"
reinforce the move that the "shorts" want.
That is just what happened last week after the previous Friday's
rebound from a rout the day before: first on Tuesday, when the
major stocks and the indices recovered from their lows (with the
Nasdaq Composite dropping 2.32 per cent), and then again on
Wednesday.
That morning finally saw some real fear and panic on Wall Street
as the Dow Jones Industrial Average plunged 435 points (4.3 per
cent) and Nasdaq 187 points (5.8 per cent) in heavy volume in the
first 10 minutes of trading.
The quick drop took the Dow below the 10,000 level for the first
time since mid-March and dragged Nasdaq's Composite index to
a new low for the year of 3026 - a 40 per cent fall from the record
high it set earlier in the year - before the angels arrived with a
rebound that left Nasdaq down just 42 points (1.14 per cent) and
the Dow down 114 points (1.32 per cent) on the day.
That was followed on Thursday, the 13th anniversary of the 1987
crash, with a 247-point (7.8 per cent) rebound on Nasdaq and a
167-point (1.7 per cent) recovery by the Dow.
The thing is, no-one knows why. Traders were stunned at the
turnaround and so was everyone else. It sparked the usual chatter
from the usual suspects about market bottoms, Microsoft's
quarterly profit report, etc, etc, but that can be dismissed out of
hand, not the least because the software giant's result might have
been better than expected on the top line but was good only on a
superficial level.
What is clear is that the turnaround began (was engineered) in the
futures market. At the lows, futures on the Nasdaq 100 index - the
largest 100 companies in the Composite without the foreigners -
were down only 4.7 per cent while the index itself was down 6 per
cent.
Curious indeed, says Bill Meehan, the chief market analyst at
Cantor Fitzgerald, who accepts that a sharp reversal was likely as
the recent lows would be heavily defended with the put-to-call
numbers so extreme, but admits to being taken aback by the
Nasdaq's ability to close the gap in less than 90 minutes.
It took a lot of heavy buying by the major Wall Street houses to
close the gap, but no-one who wants to talk will admit the source
of the buying orders that, as Meehan puts it, made the lows well
defended on Wednesday, "... perhaps with a little help from the
market's friends".
Could it have been Wall Street protecting itself? Very unlikely.
Those who live and die on the Street of Dreams are not burdened
with altruism. Certainly nowhere near enough to unleash an
extremely aggressive buying attack in the futures pits right at the
maelstrom of the ugliest market opening of the year.
These are the people who had to be strong-armed by the Fed into
1998's rescue of the Long-Term Capital hedge fund, even though
its imminent collapse threatened a systemic failure of the US
financial system.
Could it have been the Fed? Would it have been the Fed?
Yes, it could. Back in February 1994 Fed chairman Greenspan
revealed for the first time that a global link-up of central banks had
prevented the 1987 sharemarket crash from becoming a broader
international financial disaster. He did not say the Fed had
intervened directly, admitting only that "containment" involved the
"prudent provision of liquidity to financial markets" - but, said Dr
Greenspan, "we are responsible for ensuring the stability and
integrity of national financial systems ... that is the essence of our
mandate, whether written in law or not".
A few years later The Washington Post revealed the existence of
an outfit called the Working Group on Financial Markets, known
informally as "The Plunge Protection Team".
Were we seeing a plunge in the first 10 minutes of trading on
Wednesday? No question. Would the Fed want us to know if the
PPT was in action? No way. The moral hazard is too great -
investors would know their backs, and their bottoms, were
protected.
But it's worth noting that no fewer than six Fed presidents and
governors were out speaking on Thursday, including Greenspan
himself, who was widely seen as the most bullish.
Still, John Vail, chief strategist at Fuji Futures, thinks the US
media's spin on Greenspan was as positively biased as its take on
Microsoft. Vail points out that when Greenspan talked about the
backwardation in oil markets as indicating oil prices would fall, he
talked only in terms of six-year futures (which are pretty illiquid) -
and while he "dissed" the notion that oil didn't matter to the
economy, he said he was watching closely to see if the spillover
inflation would move to higher levels from "modest".
The bottom line of all this is that while the US equity markets are
not back to exuberance, they're back from the brink.
E-mail any information related to 'plunge protection' to plunge@fallstreet.com