Does The Plunge Protection Team Exist?
Rick Ackerman
October 31, 2001
http://www.marketwise.com

                 I'm not big on conspiracy theories, especially the ones that imply
                 meticulous planning, hermetic secrecy and deft execution by Uncle
                 Sam and his covert agents. Given their record of bungling, I firmly
                 believe that Lee Harvey Oswald acted alone, that the Watergate
                 burglary was not an elaborate scheme to eavesdrop on the Federal
                 Reserve Open Market Committee, and that FDR was neither
                 unsurprised nor gratified when the Japanese attacked Pearl Harbor. And while
                 Lyndon LaRouche and his ilk evidently think the CIA and Trilateralist Commission
                 run the world, I seriously doubt whether those two institutions combined possess
                 the operational savvy to run a back-alley crap game. Remember, these are the
                 same guys who tried to kill Castro with an exploding cigar, and who believed the
                 Soviet Union was trouncing us in the Cold War until the day the Berlin Wall fell.

                 Even so, there is reason to believe that the U.S. government may be loosely in
                 cahoots with some top Wall Street firms to ensure that the stock market does not
                 spook investors too badly, or too often. Now this does not necessarily mean, as
                 some market-watchers now assert matter-of-factly, that there is a Plunge
                 Protection Team which snaps into action whenever some crisis manager
                 monitoring the market's vital signs on CNBC lifts a red phone at the White House.
                 To begin with, who could run an operation like that? With the possible exception of
                 former Treasury Secretary Robert Rubin, no Cabinet-level honcho comes to mind
                 who could conceivably be entrusted with such a difficult job. And who actually
                 believes that even Rubin could second-guess the markets any more successfully
                 than, say, last month's top-rated guru in Hulbert's Digest?

               How the 'Smart Money' Got That Way

                 So let's discard the svengali theory, as well as fanciful images of a White House
                 powwow each day where guys who wear American-flag cufflinks map out
                 contingency plans to administer the Heimlich if the tickertape should begin to
                 choke on some shard of disquieting news. However, what we should not rule out is
                 the possibility that some of America's biggest and savviest financial institutions
                 have pledged their utmost diligence in helping to support and stabilize U.S.
                 financial markets whenever necessary. There are two reasons why this theory is
                 not so farfetched as it might sound. First, the firms could make quite a bit of
                 money at it. And second, they would not have to risk much of their capital to do
                 so.

                 Anyone who doubts this could not have been watching the stock market closely
                 last Thursday, when a weak and dispiriting opening hour mutated into a bullish
                 rampage that did not relent until the final bell. During bear markets in particular,
                 rallies draw that kind of explosive power not from routine buying, but from shorts
                 panicking to cover positions gone horribly and painfully awry. So when the stock
                 market is quietly morose, as it was last Thursday, just one sizable buy order
                 tossed into the S&P pit can have the effect of a Molotov cocktail, quickly engulfing
                 shorts in the fires of hell. Keep in mind that, under certain conditions, a buy or sell
                 order as small as 20 or 30 contracts can alter the course of the S&Ps over the
                 very short-term. Just imagine what kind of pop Goldman Sachs, Morgan Stanley
                 and Merrill Lynch could create, especially late in the day, if they were to
                 simultaneously enter large buy orders for S&P contracts.

                 Scam Up-Close

                 This is exactly what has been happening in the S&P futures pit recently,
                 according to friends of mine who have been close to the action, and it represents
                 the refinement of program-trading techniques that have been used with increasing
                 effectiveness since the days of the 1987 Crash. The huge growth of electronic
                 trading undoubtedly has helped to amplify the effect, since a vast, global universe
                 of traders, hedgers and speculators are effectively on a hair trigger, each seeking
                 to be a step or two ahead of the stampede. Traders in the S&P pits are among the
                 first to see the buy programs coming, and it has happened often enough lately to
                 cause them to pull their offers at the first hint that the usual suspects may be
                 about to light the fuse. When the sellers then back away from their offers, the
                 lightened supply that results makes it possible for the S&Ps to lift effortlessly,
                 kicking off a chain reaction of hedge-buying in other indexes, as well as in specific
                 stocks and related securities and derivatives. Once the panic starts, it is a simple
                 matter for the perpetrators to take sizable profits just minutes after the rally has
                 begun. And if they should conspire to kick things off just before the final bell, they
                 can position their offers in Asian and European markets so as to reap substantial
                 profits with almost no risk.

                 Key to Distribution

                 There is an additional benefit to the institutional players that is tied to their
                 long-term goal of easing out of the bear market at better prices than they would
                 receive in an unrigged game. For, every time stocks spike higher following a buy
                 program calculated to "run the shorts," the rally subsequently attracts bids below
                 the market from those who missed the impulse wave. The initial rally will typically
                 have occurred on relatively light volume, for that is the very nature of a price spike.
                 But the "detumescence" period that follows can take days or even weeks, allowing
                 institutional holders to distribute stocks into a steady stream of demand. Of
                 course, this gambit cannot overcome the inexorable power of a bear market, only
                 forestall it. Over time, the bear will have its way, as each price spike on the chart
                 eventually gives way to a lower low. My guess is that the current round of
                 thimble-rigging will play itself out within a week or two at most. No doubt, the
                 scheme has succeeded thus far by getting the jump on seasonality factors.
                 Which is to say, the "Christmas rally" has already occurred -- in the form of buy
                 programs that by now have milked the last dime from credulous buyers.

E-mail any information related to 'plunge protection' to plunge@fallstreet.com