Market Manipulation in the Balance
Clif Droke, February 5th, 2010
Page 1
Market manipulation in the balance
By Cliff Droke
Our recent commentary on the subject of market manipulation elicited a wide range of feedback, pro and con. Some respondents agreed with my assertion that, assuming the existence of market manipulation, it doesn’t preclude one’s ability to successfully navigate financial markets with a reliable technical discipline. Others expressed the view that manipulation and government/central bank interference in the market make it untenable for small traders to be participants.
Many readers had some interesting comments to make and their views are worth sharing here. What follows is a sampling of readers’ viewpoints along with my response to them. Without further introduction, let’s examine some of these comments.
Concerning the existence of the so-called “Plunge Protection Team” (otherwise known as the PPT), one reader had this to say:
“I have been following the irrational behavior of the markets and have concluded that something like the PPT must be at work. Exhibit A is the overt bailout of several ‘too big to fail’ companies, which amounted to nationalization of large segments of several US markets (banking, mortgage lending and auto manufacturing for three). Obviously, the government has no qualms about donating vast quantities of tax dollars to favored companies, be it over the table, or under it.
“ Secondly, the P/E of the US stock market is completely irrational. As the chart below shows.
“I can think of no investor, and only a few speculators, who would aggressively buy the market at a P/E over 50, especially given the business climate our current administration is promulgating, but that’s exactly what was happening through most of the 2009 ‘recovery.’ Even more suspicious is the fact that often the greatest part of daily volume was in just a few financials, a market segment that is largely government owned. (What better way to recoup the government’s bailout ‘investment’ than by pumping up the stock price?)
“As for the idea of letting the failed companies fail, I’m all for it. What we are doing is very much like a fellow with a toothache that won’t go to the dentist. He’d rather suffer long, dull agony than the sharp, but brief, pain of fixing the problem. Also like the toothache sufferer, eventually the dull agony will become unbearable and have to be addressed anyway. In the best form of politicians everywhere, our government is giving the can a mighty kick down the road in the hopes that nothing will happen until after the next election….
“In the markets, my suspicion is that the PPT is propping things up at an acceptable level in the hopes that increasing economic activity will eventually raise the floor and allow for withdrawal of the government safety net. Given all the other government initiatives that are positively punitive to business, I see this more as a trap than a viable long term policy.”
This respondent makes some sensible observations that we can’t help agreeing with. I’ll pass over the P-E ratio remarks for now but will have more to say on this after the interim weekly equities cycle bottoms.
His concluding remarks concerning the PPT are poignant in that he admits the possibility that manipulation can indeed “increase economic activity,” regardless of the rationale behind it. This agrees essentially with my original proposition that manipulative activity can serve to both prop up the financial markets and stimulate the economy, even if the effects are only temporary. It’s hard to disagree with his final conjecture, however, that eventually the government safety net will be withdrawn to the detriment of those caught up in the game at the time of the withdrawal.
