Minyan Mailbag: Plunge Protection
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.
Good Monday Morning Prof. Succo,
The Fed is delivering a steaming hot pile of $1.2 Billion in fresh, new, imaginary, electronic, fiat currency to the market today - the first permanent injection in over 4 months, and my signal to get more cautious with my mostly short portfolio. I had been expecting them to hold it at least until their next meeting, but perhaps the recent plunge created a sense of urgency.
What's your general thinking on plunge protection in general? Do you think this is an attempt to rally markets or just create cover for the well connected to get out of their positions before things really get ugly?
The Fed appears to be buying bonds with 3+ to 4+ years left to maturity at a short term high for those bonds. We'll see how bad their timing ends up being.
Friday provided fresh new evidence that the PPT is alive and well (physically at least).
Ticks reversed by 2000 within seconds.
Perhaps an example will help people understand. I was selling Citigroup (C) into the rally (off of a long vol position). I would offer 10k ten cents above the bid of 20k. I would immediately get taken and the "buyer" would bid ten cents above last sale for another 20k. This process repeated itself four or five times before I just "let it go".
I ask you, what intelligent buyer would buy something like this if their intention was to get the best price? There obviously was a seller so why not "explore" that offer and just bid for a few seconds to see if I would come down?
But perhaps the buyer in this most important market stock had a different objective. If the objective was to drive the price up as high and as quickly as possible, the objective was achieved. I (the seller) finally gave up: mission accomplished.
I still don't know why people have a problem in believing that this type of activity occurs...the Fed has said they would do it if necessary. And that type of buying comes in just when needed, when the market looks really ugly.
Of course the preferred method of driving asset prices higher is liquidity and despite the rhetoric, we know the Fed has not really tightened and is at strategic points easing aggressively. They are also keeping the yield curve flatter. I would not be surprised to see the yield curve invert over the next six months.
The PPT is a safety net to insure that markets do not react negatively to aggressive economic policy. The Fed realizes that without income generation, our economy is pretty much reliant on higher asset prices to support credit expansion.
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