There's fact and there's theory
By Thom Calandra, FT MarketWatch.com
Last Update: 12:17 PM ET Dec. 3, 2001
SAN FRANCISCO (CBS.MW) - How do you spell, or is it smell, market manipulation?
Richard Russell, who has been writing Dow Theory Letters since 1958, touches on the subject. "I continue to receive questions as to whether there's manipulation going on in the stock market. I've resisted this idea a long time, but slowly and surely I've come to the conclusion that yes, the Fed does step in at various times and manipulate the market," he says.
Russell, who has been following markets for more than 50 years, has one of the most highly respected investment newsletters in this country. Based in La Jolla, Calif., Russell has been looking at the stock market's behavior this autumn and wondering just what keeps prices so robust.
"How do they do it?" he asks in his newsletter, which is available only by subscription for $250 a year. "My guess is that the Fed does it through one or more large brokerage houses, and it's done with S&P futures. Too many times I've seen the market turn at critical junctures, and I believe it's beyond coincidence."
Russell declined to be interviewed for this article. "I just don't have the time or energy," he said via e-mail. "Guess I'm getting old." He was born in 1924.
Several commentators after the market crash of October 1987 wondered whether the U.S. Federal Reserve or a government agency used Standard & Poor's 500 and S&P 100 contracts to hasten the stock market rebound.
This time around, large buyers of contracts have at their disposal the Chicago-traded futures contracts on stock indexes and about 100 exchange-traded funds - like the QQQ (QQQ: news, chart, profile), a Nasdaq 100 Index tracking stock that trades on the American Stock Exchange. The Nasdaq cubes, as they are known, change hands to the tune of 100 million a day on busy days. On Oct. 17, 142 million changed hands. That's almost $5 billion worth.
Also available for purposes of buying a stock index are the so-called HOLDRS, or holding company depository receipts. These are essentially trust-issued securities and also trade as individual equities; the best-known one, the SPY (SPY: news, chart, profile), is nicknamed a Spider and represents the S&P 500 Index, which in turn accounts for almost two-thirds of the entire U.S. stock market's capitalization. The Dow Jones Industrial Average is represented by a so-called diamond trust, the DIA (DIA: news, chart, profile).
Wall Street's view of undercover intervention in equity markets? "My sources say possible but not probable," says Richard Suttmeier, chief market strategist at Joseph Stevens & Co. in New York.
Lo and behold, my friends
Russell turned to the subject of market manipulation after Enron Corp.'s collapse last week went more or less sailing by most investors. Enron has about $18 billion of debt in the form of bonds and off-balance-sheet arrangements. Insurers, pension funds and other high-grade holders own much of that debt, which is trading for 25 to 35 cents on the dollar. Enron filed for bankruptcy protection on Sunday.
"The Enron (ENE: news, chart, profile) mess hit the markets, some indices that I follow were right on the edge, and normally I would have expected the markets and the various averages to follow through on the downside," Russell said last week in his newsletter. (See 10-day SPY and DIA charts.) "But lo and behold, buying came in at the opening and the market pushed higher."
Russell describes himself in his biography as "the first (in 1960) to recommend gold stocks." He also says he "almost to the day" called the bottom of the great 1972-1974 bear market, and the beginning of the great bull market, which started in December 1974."
Like most financial philosophers and technicians, Russell sounds pragmatic about whether any agency's manipulation of markets - be they equity, debt or currency - works for the good of investors. "All manipulation does is hold off the inevitable," he writes in Dow Theory Letters.
Enron shares now sell for pennies and face de-listing from the New York Stock Exchange. That's fact, not theory.
On Monday, the shares rose more than 40 percent, to 37 cents or so. Pravin Banker at The Financial Network in Greenwich, Conn., says a buying frenzy may be in the works.
"There is a sneaking suspicion that dealers long the bonds might have sold short," he said Monday. If true, it was "a frantic attempt to hedge their bond positions, on which they are suffering a free-fall in value. "If the NYSE does not de-list, the share price could rally from 29 cents to several dollars per share," he says. "The potential for a giant squeeze exists."
Banker estimates an Enron share price fall from $4 to zero provides only $3.6 billion of "hedge" against a bond portfolio that fell in value by $4 billion between Wednesday morning and Friday afternoon.
Russell's newsletter is available at dowtheoryletters.com.
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