Japan's stock market could be getting some help from the SSB. What is the "SSB". Okay, I'll admit that I believe that the market is manipulated from time to time in the national interest- both theirs and ours. Here is a article.
Plunge Protection may Plunge the Economy into the loo
By Brady Willett & Todd Alway
A curiously understated article was released last week from the Financial Times:
Feb 21 -- Japan suspected of stock market intervention
When considering that earlier in February Finance Minister Masajuro Shiokaw confirmed Japan's newly formed 'stock buying body' would intervene (buy stocks) when needed, 'suspicion' hardly seems like the most appropriate word. Moreover, when considering that the Japanese 'SBB' officially started operations on Friday February 22 with 4 Trillion Yen at their disposal ($15.15 billion in 02, and 03) it would appear that further mention of 'suspect' trades will no longer be the course de jour. Rather, the fact is that Japanese officials are aiming to legitimize their newly formed organization of plunge protectors.
The SBB arrives at a time when Japanese banks are more likely than not preparing to sell their stock holdings. At the end of March (fiscal year end) banks will be required to book their equity holdings at market value – not an encouraging development for bank balance sheets when considering that the Nikkei has been on a multi-year slump. Furthermore, beginning in April 'the process will begin to scrap guarantees on bank deposits' (Reuters). Clearly, as the government attempts to rid banks of bad debts there is the danger of triggering a stock market collapse. It is this expected weakness in share prices during the upcoming March/April period that provided the incentive for the formation of the SBB.
The PPT and the SBB
Unlike the America plunge protection team, which tends to undertake market manipulations incognito, the Japanese stock buying body's sole purpose is to openly support the financial markets. Furthermore, there is considerable doubt as to whether or not the body's mandate is to simply cushion the blow as banks continue to sell-off their enormous holdings (the original concept for its formation), or if it is attempting to underpin a stock market that would otherwise deservedly fall regardless of such bank sales. To be sure, the rhetoric from the body's creators has been that the markets must stop falling:
"We must halt this fall in shares. It's like diarrhea, we must stop it. The stock-buying body was set up precisely to absorb such selling (offloading of cross-shareholdings by banks). If February is such a month, there is no excuse for not functioning at that crucial time."
Finance Minister Masajuro Shiokaw – Feb 7
"We agreed that the market's current level is clearly undervalued and needs to be corrected"
Prime Minister Junichiro Koizumi's economic adviser Heizo Takenaka – Feb 15
The phrases 'we must halt this fall in shares', and 'the market's current level is clearly undervalued' do not appear to be 'defensive only' mantras. Rather, the new body is being portrayed, at least by those who believe the very purpose of the SBB is 'suspect', as an active agent against any further stock market declines. The question is, is the SSB trying to save a market that is falling for the wrong reasons, or is it only glossing over the deep-rooted structural inefficiencies which have caused the markets to decline in the first place? The SBB, and to a lesser extent the PPT, would certainly like use to think it is the former rather than the latter.
Timing The Plunge
As is becoming increasingly evident within the America equity markets, if shares rise for reasons other than corporate earnings (or related strict fundamentals) the fallout can be that much more severe. Moreover, the fallout can be that much more unpredictable: one day the money in the markets does not care about earnings only manipulated revenue gains, and the next any company without earnings, regardless of revenues, sees its share price get decimated.
With this in mind, consider the Nikkei: the languishing leading index of corporate Japan is back above 10,000 after hitting an intraday low of 9420.85 on February 7. Drawing upon Mr. Shiokaw's previous statements, which not surprisingly came at the same time the Nikkei 'bottomed', the recent rally in the Nikkei may be confirmatory of an array of events, including: 1) the banks continue to sell as expected 2) the government is buying as prefigured 3) no one with any intelligence is shorting, and 4) speculators are hoping. That 'no one with any intelligence is shorting' is a deceptive statement. For certain, shorting specific Japanese stocks may be fundamentally sound, but how can someone short when the government is saying the market is cheap and they will now for the first time ever be buying shares directly? As for 'speculators are hoping': clearly Mr. Shoikaw's comments played a role, however small, in stopping the Nikkei's slide rather than any strict 'value' developments in the marketplace.
With these 'timing' thoughts in place, a much larger question comes into focus: should secret government backed groups be propping up the markets?
Take first the argument that the markets should not be allowed to fall, or at minimum 'rapidly fall'. To illuminate how this could be dangerous occurrence imagine Greenspan and company saying they will not let the Nasdaq fall below 5,000 back in March 2000 (granted this an extreme example that borderlines on the absurd. Perhaps 4,000, 3,000, 2,000, or 1,000 would be more applicable?) Nevertheless, if Greenspan helped form an American version of the Japanese SBB back in March 2000 would the Nasdaq still be at +5,000 today? If so, what would the average P/E on the Nasdaq be – 1500? Further, would now defunct dot coms have continued to recklessly spend because of the ready availability of capital through share offerings? Would overall telecom debt still be enlarging, risking the very sustainability of the US financial structure? Perhaps, if Greenspan played his cards right, Henry Blodget would still be employed, Cramer would still be acting like a complete psychopath on CNBC, and the FASB would still be influenced solely by corporate America? Questions, questions…
The point to be taken from the above hypothetical is that improper use of plunge protection can serve as an exacerbating agent when any downturn does arrive. If the Nasdaq were held beyond 5,000, more debts would have been granted to nonprofitable entities, more shares would have been issued, more lies would have been told. Ultimately, more damage would have been done.
To Plunge or Not To Plunge?
The case against market manipulations can pose equally interesting scenarios. Consider September 17, 2001 – the first day of trading in New York following September 11. What if Greenspan and company did nothing? What if the SEC did not rig the game so that corporations, and underfunded mutual funds could buy, buy, buy? In sum, what if the initial sell off was not supported, pessimism was allowed to grow, and prices continued to plunge?
These 'what ifs' are exactly what the plunge protection teams are supposedly trying to avoid. Arguable the PPT's motions helped quell the tides in September.
Clearly there is a gray area when it comes to the topic of plunge protection: during certain instances stopping a precipitous slide in stock prices can help the markets avoid crisis. At other times stopping a slide only serves to swell a much larger slide later on. However, the real question to be asked is by what methodology, if any, the PPT and SBB should operate. To be sure, the Fed released transcripts last week that showed that Greenspan and Lindsey both expressed worries about stock prices back in 1996. If the plunge protection team has been using this measure to establish intervention guidelines, then they would not have acted at all since that point. Put simply, by any strict valuation calculation the markets as a whole have not been cheaper since 1996 so there has been no cause for intervention.
However, as September 2001 demonstrates, recent history does show market manipulation on the part of the PPT. Thus it would appear that the plunge protection team acts in a contradictory manner to its own rhetoric and observations: they act on the basis of political considerations to ensure that prices do not fall at 'key' moments in time, rather than on the basis of economic fundamentals. In the current case, the question to be asked is when do falling prices during a 'bubble' indicate that we are not in a bubble any more? Ironically, this is a question the PPT avoids by not disclosing what they do. By contrast, in the coming months and years the SBB may not be so lucky.
SBB A Necessary Evil?
The SBB has attempted to legitimize government ownership of stocks because it has no other alternatives. Put simply, if Japanese banks are to adhere to new guidelines mapped out by the government they will have to sell an enormous amount of stock to do so. Nevertheless, it should be remembered that the major hang up when it comes to the Japanese economy is that the government does not take action in absolving 'bad debts'. With this in mind, one has to wonder whether buying shares from Japanese banks is just another form of bailing these banks out? To help you ponder this thought a question will suffice: is the SBB buying an opportunistic stake in viable, thriving corporations, or are they holding the value of corporate shares up hoping for the best? A bailout, is a bailout, is a bailout…
To date no one has even begun to debate when, if ever, the SBB intends to sell share back into the marketplace.
Hard Line The Only Line?
Generally speaking government backed equity markets, as China has recently become aware, do not work. Such markets function differently than regular markets where investors purchase a stake in a company by paying premiums that correlate to expected business developments. They function differently because they are regulated by political rather than economic considerations: a marketplace that may deserve by any and all measures to drop, is held up nevertheless.
In the case of Japan, plunge protection has not been reactionary. Rather, a methodical drop in share prices with the fear of further sharp drops is the reason for the formation of the SBB. With this in mind, the danger occurs when, and if, the SBB becomes unsuccessful in achieving their stated goals. If the Nikkei drops below 9,000 in the coming years the SBB would have wasted public funds, and potentially created a situation where ungrounded optimism transforms into ungrounded pessimism. What this means is that short sellers, and speculators (numbers 3, and 4) would likely pose a threat to Japanese stocks if the SBB does not continue to protect them.
The Honesty of a Plunge
The Nikkei is rising rapidly and many of those that feared a blow-up on February 7 still fear a blow-up. Nothing has changed following the SBB's formation except perception of stock prices – not perceptions of Japanese macro fundamentals. The verdict is still out on whether or not perception is that the SBB is a good or bad thing for the markets long term.
Just as the 1990s investor was directed away from all that is 'value', and all that is 'fundamental' when investing in stock prices, so too can plunge protection bodies serve as agents of misdirection, purveyors of prosperity when the fundamentals do not support the markets. It is worth remembering that there is a double standard constantly being formed: that being that falling prices should be supported while rising prices should be allowed to escalate. As such, perhaps the only way to calm fears that plunge teams are not fouling up the markets is to form another team of 'mania monitors': at least this way the next plunge in global stock prices will be an honest plunge – one that is as walled in as the next rally, or by the set of 'cheap' and 'overvalued' rationales bankers around the world deem fit.
Plunge protecting the world's stock markets may be a hazardous pursuit. That said, it is worth remembering that the Nikkei, thanks in part to anticipation of the new 'stock buying body', is up nearly 10% since February 7, 2002. As such, the potential dangers of governments amassing equity ownership are easily dismissed – prices are rising!
However, to play on Mr. Shiokaw's words, the fear is that perceptions surrounding plunge protection might change to: 'It's like diarrhea, we must stop it." While you can temporarily stop stock prices from sliding down the toilet by using public funds to buy shares, eventually new capital and a stronger set of fundamentals are needed to avoid a more powerful flush. |
