Some See a Second Invisible Hand
By Aaron L. Task
Senior Writer
TheStreet.com
07/23/2002 06:45 PM EDT
Fair to say, today was the nuttiest 82-point day in history. The Dow Jones Industrial Average's relatively modest decline (relative to the past few weeks) followed another session of wild swings amid heavy volume. Moreover, it was accompanied by even wilder rumors and dramatic movements in foreign exchange and commodity markets.
The Dow traded as high as 7894.41 early in the session and as low as 7682.89 at about 2 p.m. EDT. The index flip-flopped between up modestly and down modestly at least 10 times during the session and suffered yet another steep drop in the final hour of trading, ending down 1.1% to 7702.34.
Broader market averages sustained less volatility but suffered bigger declines. The S&P 500 closed down 2.7% to 797.71, while the Nasdaq Composite shed 4.2% to 1229.05. Additionally, the Russell 2000 shed 4.1% to 363.99.
Declining stocks pounded advancers by more than 5 to 1, and 52-week lows swamped highs 678 to 11 in Big Board trading, where 2.4 billion shares traded, the third consecutive session with more than 2 billion shares. Over-the-counter internals were similarly dismal.
Notably, there's still no shortage of people trying to call a bottom, despite the broadening carnage. Many noted the VIX's rise above 50 today, while others suggested that CNBC's Maria Bartiromo recommending short-selling must surely be a sign of an imminent turn.
Maybe it is, but still (still!), the prevailing fear on Wall Street seems to be one of missing out on the next rally, rather than one of suffering more losses.
Rumor Rumor Everywhere
Many of Dow's woes were due to another day of steep losses in its financial components. Citigroup (C:NYSE - news - commentary - research - analysis) fell 15.7% amid concerns about its role in the Enron debacle and its potential liability in shareholder lawsuits. J.P. Morgan (JPM:NYSE - news - commentary - research - analysis), dogged by similar concerns, fell 18.1%. The Philadelphia Stock Exchange/KBW Bank Index fell 7%. (After the close, Citigroup chairman Sandy Weil reportedly gave a "pep talk" to the firm's employees and stressed that the firm's financial reserves remain more than adequate and that its shares are undervalued.)
"All the money-center banks were rumored to be problems -- it was one thing after another," said Michael Driscoll, director of listed trading at Bear Stearns (one of the few firms not in the rumor mill). "Everything I heard rumored today I've heard before, but the market is so hypersensitive to any whiff of bad news."
I don't want to rumor-monger, but given what's transpired with Enron, WorldCom, et al., nothing would surprise me anymore. Furthermore, there seems to be a growing consensus on Wall Street that at least one major financial institution is imperiled or may be forced to slash its workforce and/or merge to survive. (On a separate but related note, Goldman Sachs (GS:NYSE - news - commentary - research - analysis) fell 5.9% today amid rumors it will soon announce layoffs.)
The Man Behind the Curtain
Among the day's most noteworthy rumor was that the Federal Reserve was convening an "emergency meeting" to deal with the market's meltdown in general and J.P. Morgan's derivatives exposure specifically.
Spokesman for both J.P. Morgan and the Fed did not return phone calls seeking comment (not that I expect they would have commented, anyway).
At the end of 2002's first quarter, the notional value of derivatives contracts involving U.S. commercial banks and trust companies was $45.9 trillion, according to the Office of the Comptroller of the Currency's bank derivatives report.
The OCC noted that seven commercial banks accounted for almost 96% of the total notional amount of those derivative contracts, which are complex financial instruments used to hedge risk against and/or increase leverage to movements in various financial assets. J.P. Morgan Chase is far and away the most active participant in the derivatives market, with involvement in $23.2 trillion, or 50.5% of the total.
For some time now, years literally, the hard-core bears have been talking about a "sum of all fears" scenario involving J.P. Morgan's exposure to derivatives in general, and bearish bets on gold in particular.
Today, the price of gold fell 3.4% to $312.60 per ounce, its lowest close since July 8, while the dollar rallied sharply vs. the euro, which fell below parity to 98.62 cents vs. yesterday's close of $1.0080. The dollar also rallied against the yen, and the dollar index rose 1.95 to 107.08.
Given the greenback has recently been moving in the same direction as equities (i.e., down), while gold has been trading inversely (although more sideways-to-down of late), today's movements were somewhat curious.
Indeed, a person given to conspiracy theories might surmise the Fed did convene a meeting today and decided to intervene to boost the dollar and weaken gold in order to help alleviate pressure on money-center banks, such as J.P. Morgan and Citigroup.
However, Ted Wieseman, an economist at Morgan Stanley Dean Witter, doubted such a scenario was unfolding.
"I don't want to say it's impossible, but it's unlikely," Wieseman said. "I doubt there's intervention going on. If the government were going to intervene [in the currency markets] , that's something they would want to announce." (Indeed, in 1998, then-Treasury Secretary Robert Rubin made sure everybody knew the Treasury was intervening to support the dollar.)
Furthermore, Wieseman said Morgan Stanley's fixed-income team believes the U.S. government is unlikely to intervene as long as the euro is under $1.05, and that it might not act if a move to those levels or higher was orderly and gradual.
I'd called Wieseman to discuss a recent report he'd penned which sought to debunk rising speculation that the Fed is intervening the equities markets. I've noted such speculation repeatedly, and Wiesman and Morgan Stanley were increasingly getting similar inquiries from clients, especially from overseas.
"I think it's pretty clearly illegal for the Fed to be doing it," the economist said. "No one in the government is directly buying stocks."
Wieseman cited Section 14 of the Federal Reserve Act, which "specifically identifies the types of securities the central bank is allowed to buy and sell." These include Treasuries, agencies, short-duration munis, bankers' acceptances and gold. In 1962 the Fed was given authority to buy and sell currencies as well.
I wanted to share this with readers who've asked about the rumors, but I seriously doubt this information is going to disabuse some from the notion that various forces are trying to manipulate the financial markets
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Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. |
