The Working Group on Financial Markets at work
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The Working Group on Financial Markets at Work
My Home Lender email newsletter | March 14, 2003 | Roger Arnold
Posted on 03/14/2003 7:29 AM PST by hripka
The Working Group on Financial Markets at Work
I'm Glad to see a recovery this week in equities world wide and the corresponding reduction in Gold and increasing treasury yields.
I however do not believe there is any fundamental reason to believe that this is anything other than a near term turning point in the market.
I also do not believe that this was driven by market fundamentals.
On Tuesday evening, about 2 hours after the Japanese markets opened I sent out 2 e-mails to money mangers with whom I correspond:
First e-mail :
Watch for an increase in Gold long selling and short selling soon - perhaps tonight even - the cash will be used to buy US equities and increase margin into equities in an attempt to bolster US equities.
This appears to be driven by PPT coordination as a means of halting a cascading sell off of equities.
I believe the near term increase in margin is anecdotal evidence that has already begun.
The margin increase is almost exclusively on the commercial side versus retail or professional trading side and is being targeted at large blue chips mostly.
Second e-mail: about 45 minutes later
Watch for an increase in Gold long selling and short selling soon - perhaps tonight even - something greater than today's $5 down - a $15 down day - the cash will be used to buy US equities and increase margin into equities in an attempt to bolster US equities.
This appears to be driven by PPT coordination as a means of halting a cascading sell off of equities.
It occurred just after 1987's 500 point Dow fall - The PPT of course was born out of the that event.
I believe the near term increase in margin is anecdotal evidence that this has already begun.
The margin increase is almost exclusively on the commercial side versus retail or professional trading side and is being targeted at large blue chips mostly.
The point in sharing these with you now is that in my opinion the market action of the last 48 hours has been driven exclusively by intervention regardless of economic fundamentals.
Concurrently with the surge in Equities in Europe, which was the precursor to the increase in Equities in the US, there was terrible economic news out of Asia, both Japan and South Korea, which sent their indices down. The Japanese market fell another 1% that night, falling below the absolutely critical level of 8,000 which must be maintained to avoid a systemic collapse of the Japanese banking system.
That night, while we in the US slept, the Japanese Prime Minister, publicly requested assistance from the ECB and US Fed as well as from the Large governments of the world to help Japans currency and stock markets as the fiscal year ends this month.
At the same time in Korea a moratorium on withdrawals from mutual funds was instituted to avoid a run on the funds there following 2 days of massive mutual fund redemptions.
But within just a couple of hours of these occurring the European markets were opening up and heading up all day without any fundamental news to validate it.
This simply doesn't happen.
The risks of a systemic collapse of the worlds capital markets was approaching very quickly if the markets maintained their downward momentum. As this was well known the markets were accelerating their move to the downside. In this type of crisis market traders risk aversion increases and the selling becomes self validating. That is the path the world financial markets were on this week.
There needed to be a catalyst to break the markets momentum. In my opinion that catalyst was a coordinated effort between the European fiscal and monetary authorities with those in the US and the associated large private money centers.
These organizations realizing that a systemic crash was imminent stepped in to stop the markets fall by :
Selling gold: Averting a crisis in the gold carry trade market, primarily protecting JP Morgan.
Selling US Treasuries: Averting an immediate interest rate derivative problem at JP Morgan and Fannie Mae.
Buying US and European equities: Averting an immediate reserve crisis at the German Banks.
This original catalyst was then picked up by the momentum traders and all of these markets extended the gains or losses for the day.
Within the last 24 hours the Japanese and Europeans have announced sweeping capital market reform plans in an attempt to ensure that the markets do not slip back into the trend they were in previously.
Will it work?
In the very near term the answer is yes. I believe it is highly unlikely to be successful in the long term however. The fundamental economic situation all over the world continues to be very bad.
I still believe the markets will reverse course again sending gold up, treasury yields down and equities down as the market begins to focus on those fundamentals again.
This is however one of those times when it becomes apparent just how difficult it is to apply macro-economic understanding to the capital markets on a daily basis.
I would also add that the intervention was absolutely necessary.
I just wish I had told you about here first. |
