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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: john a who wrote (53175)	5/23/2000 11:48:00 PM
From: Alex	Read Replies (1) \| Respond to of 116972

Interesting read from Kitco............ Date: Tue May 23 2000 22:17 jbr29 (Stock market crash ?) ID#195256: Copyright ¸ 2000 jbr29/Kitco Inc. All rights reserved A lot of talk about stock market crashes this evening. Today is quite different than 1929-32. The two outstanding differences are derivatives and a very different currency which denominates the share prices. Derivatives: 1987, 1997 and probably a few times since the Fed/Treasury has been successful in stemming share price collapse by providing brokerage houses with absolutely huge arbitrage opportunities, enabling them to realize tremendous financial gain over a very short period and with virtually no risk. In effect, the government is subsidizing these brokerages for doing its dirty work. The mechanics: Via S&P index contracts ( and lately similar contracts in other exchanges ) the Fed, through special accounts, goes "long" literally thousands of these contracts as market action accelerates to the downside. You might ask, who in their right mind would take the short side of this action with the Fed bent on turning around prices to the upside ? Well, it is the brokerage houses, and here is why: arbitrage. As the Fed issues orders to buy these contracts in volume, the buying pressure forces the contract sale price higher and higher, even while the stock market falls. As the brokerages buy, they "lay off" their risk by simultaneously issuing buy orders to their floor brokers for the very stocks that are part of the "basket of stocks" of which the contract is comprised. Now the price at which they sold was considerably higher than the cost to them to buy this basket of stocks, so they have effectively locked in the difference. In the 1997 correction, this difference at one point was 3500 points ( 35 clicks ) or $8750 per contract. When the contract expires it is cash settled. On settlement day, the index settlement converges to the underlying aggregate stock valuation. If the index contract value is less than the initial sale price ( presumably not as the whole point of the Fed's actions was to buttress prices ) , the brokerage will realize a gain on the index short ( paid by the Fed ) , but an identical snapshot loss on the stocks that it had gone long with, hence the profit is the initial locked-in arbitrage. On the other hand, if the index finishes higher than the point at which it was sold, the Fed realizes a profit from the brokerage on the cash settlement, but the brokerage offsets this loss by the snapshot higher valuation of its purchased stocks, again resulting in a net gain of the initial arbitrage. This power of the Fed to support these markets is only made possible by my second point: the very different nature of today's money from that of 70 years ago. Whereas then the dollar was very much joined at the hip to gold, today it is not. Hence money is literally no object when it comes to supporting markets. It can be issued until the cows come home if need be. I am not arguing that the Fed would not like to see the markets retrench somewhat to calm the financial gyrations that threaten the whole system. Indeed, they would probably prefer to see the steam gradually let out of the markets. Yet it is the money pump that they must use not only to stem market collapse, but also the solvency of a growing constellation of overextended players in the credit markets that threatens a crash of a completely different nature: the very unit of account which denominates all world transactions, the US dollar. The moment of truth is fast approaching in which the holders of these dollars, nervously watching the other players watch the exit doors to the theater, make their break. That will be a crash to behold. kitcomm.com