Schaeffer article on the market manipulation attempt in progress:
I ask that you carefully review the following news dispatch from the web
edition of The Guardian, billed as the most popular newspaper website in
the U.K.
"Fed to prop up Wall St"
Shadowy committee ready to pour billions into stock markets to avert
shares meltdown
Richard Wachman and Jamie Doward
Sunday September 16, 2001
The US Federal Reserve and Wall Street's powerful investment banks are
preparing to spend billions of dollars to support the US stock market,
which opens this week for the first time since last Tuesday's terrorist
attacks on New York and Washington.
A secretive committee - the Working Group on Financial Markets, dubbed
'the plunge protection team' - includes bankers as well as representatives
of the New York Stock Exchange, Nasdaq, and the US Treasury. It is ready
to co-ordinate intervention by the Federal Reserve on an unprecedented
scale.
The Fed, supported by the banks, will buy equities from mutual funds and
other institutional sellers if there is evidence of panic selling in the
wake of last week's carnage.
The authorities are determined to avert a worldwide slump in share prices
like the crashes of 1987 or 1929. Investment banks and their broking
subsidiaries are to block short-selling by speculators and hedge funds by
making it hard for them to obtain prices on favourable terms.
'Everyone is eager to avoid "contagion", where prices fall rapidly as
investors react lemming-like to a falling index,' said one banker.
In addition, US regulators are prepared to ease rules that prevent
companies from buying their own stock.
The 'plunge protection team' was established by a special executive order
issued by former President Ronald Reagan in 1989. It is known to include
senior bankers at leading Wall Street institutions such as Merrill Lynch
and Goldman Sachs. It has acted before, in the early Nineties and during
the 1998 LTCM hedge fund crisis.
Whether coordinated action by the US authorities and banking institutions
will be sufficient to avert a large-scale sell-off on Wall Street this
week remains to be seen.
Tony Jackson, director of UK equity strategy at investment bank ING
Barings, believes there may be an emotional tide of support for Wall
Street this week, but that it will be short-lived. He said: 'Some people
are talking about a "patriotic rally" that could lift the Dow by 1,000
points on reopening. I don't think it will be that high, but it will
certainly go up, perhaps several hundred points.
'But long term, the trend will still be down, perhaps 10 percent from
where it opens. Many companies will cut earnings forecasts now.'
Khuram Chaudhry, equity strategist at Merrill Lynch, believes that Wall
Street could fall by as much as 10 percent. 'You have to remember that
things did not look that good before the attack on the World Trade Center.
There were already signs that American consumer confidence was
deteriorating. I don't think people are now going to rush out to take
foreign holidays or crowd the shopping malls.'
John Llewellyn, economist at Lehman Brothers, is worried that markets may
prove disorderly, despite the best efforts of the authorities.
'There is a degree of synchronisation between the three major economies.
The US and Europe are weakening in tandem, while Japan is in the doldrums.
In the early Nineties, Japan was in better shape. The global economy may
end up in a worse condition than 10 years ago.'
But there are optimists too. Sonja Gibbs, chief equity strategist at
Nomura International, believes 'the economic fundamentals will take a turn
for the better in 2002'.
Robin Aspinall, equity analyst at broker Teather and Greenwood said: 'The
Americans will want to show that the stars and stripes still fly over Wall
Street.'
For several months now in this space, I've been pointing to what I've
speculated to be a rather brazen attempt by the "powers that be" to prop
up the US stock market through manipulation (for an example, see Microsoft
Manufactures a Tech Rally,
schaeffersresearch.com. And
now, according to The Guardian, my speculation looks to have been quite
correct.
I will take a back seat to no one in my outrage at the horrible events of
September 11, 2001 and in my desire for this nation to do all that is
necessary to assure that we can once again live in safety and prosperity
(see Thoughts on America's Tragedy,
schaeffersresearch.com.
Many uniquely American virtues have already come to the fore since last
Tuesday, and I'm certain that many more will reveal themselves in the
months ahead.
However, manipulation of the market at the highest levels of government
and industry is not one of these virtues. In fact, market manipulation
violates many of the principles of a free society and all of the
principles of a free economy. And market manipulation is destined to
ultimately fail, unless we as a nation are prepared to shut down our free
market economy, and thus pay the ultimate economic price.
As was stated so eloquently by James Grant in a special September 14, 2001
edition of his Interest Rate Observer:
The attack on Pearl Harbor preceded the epochal 1942 stock market bottom
by less than six months. Then again, on December 7, 1941 the U.S. stock
market capitalization was not 135 percent of GDP (it was closer to 20
percent). The bear market in progress since early 2000 has had a rare
personality disorder. As far as can be inferred from valuations, it thinks
it's a bull market.
The principal risk to financial markets lies not in any crisis-induced
loss of confidence, but rather in the consequences of the preceding
overconfidence.Equity earnings yields of three percent imply an almost
arrogant certainty. The future would be exactly like the present except
better, the consensus of investment opinion has had it. It went without
saying that peace would reign forever (was the Soviet Union not out of
commission?) … What is 30 times declining net income except an expression
of certainty?
And some wisdom regarding "patriotic stock buying" from a column over this
past weekend from Jon D. Markman, managing editor of MSN Money:
"Just about every professional investor thinks that equating patriotism
with buying stocks is not only risky, but ill conceived, and they differ
on what the results might be come Monday.
William Fleckenstein, a hedge fund manager in Seattle who has called the
declining U.S. market with deadly accuracy for the past two years and more,
likewise advised investors to beware. ‘To the extent that people say they
will be patriotic and buy stocks -- that's a poor use of their resources.
They should take the same money and donate it to people in need. You
cannot cause the stock market to surge in an act of patriotism, people are
confusing two separate but overlapping issues.'"
To Mr. Fleckenstein's advice I will add the fact that New York City is
very soon expected to issue $2.5 billion in notes to finance the recovery
from the attacks. I would urge that if you have spare cash to invest,
check (as I have already done) with your brokerage firm or bank to see if
you can participate in this offering.
The price level of the stock market will ultimately reflect the health of
America's economy, which is certainly going to be put to a test as a
result of last week's horrors and the events that will unfold therefrom.
Manipulative practices will, to the extent they may briefly succeed, have
no positive effect on the ultimate economic outcome and will most
certainly have a lasting negative impact on the free market principles
that have helped make this nation so great.
Bernie Schaeffer
Chairman and CEO
Schaeffer's Investment Research, Inc
schaeffersresearch.com
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