Monday, October 23, 2000

Angels from on high drag markets to safer ground

By BRIAN HALE in New York

Nervousness hasn't cleared from Wall Street despite the bounceback from Wall Street's near disaster mid-week after IBM's result gave the short sellers a long start in their hunt for a Red October.

The question, though, is whether Big Al (Greenspan) is pulling on the end of the bungee cord. Uncertainty over the answer means there still is almost as much red as green on the stock tickers, showing that whatever the direction of the indices, lots of stocks are going down rather than up and the shorts are keen for another big down day.

There seem to be more of them around, too. It's not surprising. Selling (shorting) stocks you don't own with the intention of buying them back at a lower price and pocketing the difference has been the best way to make money on Wall Street for two months.

At the moment it even seems like a lay-down misC(re because there's a horde of margin investors who bought on borrowed money and are now forced sellers, depressing share prices further whenever stocks start to tumble.

At last count, which was at the end of September, margin debt had edged higher again by $US3.2 billion to $US250.8 billion ($475 billion) - just 10 per cent down on the peak of margin debt in March at $US278.5 billion.

It's a fair bet that every borrowed dollar was punted on technology stocks. Almost everything else tanked long ago and no-one gears up to buy shares in General Electric or General Motors. It is the tech stocks that now are leading the way down, so when the techs tumble, the margin calls multiply and the forced-seller "longs" reinforce the move that the "shorts" want.

That is just what happened last week after the previous Friday's rebound from a rout the day before: first on Tuesday, when the major stocks and the indices recovered from their lows (with the Nasdaq Composite dropping 2.32 per cent), and then again on Wednesday.

That morning finally saw some real fear and panic on Wall Street as the Dow Jones Industrial Average plunged 435 points (4.3 per cent) and Nasdaq 187 points (5.8 per cent) in heavy volume in the first 10 minutes of trading.

The quick drop took the Dow below the 10,000 level for the first time since mid-March and dragged Nasdaq's Composite index to a new low for the year of 3026 - a 40 per cent fall from the record high it set earlier in the year - before the angels arrived with a rebound that left Nasdaq down just 42 points (1.14 per cent) and the Dow down 114 points (1.32 per cent) on the day.

That was followed on Thursday, the 13th anniversary of the 1987 crash, with a 247-point (7.8 per cent) rebound on Nasdaq and a 167-point (1.7 per cent) recovery by the Dow.

The thing is, no-one knows why. Traders were stunned at the turnaround and so was everyone else. It sparked the usual chatter from the usual suspects about market bottoms, Microsoft's quarterly profit report, etc, etc, but that can be dismissed out of hand, not the least because the software giant's result might have been better than expected on the top line but was good only on a superficial level.

What is clear is that the turnaround began (was engineered) in the futures market. At the lows, futures on the Nasdaq 100 index - the largest 100 companies in the Composite without the foreigners - were down only 4.7 per cent while the index itself was down 6 per cent.

Curious indeed, says Bill Meehan, the chief market analyst at Cantor Fitzgerald, who accepts that a sharp reversal was likely as the recent lows would be heavily defended with the put-to-call numbers so extreme, but admits to being taken aback by the Nasdaq's ability to close the gap in less than 90 minutes.

It took a lot of heavy buying by the major Wall Street houses to close the gap, but no-one who wants to talk will admit the source of the buying orders that, as Meehan puts it, made the lows well defended on Wednesday, "... perhaps with a little help from the market's friends".

Could it have been Wall Street protecting itself? Very unlikely. Those who live and die on the Street of Dreams are not burdened with altruism. Certainly nowhere near enough to unleash an extremely aggressive buying attack in the futures pits right at the maelstrom of the ugliest market opening of the year.

These are the people who had to be strong-armed by the Fed into 1998's rescue of the Long-Term Capital hedge fund, even though its imminent collapse threatened a systemic failure of the US financial system.

Could it have been the Fed? Would it have been the Fed?

Yes, it could. Back in February 1994 Fed chairman Greenspan revealed for the first time that a global link-up of central banks had prevented the 1987 sharemarket crash from becoming a broader international financial disaster. He did not say the Fed had intervened directly, admitting only that "containment" involved the "prudent provision of liquidity to financial markets" - but, said Dr Greenspan, "we are responsible for ensuring the stability and integrity of national financial systems ... that is the essence of our mandate, whether written in law or not".

A few years later The Washington Post revealed the existence of an outfit called the Working Group on Financial Markets, known informally as "The Plunge Protection Team".

Were we seeing a plunge in the first 10 minutes of trading on Wednesday? No question. Would the Fed want us to know if the PPT was in action? No way. The moral hazard is too great - investors would know their backs, and their bottoms, were protected.

But it's worth noting that no fewer than six Fed presidents and governors were out speaking on Thursday, including Greenspan himself, who was widely seen as the most bullish.

Still, John Vail, chief strategist at Fuji Futures, thinks the US media's spin on Greenspan was as positively biased as its take on Microsoft. Vail points out that when Greenspan talked about the backwardation in oil markets as indicating oil prices would fall, he talked only in terms of six-year futures (which are pretty illiquid) - and while he "dissed" the notion that oil didn't matter to the economy, he said he was watching closely to see if the spillover inflation would move to higher levels from "modest".

The bottom line of all this is that while the US equity markets are not back to exuberance, they're back from the brink.

http://smh.com.au/news/0010/23/business/business12.html

-- Martin Thompson (mthom1927@aol.com), October 25, 2000