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July 01, 2009

Market Manipulation from the Big Boys: Is there really a PPT (Plunge Protection Team)?
by Reggie Middleton

I decided to dedicate some resources into the reason stock prices have diverged so far, and so fast from the underlying fundamentals. The preliminary results of my findings will be released over the next day or two, hopefully. In the meantime, enjoy this precursor.

Market volumes

Volumes in the markets are tapering down and are undermining the strength and sustainability of the recent rally. The average volume of both Dow Jones and S&P 500 in June were below the average volumes (since Jan 2008)

As a matter of fact, you can easily and visually discern from the charts above that there is a clear inverse correlation between volume and index price. The higher the volume, the lower the index goes, the lower the volume the higher the index goes. I attribute this to the observation that most REAL investors realize that there are too many headwinds in the market to truly commit significant long capital. Well, if that is the case, what is causing the stock prices to rise on light volume????

Growth in program trading

There has been a phenomenal surge in program trading over the past one year with program trading accounting for 40.4% of total trading volumes on NYSE for week ended June 19, 2009 against 35.1% in January 2009 and 27.8% for the previous 52 weeks. The growth has been exceptional particularly since the last week of May 2009. This smells quite fishy, after all the last week in May also saw a significant jump in both the S&P and DJIA on diminished volume.

Influence on market

Since April 6, 2009 when S&P 500 index was at 857 points program trading accounted for 30.9% of total NYSE volumes. Over the past two months when S&P 500 increased to 921 points program trading has increased to 40.4%. Similarly, the relation between program trading and the S&P index was also witnessed during December, 2008 - February, 2009. Increase in program trading historically has been a major contributor of increased volatility due to abrupt price changes due caused by automated rule based trading. Widespread use of program trading has been one of the causes for the stock market collapse on October 19, 1987, also referred as Black Monday. However, there are numerous other factors that could explain the increased volatility and it would be difficult to discern the sole impact of program trading on volatility.

Major Players

Goldman Sachs is the largest player in the program trading market space with nearly 20.6% of program trading volumes as of June 19, 2009. Overall, Goldman Sachs program trading volumes alone form a substantial 8.3% of NYSE total volumes, up from 7.0% since 2009 beginning. Although, Goldman Sachs trading volumes still dominate the program trading there has been significant surge in program trading volumes of Deutsche Bank, Morgan Stanley, Barclays and Credit Sussie with 158%, 89%, 152% and 118% increase in program trading volumes. Deutsche Bank, Morgan Stanley's share have increased to 12.3% and 11.6%, respectively for the week ended June 19, 2009 compared with 8.3% and 4.0%, respectively for the week ended January 2, 2009 suggesting that some of the recent rally could be driven by increased trading by these institutions.

Now, I have warned about Goldman's increased VaR and exposure to trading activities over a year ago (see "Goldman Sachs Snapshot: Risk vs. Reward vs. Reputations on the Street"). For those that believe Goldman is invincible in the trading markets, I strongly suggest you query their December 2008 trading performance, which resulted in a big loss. These results somehow became "orphaned", not being included in Q4-08 or Q1-09 results. This was a convenient exercise of hide the sausage, since the December result would have skewed either quarter significantly to the negative. Goldman is now basically a big hedge fund, and would (and should) be valued as such if not for the premium, "mystique" brand name that has been attached to it by those who do not adequate vet the financial statements. I will bring more on this topic tomorrow. In the mean time, I suggest all re-read my missive from April of this year - "Who is the Newest Riskiest Bank on the Street?". I saw this coming a while back.

Maybe readers should send their local elected official a copy of "Newest Riskiest Bank" as well as this article to their fellow taxpayers and elected officials in Congress so all can see what our tax monies have been bailing out and supporting over the last year - the continued and blatant risk taking that was the root cause of this mess to begin with. I pray thee tell me, what happens if Goldman crashes in a programmed trading meltdown??? More taxpayer TARP, bank bailouts, supports and guarantees. Now, what do you think happens if things go well for their trading program? The biggest bonuses in the history of the company, in order to "incentivize" stars to stay. This is absolute nonsense, and the takers of the risk need to be the ones to bear the consequences of said risk, not simply be the sole persons and entities to benefit from the rewards of said risk. I say the taxpayer should share in the Q1 Goldman bonuses, since it was the taxpayers support that kept Goldman alive through Q1 (remember the Decemember loss, the expedited federal bank charter, the debt guarantees, the TARP, the ZIRP, the taking of junk assets as collateral, the TALF, the PPIP, the AIG bailout funds forwarded to GS, and the whole enchilada???). Does anyone really think that Goldman earned those bonuses without government assistance. Now, I feel I should keep my bonus, if I were to get one, because no one gave me $55 billion to keep me in business while I waded through risky mistakes until I found some that paid off! Can Goldman say the same???

Do not simply follow accounting earnings without taking into consideration the risk involved in generating said earnings. Consider yourself warned!

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.

Copyright © 2007-2010 Reggie Middleton

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