Dow rally makes you sink

The Big Read: Late last Friday night, when few in the southern hemisphere were watching the US stock market, the Dow Jones did a bizarre thing.

Just before the close, after a week of bumbling confusion that threatened to drag the bellwether index below the psychological barrier of 10000 points, a remarkable rally occurred.

In the space of minutes, the stock ticker jumped 125 points, bringing the Dow from flat (and falling) to a 1.25% gain for the day. Amazing!

A nanosecond later, the conspiracy theorists were baying in full voice. If the 30 biggest listed companies in the US (which make up the Dow index) weren't worth buying in the five days prior to the bounce, they asked, what suddenly made them so attractive?

We all know financial markets are fickle and perverse and they attract an army of people whose paranoia sometimes outweighs their good sense. But you know what they say about the crazy: they're often right.

The following comments were taken from marketwatch.com, but similar sentiments were expressed far and wide on the Internet. Bears far outnumber bulls in cyberspace these days.

"What a crock of ****. Did all of the sellers die 15 minutes before the close? There is no way this market is not being manipulated."

"How many hundreds of billions of taxpayer dollars were wasted on this stupid show today? For what?"

"No one normal waits to the last minute in a volatile market. No one."

"It is nothing but one big crime syndicate. This racket would make Al Capone proud."

"Rally my ass! This is nothing but absolute, 100%, unmitigated fraud!"

"I sold - needed the money to stock my cave with leftover Y2K supplies, generator and windmill, plus a few ounces of gold to trade with the natives after the 2012 End of Days when the Mayan calendar ends."

To an outsider, with a graph of the Dow's daily activity in front of him, Friday's closing action does look weird. A lazy meander up until midday, then a normal-looking zig-zag down during the afternoon, until . pow! a truly shocking move out of the blue that must have evaporated many a trader's carefully won profits.

The usual excuse trotted out by apologists for this kind of activity is that buyers were "bargain hunting", but such a flurry of purchases will always carry a taint of suspicion - and the usual suspect was a shadowy US government task force colloquially known as the "Plunge Protection Team". The name was first coined by The Washington Post in an article on February 23 1997, in the wake of a series of extraordinary co-ordinated moves by the political establishment to prop up the stock market.

Since the 1929 crash, the US government has openly been on hand to dole out loans to beleaguered banks. But it wasn't until stocks collapsed in 1987 that a dedicated rescue unit was founded under the leadership of the president.

The Plunge Protection Team is formally called the Working Group on Financial Markets, which includes the secretary of the treasury and the chairmen of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The group's activities have been likened to that of a "war room", said The Washington Post in 1997, to ensure that markets keep operating in the event of a plunge in stock prices - and to prevent a panicky run on banks, brokerages and unit trust funds. Along with its power to enter the market, the team also imposed rules on how far stock indexes were allowed to drop before halting trading by the use of "circuit breakers".

The unspoken bankroller behind the group, of course, is the US Federal Reserve - using taxpayers' money to buy up shares that the very same taxpayers may be rushing to sell.

This is all well and good, say the sceptics, but government-funded manipulation of stock prices goes against free-market principles. For instance, a person holding a legitimate "short" position in a stock - in effect, betting on a fall in its price - stands to be wiped out on the whim of a faceless state entity.

On the basis of Friday's activity on the Dow - if indeed it was the hand of the Plunge Protection Team at work - they have a point.

There is no official equivalent body in South Africa to the Plunge Protection Team. There's nothing to stop anybody in the government having a quiet word in the ear of the Public Investment Corporation, which controls state pension assets, but anything a local investor did would be swamped by the daily cascade of foreign money that effectively rules the ups and downs of the JSE's stocks.

The larger concern about US government intervention in markets is debt. As it is, the US government is operating under the burden of a mind-bending deficit. When it taps the Fed to wade into the stock market and prevent a fall in prices (and losses to shareholders), it's basically using borrowed dollars - by the truckload. Debt to prop up debt in an endless deadly circle, throwing bad money after bad.

Already, through its bailout of the US banking system, President Barack Obama's government has had to step in as lender of last resort. Trouble is, the lender of last resort is broke - and borrowing more to keep stock prices from falling is just plain folly. In fact, say the more extreme of the doom-mongers, the US government is spending itself into the same oblivion that faces the likes of Greece and Spain.

In the midst of the credit crisis, it was said that banks were "too big to fail" . yet many banks failed.

Now, say the bears, we should be asking if governments - including the biggest government of all - are too big to fail. Because there won't be a Plunge Protection Team big enough to save them.