Thursday, January 21, 2010
After a 20-year career trading S&P 500 futures contracts on the floor of the Chicago Mercantile Exchange, my friend Charlie suddenly retired last November.
"There was no way to protect yourself," Charlie said to me over lunch a couple weeks ago when I asked him about his unexpected decision. "This guy would walk into the pits and just start buying. It was unconventional. He'd buy at times when it really didn't make any sense – at least not to those of us who'd been around for a while. And he'd buy HUGE."
"It got to the point," Charlie continued, "that we'd have a bunch of our interns just watching the guy when he was off the floor. We'd know if he took a phone call. We'd know if he'd gone outside for a smoke. And we'd know if he started walking in the direction of the pit. That was our cue to start buying futures contracts ourselves – just to get in front of the guy.
"I knew it was time to retire," Charlie sighed, "when I started planning my trading day around this guy's bathroom breaks."
For the past 20 years, conspiracy theorists have engaged in stories about the "Plunge Protection Team" – a group of traders funded by the Fed whose sole purpose is to prop up the stock market. I never really bought into the argument, though. After all, an awful lot of people "in the know" have to stay quiet in order to keep the conspiracy going. And it's unlikely any group of people can maintain that sort of silence for two decades.
But Charlie's story got me thinking.
Then, last week, Charles Biderman, CEO of TrimTabs – one of the most respected and widely read financial research organizations – published a report that raised the possibility that the Fed is actively involved in boosting stock prices.
In the article, Mr. Biderman suggests it would only take $5 billion to $15 billion each month to buy enough S&P 500 futures contracts to boost the market 70%. Surely, with all the hundreds of billions of dollars used to prop up the real estate, auto, and banking industries, it's reasonable to suspect the Fed might use a few bucks to prop up stock prices, too.
At least it's something to think about.
I'm still not sure if I can completely buy into the whole conspiracy theory just yet. There is, however, one thing I do know for sure...
If the Fed has been actively engaged in manipulating stock prices higher, then it can manipulate them lower as well. You won't want to be the one left holding the bag when that happens.
Best regards and good trading,
Silver slips below $18... down 4.5% yesterday on commodity selloff.
Miners tumble... BHP, Rio Tinto, Anglo American, and Newmont all slide over 3% yesterday.
Euro hits five-month low of $1.41 on Greek debt concerns. The long dollar trade is on.