Yesterday the Federal Reserve held their August FOMC meeting. Prior to the meeting the markets were trading in positive territory with the S&P index up over 20 points in early trading. In late afternoon the Fed released their statement in which no QE was announced openly. Immediately stocks tanked and the S&P index fell as was trading down more than 10 points. However, almost immediately stocks began to soar into the last hour of trading and the S&P index rose by more than 60 points from the low into the close.
What caused the turn around in sentiment? Was it the statment by the Fed that: “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate…” that led markets to believe that QE 3 was coming sooner rather than later and may be announced at the Jackson Hole Economic Summit later this month? Or was it something more sinister? A stealth QE3 perhaps?
Our friend Bill King, editor of the “The King Report”, made the following observation: “After the disappointing FOMC Communiqué, no QE3, stocks tanked. But someone forced S&P futures 64 points higher in the last hour (+37 last 30 min) of NYSE trading. GS was the rumored major domo. Stocks were greatly oversold on a short-term basis but Tuesday’s manipulation smacks of desperation.
Perhaps out of necessity the Fed is following the recommendation of former Fed Governor Robert Heller. In 1989 Heller suggested that when stocks crash the Fed should buy S&P futures to support the stock market instead of flooding the system with credit because the easy money causes too many problems.”
The NY Post’s John Crudele just posted in his article “How To Fix A Market” the same idea: “Back in October 1989, a guy named Robert Heller, who had just quit his post as a Fed governor, suggested that the government should purchase stock index futures contracts to calm the markets in times of distress. “The Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole,” Heller wrote in an op-ed piece in The Wall Street Journal after saying the same thing in a little-noticed speech. “The stock market is certainly not too big for the Fed to handle.”…
Heller suggested that the stock market be rigged before the Fed does all the dangerous things it has already done — like adding too much liquidity to the monetary system. That, he said, would be a bigger mistake than forfeiting our innocence by propping up stocks.”
So, was it just an oversold bounce or a stealth QE program going on behind the seems. It is certainly feasible for the Fed to orchestrate mass purchases of index futures through the major firms and the firms have plenty of excess reserves to accommodate them. Furthermore, with the Fed’s tool box near depletion and no real ability to know if a third QE program will have any real effect it is an interesting theory nonetheless. After all this is similar to the operation that was used to resurrect the stock market and financial system on October 20, 1987.
Bill King, in his report, wrote that he had received an email yesterday stating that “GS [Goldman Sachs] is standing in SP [S&P Index] pit buying nonstop.” The use of GS to buy, if true, suggests that the manipulator knew that traders suspiciously scrutinize GS for unusual activity that leads to profits. Ergo, traders will eagerly become complicit in the operation. If the Fed now feels that it must manipulate the stock market higher because QE is no longer effective and might be harmful, we are in a very, very dangerous situation.
But desperate times demand desperate measures and with QE2 drawing so much political fire maybe this time the Fed is opting for something a little more covert. Regardless, our targets for this rally are currently 1200-1250 on the S&P index and we will evaluate market performance when we get there. Whether the Fed is operating behind the scenes or make a public announcement of QE 3 either at the end of the month or year is yet to be seen. In the meantime, it makes for great and interesting speculation and writing but the management of money comes down to actual, observable market events and those we will monitor and report to you on as they occur.