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haha · 03-07-2007, 11:25 AM

The rapid recovery and obvious short covering after this recent market distress has me wondering if there is more to this than meets the eye.

I don’t know why a plunge protection team couldn't wade in and make abrupt clumsy purchases of futures and derivatives. The futures/ stocks arbs would see to it that any AM rally in futures carried through to the equities market, which would then start the short squeeze and quite likely stop the decline.

Does anyone doubt that the Wall street-Washington axis would hesitate to do anything that they thought they could get away with?

Is Paulson more interested in his buddies from Park avenue, Greenwich and Upper Saddle River, or in Joe Sixpack in Oshkosh?

This sounds like Roswell stuff, but I think it is not only possible but maybe even likely.

Ha

MasterBlaster · 03-07-2007, 12:03 PM

Well I suppose given enough money one could way in and buy opposing futures to stop the decline.

The problem is that nobody wants to be on the wrong end of a tidal wave. That could be very expensive buying up all of those contracts.

As I understand it, the recent drop was due in large part to highly leveraged participants fleeing the Yen carry game. Even though the Yen only went up a couple of percent relative to the dollar, if you are leveraged 10 or 20 times to each dollar then you'll start to feel some real pain when the markets move against you. At that point they sell at any price just to get out.

The question then becomes, what if large players with tremendous positions cannot cover their losses. That's when the non-players start to feel their own pain. The net effect may be that equity and bond prices suddenly tumble, and interest rates go suddenly very high. So we may be exposed to lots of risk even though we are not direct participants.

It gets even more interesting in that nobody has a handle on how much of this "hedge fund" nonsense is taking place. Another interesting thing is that this thing takes place on the intenational scene so it's not clear who, if anybody, could regulate it.

The fear is that there is a Black Friday scenario out there.