As Plunge Protection Team pours gasoline on a market already in flames, TD Financial Sector Put Gains Up to 105%!

Yesterday, my fellow editor, Justice Litle, asked where the hell the Plunge Protection Team, or PPT, had gotten to. Today we know the answer: they are up to no good.

For those of you who don’t believe that Washington and Wall Street manipulate the economy and the market, it’s time to grow up and get real.

This is not some conspiratorial mumbo jumbo. Heck, several departments within the executive branch are specifically and publicly dedicated to preventing economic and market crashes.

Other semi-independent entities like the Federal Reserve, Fannie Mae, Freddie Mac and the FDIC were created to insure confidence in various components of the system as a whole.

The PPT itself has been described numerous times in legitimate media and spoken of in many Wall Street and Washington power player memoirs.

Beyond that, the evidence for its existence is readily observable. Over the years, students of the market have seen the following trick performed over and over whenever some “line in the sand” has been breached.

In the midst of a rout, “someone” ignores the six inches of blood on the trading floor and begins to buy massive quantities of S&P 500 futures with the apparent assurance that none of Wall Street’s major players will short this position.

We are talking billions of dollars here. Thus we presume that it must be a major Wall Street trading house that has been given the nod to act.

This sudden flood of cash on Wall Street is always followed by a flood of positive press releases from Washington: “We have confidence in the system… we will insure liquidity… might even fork over a rate cut… yadda, yadda, yadda.”

The following morning, the market turns a bit, and the futures buyer is made good. For the moment, a bottom is set, and Wall Street has a little breathing room in which to try desperately to work something out.

Does any of this sound familiar? Monday morning, in the face of the worst bankruptcy in history, “someone” began buying up great huge gobs of S&P 500 future contracts.

Right about then, a parade of premium faces (including President Bush and Senator McCain) went on the air with virtually the exact same speech, assuring us that the country’s fundamentals were sound.

Then word began to circulate that despite Washington’s initial reticence, it would pony up $50 billion fresh new dollars after all “to lubricate the banking system.”

Monday night, when even that didn’t work and the market had put in the worst day in recent memory, word began to circulate that the Feds would ignore its own warnings about inflation and cut rates Tuesday, possibly by as much as 50 to 100 basis points.

Tuesday morning, “someone” ignored common sense and began to buy great gobs of S&P 500 futures again. Lo and behold, the market put in a short-term bottom.

You can argue the wisdom of this sort of manipulation. In fact, I am about to. But you simply must accept the fact that it happens.

Now I will tell you exactly why sending more money to Wall Street is a very bad idea.

This crisis was created in the first place by Washington’s cowardly habits. For the past twenty years, every time Wall Street whined that it had created some kind of trouble for itself, Washington ginned up a trillion dollars to bail them out.

Sometimes Washington printed shiny new dollars. Sometimes it borrowed them from folks who may not have our best interests at heart, like the Chinese government, Russian oligarchs and the Saudis royal family.

Either way, the incredible increase in dollars in circulation without genuine growth in GDP is destroying America. Our consumers are broke. Our workers are not working. Our houses are being foreclosed. Our banks are failing. And the Federal institutions that were created to foster stability and protect against genuine emergencies are in shambles.

Our financial house has been bombed.

It is burning down.

And Washington is pouring more gasoline on the fire.

Another $50 billion and another rate cut may help out Wall Street for a day or so. But in the medium term it will only further make life worse for Americans trying to get by. And in the long term, the stock market will still fail, because it is those very excess dollars that are choking it to death.

A few weeks ago, I advised readers of this column to purchase put option contracts against Standard & Poors Select Financial SPDR ETF (XLF:AMEX). As I write to you, those puts have gained as much as 105%.

In time, Washington may be forced to stop flooding the market with dollars. If and when this happens, the rest of Wall Street’s worst players will go bankrupt. Billions more dollars will be lost. In the end, the survivors may even become value buys.

However, there is no sign of this happening anytime soon. And in the meantime buying puts is the only assured defense against Washington and Wall Street’s continuing malfeasance.  

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