aleatory

First came the ban on naked shorting yesterday, swiftly followed today by a total ban on shorting of all 799 financial stocks.  Of course this is all just temporary and begs the question – what is going to be different about world markets when the bans are lifted? 

The Treasury believe they have the long term answer to crippled credit markets; rolling up all troubled debt instruments and removing them from Wall St’s collective balance sheet.  This will cost says Paulson, “hundreds of billions of dollars”.  To arrange this they are going to need time.  This is the reason for the market manipulation they are engaging in, something which is far more cavalier than the legitimate strategies adopted by short sellers that has come in for criticism from the mob.  The Fed know this temp ban on shorting will do nothing in the long run; shorters merely wait for their prey to come out into the woods again, as the previous summertime short sale ban proved.  The decree “will last no longer than 30 days”. 

The clock is ticking. 

To be sure, the credit crisis has already infected the economy, starting with the homebuilders, spreading to the financials, engulfing financials in drag such as General Electric, General Motors and Ford and will eventually phase through retail, technology, credit card companies and commodities.That’s the orderly scenario, a stair-step through industries until debt is destroyed and a more sustainable economic foundation takes root. It’s akin to credit cancer and once it spreads through our entire financial body, we’ll be in a position to enjoy the globalization-themed “outside-in” recovery that awaits.

The other option is an outright car crash, a collision where credit seizes, capital markets freeze, price discovery permeates and social mood shifts as we come to terms with the new world order.

Todd Harrison, Minyanville

Amongst his usual metaphoric ramblings, Todd sets out the stark reality US markets face today & for the foreseeable future.  But how can we quantify crash avoidence versus a step-wise sector-by-sector decline?  Another excerpt may help the reader:

Financial institutions have $871 billion in debt coming due into year-end.

If corporate America can successfully roll those obligations and buy more time, odds are we’ll see a sharp upside equity rally.

If, however, sufficient appetite doesn’t emerge for that credit, the potential exists for an unmitigated equity disaster.

A key player in all of this is as always the economic powers that be:

The boys on the Beltway know this all too well and we should expect a wave of announcements in the coming months designed to spur the herd higher.

Therein lies the risk to downside bets, a coordinated agenda that is by design the recipe for a short-squeeze.

So we have fight between a credit market that doesn’t want to trade versus businesses in sectors that haven’t yet felt the impact & the bureaucrats that may or may not have the power to avert disaster.  Can the latter really muddle through this time?