The Dead Cat Bounce, MS, Short Selling Halted, Worldwide Market Fluctuations, and

A great man once told me the analogy of "Dead Cat Bounce", or what some technical traders would consider a technical head fake.

When you drop a dead cat from 20th floor, it will undoubtly hit the floor with great splat and bounce from the pavement. Unfortunately even after such a bounce the cat, well, remains dead.

We've clearly seen the next-day optimism overrun the market quite a few times in the last year or so. Let's recount some of them.

September 2007 - Rate Cut announcement from Feds (series of annoucements)

If you plotted out all the dates of the announced Overnight Lending Rate cuts, you would've seen a nice recovery on the market on the day following.

Unfortunately in each of the cases the temporarily rise faded quickly with other less than stellar earning news and expected losses. It was good while it lasted, throughout 2007 rates had been cut from 4% all the way down to where we are now, 2% overnight.

It's been said this week 30-day Treasury Notes hit 0% Interest.

0%.

Let's take a second and figure out the implications there. It does not take a rocket scientist to figure out something is wrong with the system.

What this means is at one point this week, people were so desperate for some sense of security thaty they would rather lose money to inflation than to keep cash around. Hey, at least the government will back us up with these fancy certificates, right??

I think that might be a bit too short sighted, like most of the markets today.

The Feds announced further drastic action in light of another Investment Bank Morgan Stanley and WashingtonMutual in talks of illiquidity(where have we heard that before?).

Morgan Stanley may sell stake to Chinese sovereign fund

MORGAN Stanley, the second-biggest independent US securities company, may sell a larger stake to China Investment Corporation and is in talks about a possible merger with Wachovia, a source familiar with the matter says.

China's state-controlled fund may buy as much as 49% of the New York-based investment bank, said the source, who declined to be identified because the talks aren't public and may end in no agreement.

Morgan Stanley resumed its decline on the New York Stock Exchange, falling as much as 22%.

To quell the anxious investors, the US Government has a few initiatives, do you think they would work?

1) US Treasury to guarantee money market mutual funds up to $50 billion

The Treasury Department says it will tap into a Depression-era fund to provide guarantees for U.S. money market mutual funds. Seeking to deal with a severe financial crisis, the department said Friday that for the next year the U.S. Treasury will insure the holdings of eligible money market mutual funds. The money to insure the mutual funds will come from the Treasury Department's Exchange Stabilization Fund which was created in 1934 to provide support for the dollar. Treasury took the action to stabilize the giant money market mutual fund industry after fears were raised about their investments earlier this week when Primary Fund announced that the value of its fund's assets had dropped to 97 cents for each $1 put in by investors, exposing them to losses. This instance of "breaking the buck" marked only the second time since money market mutual funds were begun in the United States in 1970 that a fund couldn't assure clients of the full value of their investments. President George W. Bush has authorized Treasury Secretary Henry Paulson to use up to $50 billion from the Exchange Stabilization Fund to provide the guarantees, Treasury said in a statement

Oh great, that's more money out of the taxpayer's pockets. It's not unexpected the $USD is dropping versus everything else... more capital injection means more M3/Money Supply = dilution of the dollar's value!!

2) Part 2 of this massive Friday Initiative included the Short Selling Ban.

To help limit the freefall in financial stocks, the Securities and Exchange Commission on Friday enacted a temporary ban on the short-selling of nearly 800 financial stocks. Short-selling is the common practice of betting against a stock by borrowing shares and then selling them in the open market. A short-seller's hope is the stock will fall; if it does, the stock can be bought back at the lower price. Those cheaper shares can be returned to the lender, allowing the investor to pocket the profits. Traders can lose, however, if the stock rises.

Wall Street observers have disagreed over the extent to which pressure from all those bets that a stock will fall shaped investor sentiment and strangled some financial stocks, like those of Lehman Brothers last week. Some say the fundamental problems with the financial stocks warranted the pessimism while others say the short selling was a death knell for some financial names.

What this means is that speculators can no longer hedge their bets against businesses (read: banks) that have commited an error in calculation and got too aggressive. In most cases, simply not enough due dilligence were done before commiting to billion-dollar-deals.

Last I checked, capitalism meant a free market.

A voluntary ban of selection of stocks just because they were indeed businesses that lost money due to their own stupidity and greed while using taxpayer's money to do so, is plain wrong. Unfortunately the scale of the situation is so large it remains to be seen if the Feds will at one point let more companies like Lehman go under just to experiment the after effects. On the news of this, most financial stocks in US jumped 20%-30% today and Dow Jones closed at a convincingly positive 11,388.44 up almost 3.4%.

What we are looking is the end of a 30-year run of fantastic capitalism on the biggest world stage - the era of regulation.

What lies ahead of us remains to be seen - but one thing is certain, commodities like Gold, Copper and Gold Juniors are here to stay.