Recently here I suggested that we all had to hope that Secretary Paulson had another rabbit in his hat. When the European markets closed yesterday failing to rally after an injection of $180bn and Morgan Stanley and Goldman Sachs looked like they were about to be thrown onto the bonfire of vanities, the authorities knew that they had to perform like true magicians. So we got two elements in a carefully planned set of leaks/announcements. First, the UK's FSA came out with an outright ban on short selling of financials, and then we got the news that an RTC type solution to the systemic financial crisis was being sketched out with Congressional leaders. Perfect timing and worthy of a true magician.

The nasty hedge fund fat-cats were set up as the distraction while the real illusion is performed, which is that the effective nationalization of the illiquid assets of the banking system will restore confidence to the system. And it probably will - eventually!

What I like about the idea (please excuse the irony) is that since it is still vague and has so many nuances and complexities to be ironed out it will allow for a stealth-like alignment of the twin needs of separating out good bank/bad bank stuff with the other vital dichotomy private gain and public loss.

The timing of this was critical and is well reflected in the chart below for the VIX which shows that maximum fear as the 42 level was breached was the signal to the "authorities" that they really had no choice but to fire the biggest gun left in their arsenal.

One of the awkward questions that is going to have to be answered is what kinds of instruments will the RTC type entity be actually buying from the distressed banks? Presumably it will include all of the toxic structured instruments that do not trade, cannot be marked to the market and that none of the astrophysicists who concocted them can value either. What price should be paid for these exotic items? How long does the public sector keep them on its books?

If this issue doesn't finally reveal the completely bogus way that the mathematics of risk management are being practised then nothing will.



The FSA in the UK have moved the goalposts in a major manner, and it is having the expected effect for the FTSE as a massive short covering is taking place in all of the battered financials. This will not be a champagne occasion for some in Mayfair tonight.



The Asian markets had a bonanza session with the Hang Seng index (^HSI) seeing an almost ten percent rally. But reviewing the chart it still apparent how much damage has been done to sentiment in this very speculative market.



The most dynamic move in the US equity indices yesterday was seen in my favorite barometer index, the Russell 2000 (^RUT) which surged by seven percent and regained a close above the 720 level. Perhaps we will get the test of the 760 level that I was discussing here just two weeks ago and, which following the recent events, was something I did not believe we would see for quite a while.

What continues to make markets so fascinating - truth is stranger than fiction - is that I would not be surprised to see us above 760 in coming sessions or below 660.




Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

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