Someone mentioned in the Rick’s Picks chat room that our old friend Jon Najarian – “Dr J” to all of Chicago – estimated that bears had covered only 25 percent of their short positions at Tuesday’s giddy highs. If so, we can expect the markets to remain vulnerable to the kind of take-no-prisoners short-squeeze that occurred that day.  Face it, no one is so stupid – not even Larry Kudlow – to be buying stocks at these levels simply because he “likes” the market.  The country is in incipient recession, the banks have only barely begun to acknowledge their CDO losses, and the whole debt pyramid is trembling because the players are clueless as to the ultimate value of hundreds of trillions of dollars worth of highly leveraged securities. Under the circumstances, only a bear caught in a short-squeeze could find a compelling reason to buy shares.

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In the meantime, when discussing our financial woes, the usual experts have acknowledged only the tip of the iceberg – i.e., that it is impossible to know for certain how much a mountain of soggy subprime paper is worth.  But surely even these bozos know that nearly all debt paper has been similarly encumbered by leveraging schemes so esoteric as to verge on the metaphysical.  We suspect that even Joe Investor’s lowly passbook account has been multiplied in ways that would make it impossible to determine what might remain of it after the inevitable meltdown occurs. Follow the money trail and you might discover that Joe’s paltry savings have been pledged 20 times over by some Master of the Universe who makes his living selling synthetic put options on Bolivian reverse floaters.    

Epochal Con-Game

Putting aside the unsettling implications of this epochal con-game, we can be fairly certain that the only buying power left to buoy the stock market right now is short-covering. And if Dr J is right, which he usually is, there will be more days like Tuesday, when stocks surge so ferociously as to briefly cause us to forget that Kudlow’s Goldilocks Economy is a cynical hoax. Even so, bears would be wise to stand their ground, especially since Tuesday’s hysteria was probably as painful for shorts as it’s going to get, at least for now.

The Dow’s 319-point rally that day elicited this delirious note from a Wall Street Journal reporter:  “Stocks took off and never looked back Tuesday as investors grew more optimistic that the ugliest wreckage from disastrous mortgage bets is in the rearview mirror for major Wall Street firms.”  If you believe poppycock like this – believe, in effect, that the recent hits taken by Barclay’s ($2.67 billion), UBS ($7.1 billion), Bank of America ($3.1 billion), Merrill Lynch ($8 billion)  et al, will be the end of it, then step up and join Kudlow on the bid side.  For our part, we see these losses as just the very beginning of a long and devastating run on the money centers. Accordingly, we’ll reiterate our prediction that the shares of Citigroup, for one, eventually will trade for less than 10 percent of the $57 peak they reached earlier in the year.