In my Big Whoosh, Part 2 item from Sunday, I said Monday’s trading will hold the clue to how bad the eighth and ninth innings of this financial crisis will be.
Well… Monday’s rise followed by Tuesday’s rally and yesterday's trounce can only mean one thing: When the free market capitalist system works the way it’s supposed to, which isn’t always the way free market capitalists want it to, the free market capitalists freak out and sing “Rescue Me” to the very government they say should never intervene.
As a result, it appears that every event that can cause a serious psychological jolt to the market will be met by a government-inspired counter-action designed to create fiscal but, perhaps more importantly, psychological relief. Nothing wrong with that except if more bad news emerges (and it likely will) the rescue plan du jour will create a false sense of security and a subsequent ratcheting down of prices rather than a steep decline.
In the end, it’s all about the stock market, stupid. It is, after all, the public face of the financial fiasco. The Bear Stearns (BSC) situation is merely part of the unwinding process; we can only guess what comes next and the financial ball of string continues to be untangled.
The real moral of the story, as is often the case, is that a rise in stocks — even the biggest jump in five years — doesn’t necessarily guarantee that the game is over. Forget about what I said about the eighth and ninth innings; this one looks as though it may go into extra innings.