The bulls are clearly back in charge of the stock market. Companies report poor results and/or poor forecasts, the shares sell off and are then bid right back up again. Any bad news is deemed to be the last bad news, the future is rosy as the bailing buckets from a panicking government swing ever faster. Too bad the leaks are getting bigger, as the credit meltdown in housing is spreading to commercial real estate and corporate securities.

Hopefully the rally has enough legs to create a really good shorting opportunity. Looks like the energy price bubble is at least cracking, with crude oil now down about $20 from its peak. If oil continues to drop, which it should as the recession bites, doubtless there will be a boost to bullish sentiment. At some point, though, folks will figure out that oil isn’t and wasn’t the problem, just a gratuitous piling-on. The real problem is that the financial system is gravely wounded. The broker/dealers were the first to suffer, because they are both more aggressive and more leveraged. But the pain will trickle down to the smallest bank, with 60% of domestic loans in real estate, how can it not?

I know everything is fine according to Mr Bernanke, who believes the economy will continue to grow. Or more precisely, who says he believes the economy will continue to grow. And senior government officials don’t lie, do they? But maybe we should take a look around:

• There are pictures of bank runs in the media, complete with police to keep order in the line.
• Entire subdivisions of new houses stand empty, ghost towns that were never inhabited.
• In many areas, foreclosures account for the majority of house sales.
• General Motors is “restructuring” and laying off employees for the second time this year.
• The SEC is restricting short selling in certain financial stocks.

There had been much talk about eliminating short selling. The NYSE now requested lists of all holders of borrowed stock (short sellers). The rush to cover to stay off the list and to realize profits assisted in ending the decline.

The discount rate was reduced again, to 4 1/2%. Congress rushed a tax cut. Rockefeller ordered 1 million shares of Standard Oil at 50. An order for 50,000 shares of U.S. Steel at 150 “pegged” that speculative leader. Its drop from 261 3/4 to 165 had been the bellwether of the crash.

The gyrations quieted. The stock market rallied in quiet trading for the rest of November 1929.

The stock market thrashes around under the control of the program traders; it is expiration week, after all. The economic news is poor - producer prices up 9.2% year-over-year, nominal retail sales up 0.1%, which means a fall in real terms. The SEC is restricting short-selling of shares of the GSEs and the brokers, which is another sign of panic - and by the way, shows the SEC’s real mission of protecting the industry from its customers. Financial stocks are up a bit, but the real energy continues to be focused on the over-loved and over-priced technology stocks, which are still well above their March lows (as represented by the Nasdaq 100, anyway). Oil fell today, although it needs to fall a lot more to make any economic difference.

The market is still ludicrously overpriced. Must be that dark energy holding it up, countering the force of gravity. Do dark pools contain dark energy?

Edit: And for a chuckle. Well half a chuckle, half a sigh. Recession-Plagued Nation Demands New Bubble To Invest In. A little too close to the truth, I fear.

I must say, watching the market action this morning, that it is remarkable (which would be why I’m remarking on it) how little concern people have about the ongoing disintegration of the financial system. Over the weekend, the second largest mortgage lender (Indymac) was taken over by the FDIC, and the government nationalized mortgage lending for all practical purposes. Somehow, this is seen as a good thing for investors. I suppose it is a de jure recognition of a situation that has existed de facto ever since the collapse of the mortgage securitization market, but even so I hardly think that it is a cause for optimism. I could understand a buying spree if the market had priced in a collapse of mortgage lending, but that it clearly not the case.

Apple did good business with the 3G iPhone, apparently, so people still have money for toys. One wonders for how much longer.

In another sad echo of the past, the SEC is starting a witch-hunt in order to eliminate bearish rumors. Any and all bullish false statements are OK, of course.

Epic battle between the sellers and the pumpers today. Perhaps it is starting to sink into the thick heads of the bulls that the economy isn’t going anywhere without a well-capitalized credit system. And we don’t have one of those to hand. And that lack creates a massive hole in the belief that these hyper-inflated consumer stocks like Google, RIMM, Apple and Amazon will be objects of desire in the future.

Once more unto the breach, dear friends, once more,
Or close the wall up with our English dead!
In peace there’s nothing so becomes a man
As modest stillness and humility;
But when the blast of war blows in our ears,
Then imitate the action of the tiger:
Stiffen the sinews, summon up the blood.

William Shakespeare, Henry V

The economy was dead already; killed by the collapsing credit bubble. The oil price issue is just the coup de grâce.

Edit: Bears were Bernanked this afternoon, “Give me more power” Ben further expanded his empire by extending discount window lending to Fannie and Freddie. Now they should be subject to bank capital ratio restrictions. Which they won’t be of course.