Nicely structured reasoning via Barron's Randall Forsyth:

Borrowings at the Federal Reserve's discount window averaged a record $16.4 billion in the week ended Wednesday, up $2.5 billion from a week earlier. A spokesman for the New York Fed had no explanation for the jump.

That, by the way, doesn't include any of the new-fangled lending to securities dealers, which were nil in the latest week. (The Fed's $29 billion of financing of the Bear Stearns assets in the JPMorgan Chase acquisition resides under the quaint heading of "holdings of Maiden Lane LLC.")

Keeping the borrowing from the so-called PDCF, or Primary Dealer Lending Facility, would seem to be a significant impetus behind the Securities and Exchange Commission's crackdown on naked short-selling of big financial stocks, observes Joan McCullough of East Shore Partners.

In SEC Chairman Christopher Cox's op-ed piece in The Wall Street Journal last week, McCullough writes, "he spilled the beans as to why naked shorting has been forbidden in that select litany of names. According to Mr. Cox, the list 'applies to precisely those financial firms that the Fed has designated as eligible for access to its liquidity facilities -- and for which the taxpayer could be on the hook.'

"So there you have it. Under the guise of not wanting to further burden the taxpayer, they put together that very telling list of [primary dealers] and [government sponsored enterprises]. Of course, they don't give a fig about the taxpayer." The real aim was to avoid wasting the Fed's powder on institutions targeted by evil short sellers, McCullough comments.

In any case, the myriad woes of the credit system strongly suggests that the stirring stock market rally led by the financials in the wake of the Fannie-Freddie bailout and the crackdown on short-selling was mainly the product of short-covering.

Not exactly an original notion, but one well-supported by the data. Bespoke Investment Group points out that banks were the most heavily shorted group among the Standard & Poor's 1500 index in the latest short-interest numbers through July 15 -- the day the financials made their lows. Short interest hit 19.6% of an average bank stock's float; no doubt much of that has been bought back in the subsequent week. Last Thursday's wicked selloff suggested that's likely played out.

As the credit crisis prepares to mark its first anniversary, it's only fitting that the bulls claim the bottom has been reached. MacroMavens' Stephanie Pomboy notes similar declarations after bear-market bounces, as with the Nasdaq in 2001 and the Nikkei in 1990.

But, given the banking system's record exposure to real-estate assets, which continue to deflate, the fate of the financials -- and indeed the stock market -- seems tied to the housing market.

"As long as real-estate values continue to decline, banks will continue to frantically reduce their exposure," says Pomboy. " This is why it seems irrational in the extreme to anticipate a bottom in financials before the bottom in housing is in!"

Irrational, indeed . . .

Source:
Isn't It Rich? 
RANDALL W. FORSYTH    
BARRONS JULY 28, 2008   
http://online.barrons.com/article/SB121702614341886209.html