Wal-Mart's current marketing slogan, by the way, is "Save Money. Live better."

It was an island of good news in an ocean of panic. Large retailers in American are feeling the sting and going numb. Some are going out of business, like consumer electronics retailer Circuit City. But for a day, the Wal-Mart led-rally took stocks from nearly 300 points down in early trading to over 500 points up by the end of the day.

Will it carry over to Australia? Probably. It's either rally, or, according to SWARM Trader editor Gabriel Andre, re-test 3,500 as the long-term support for the ASX/200. Also, the sort of news coming out of American retailers this week would be pretty ominous for Aussie retailers, you would think. If the full array of credit-crunch related side effects begins slamming into the Aussie economy (and it already is in the banking sector), consumers are going to save more and spend less.

ASIC announced the ban on short-selling of non-financial stocks will be lifted on November 19th, while the government has introduced a bill to ban naked short-selling. The ban on covered short-selling of financial stocks has been extended by ASIC to January 27th of 2009.

Have you noticed that since ASIC banned short selling over the weekend in late September, the All Ordinaries is down by nearly 24%? Take a look at the chart. We're not making it up.

This isn't to suggest that the ban on short-selling is solely responsible for falling Aussie stocks. There are plenty of reasons for that. But is this a case of it being necessary to crash the market in order to "save it" from unscrupulous short sellers?

Granted, naked short selling by speculators was probably a good riddance. But let's not disparage the valuable role professional short-sellers play. Many of them analyse a company balance sheet to see what's wrong with it. Then, they go short, based on their conclusion that the business (Enron, GM, Fannie Mae) is in big trouble.

Shorts also provide a kind of floor for the stock market. When shorts cover, they're the only ones who step back into the market to buy at the bottom. Often times, they may decide that it really is time to buy a stock at a much lower price. But even if they aren't buying as value investors, they ARE buying. And a short-covering rally can be just the thing to lead to a capitulation in sentiment and a reversal of the primary bearish trend.

Of course none of that will happen if you can't short stocks. You reckon, though, that by extending the ban on financial stocks (including property trusts), ASIC is trying to prevent a wipe out in shareholder equity while asset values continue to fall. This would be the dreaded problem we mentioned yesterday, where short-sellers see a badly over-levered balance sheet and take the appropriate position short the stock.

The ban on short selling doesn't improve an impaired balance sheet. But it does delay the market mechanism by which the share is accurately valued. It also gives insiders and existing shareholders the chance to bail out of their shares before common shareholders are wiped out in a real collapse. So it's got that going for it.

A quick addendum to our observation about Robert Rubin's gambit to build up a surplus in the capital account while running a current account deficit. You could argue, in Rubin's defence, that he was accepting the facts of economic life, that Americans were going to binge, and that the only way to offset this without crashing the dollar was to create a capital account surplus.

But that would be a generous argument. As one reader suggested, Rubin helped build a system where the U.S. financial industry was global ticket clipper. It was a dollar-based hegemony in financial services, in which Wall Street generated huge fee and transaction income by the recycling of global trade surpluses and savings via U.S. stock and bond markets. Everyone had to pay a toll to stay in the game.

There's also a philosophical problem that we think our old mentor Dr. Kurt Richebacher would have identified. Rubin's preference for a capital account surplus seems like it's based on the assumption that you can get wealthy collecting fees on financial transactions. But that is bad national strategy for wealth building. In fact, it is a strategy for national wealth destruction.

As Dr. Richebacher soften pointed out in his work, real economic value begins with production. If you don't produce anything, you can't sell anything. And if you can't sell anything, you can't buy anything. Consumption is also indispensable to a growing economy. But real value creation begins with production, and the Rubin model rejects that in favour of debt-based consumption.

The net result has been a disaster for Western consumers (whose whole identity, in fact, is based on consuming...we don't call them producers). Their real wages have fallen as labour markets (especially manufacturing) have been globalised. Asset prices that were goosed up with funny money are now falling. And all that debt they took on to make up the difference between falling wages and a rising cost of living must now be repaid. In order to save (enslave) the consumer from debt (to debt), it was first necessary to destroy him.

Here's a question. Does Henry Paulson's ever-changing TARP now exclude the government buying distressed assets because the Treasury can't figure out what they're really worth? Let's see. The banks don't know what they're worth. Investors don't know what they're worth. And now the government doesn't know. It's a clean sweep!

Or maybe they all know what these securities are really worth. And that's why none of them are selling.

If you stop hearing from us here at the Old Hat Factory, it will be because we've made the government's new blacklist of banned internet sites. Of course, you wouldn't know we're on that list (and neither would we) because no one is allowed to see what's actually on the list. But it's not for lack of trying.

We rang up the Australian Communications and Media Authority (ACMA) to ask which websites are currently on its blacklist.

"We can't really say."

"Well how does something get the list right now? Is it done manually or by some sort of automated process?"

"It's manual right now. Someone submits a complaint about a site. We investigate it. And then if it's deemed to be illegal, it goes on the list."

"Who does the deeming?"

"We do."

"Can I see the list?"

"No."

"Why not?"

"Because it's full of illegal content. We wouldn't want to share that so you could go have a look, now would we?"

"Under what legal authority can you prevent the public from know what's on the blacklist?"

"I don't really know. You'd have to ask our lawyers."

The story of Australia's plan to filter/censor the internet even made it to the front page of the Drudge Report this week. The key word was, "unwanted." Communications Minister Steven Conroy said earlier this week that, "The pilot will test filtering specifically against the ACMA blacklist of internet prohibited content, which is mostly child pornography, as well as filtering of other unwanted content."

So what is "unwanted content?" The government may know. But it's not telling you. And apparently, it doesn't have to.

What should you do if you're opposed to the internet filter? Well first, there are plenty of ways around it. We can't say what they are, because for all we know, saying so would be a crime. But a little Googling should get you there easily enough.

There are also a few websites spring up on Facebook and other places where you can voice your displeasure. Another place to start is here: http://nocleanfeed.com.

The Yanks will shut up today about Australia's legal system and a Bill of Rights and guns. Here' s some reader mail from the last few days:

Dear Dan Denning,

So we barbarians should adopt a Bill of Rights like the non-barbarian USA. What a wonderful example it sets to the world!!

Perhaps we should so we can load ourselves up with guns and shoot at all sorts of enemies whether real or imagined - just like Denny Crane in Boston Legal! (a great show!!) But then perhaps not - we haven't done too badly without one. As citizens are we less secure and frightened than those of the USA? Do we have less freedom? Is our legal system more corrupt? I can't see that it is.

I would prefer Australia to be a republic. But I suspect, like most Australians, I would fear the adoption of the USA system and the possibility of ending up with a president who is contemptuous of civil rights, invades other countries on false pretexts, claims the right to conduct illegal acts in other countries and bankrupts the nation in the interests of his cronies.

I am not anti- USA. Indeed I had long admired it. It's just that it is getting harder to do so these days.

I think we are better off with continuing to evolve our Westminster based system of government - no need for guns! I don't like inherited monarchies but the rule of Queen Liz isn't too onerous compared to a George B and probably less costly. Now there is a thought!! Why not return to the Crown? Give up the rule of the gun and learn to make a decent cup of tea instead. A good cup of tea ( and perhaps a Bex and a good lie down ) would probably have a more calming effect than a gun in most situations. ( I enjoyed my trips to the USA but I couldn't get a decent cup of tea.)

Thanks for the interesting work on finding good companies to consider for investment - as well as a good laugh!!

Regards

Walter

G'day, Dan

Your few paragraphs on Bills of Rights said more than the words. James Madison would be proud. Much appreciated.
Best regards,

Joseph

"Yankee go home!"

• Short Selling Ban May Kick Off Market Liquidation
• CBA Sees More Bad Loans
• Where is J.P. Morgan When We Need Him?
• Gold ETFs Aren’t Looking as Good as They Used to Be
• We Do Not Live in Normal Times

It shouldn't be that surprising. And perhaps it wasn't terror. Maybe it was just plain old common sense. You can't short stocks anymore in some places. But you can buy commodities! With the global supply of dollars on the verge of a huge increase, investors declared for gold and oil yesterday.

The Dow lost 372 points in New York to close just above 11,000. The S&P 500 shed an impressive 3.8% nearly half its gains from the last two giddy days. So it turns out the ban on short selling in the financials doesn't keep stocks from falling. It just reminds investors there are some very good reasons for selling.

Meanwhile, the Reuters/Jeffries CRB commodity index posted its biggest one-day gain since 1956, when iron ore exports were still capped in Australia because no one really knew how much ore there was in the Pilbara. This confirms our basic thesis that "stuff" is currently a much better bet than "paper." Liquid stuff was the real star yesterday.

The October crude oil futures contract was up 16% (on the day) to close at US$120.92. It was up as high as $130-oil's biggest done day move since crude futures began trading in the early 1980s. Can a ban on speculation be far away now?

If you're a trader, this is the blessing of the times we live in. With immense volatility comes incredible opportunity. You just have to know what you're doing to spot these things.

We're glad to have our technical analyst Gabriel Andre in the office for just this purpose-although we should take a moment to let you know Gabriel and his wife have just welcomed their first child (a little girl) into the world over the weekend. Congratulations!

Gabriel will be back next week, presumably to tell us how to play all of this volatility in the commodity patch via the Aussie share market. He's calling it a technical swarm. He says he has 14 swarm trading tactics. We have no idea what it means, but will keep you posted.

Dan Denning
The Daily Reckoning Australia

• Discussing the Dreaded Fibonacci Retracement
• Crude Oil and the Dow Jones Index…a Close-Up
• Australia Possibly Among Top 10 Countries Globally Measured By Size of Gas Reserves
• Corn Prices on the Rebound
• The Aussie Dollar as a Measure of Global Risk Appetite

Keep this one point in mind, we have moved beyond debates about asset valuations and whether this is a liquidity crisis or solvency crisis. This is now a test of whether ordinary investors and savers believe the financial system is on the verge of a collapse.

That's it, plain and simple. It's tempting to think we've averted the crisis and are now beyond it. Most of the time, investors ride the ups and downs in the market and go about their normal business.

But this is not most of the time. The action in the money markets last week made it clear that investors have lost nearly all confidence in the share market and in the regulators of the financial system. They are moving to cash.

If the Paulson plan fails to restore confidence, the next logical move by governments is to close markets altogether. Think about it. First, the regulators ban short selling. This squeezes the bears to cover and sends markets soaring, at least for a bit. But if it doesn't work, the only real intervention left is to close the market altogether and take a bit of a holiday.

But for now, we'll have to see how markets reaction. The first indications are: with indecisions. The ASX delayed its opening this morning so that ASIC could clarify its new policy on short selling to market participants. That policy changed twice over the weekend. First, ASIC joined the U.K. and the U.S. in banning naked short selling.

It didn't stop there. Whereas the U.S. has banned short selling of any kind on financial stocks to halt the collapse in share prices, ASIC put a blanket ban on shorting of all Aussie shares, full stop. The regulator was apparently concerned that leaving open the resource shares to shorting by global hedge funds was not prudent.

The policy goal is obvious: halt falling share prices by shooting the bears in the head. The intended consequence was achieved in London on Friday, where shares were up 9%. But look out for the unintended consequences.

It's not just bears who short sell. Hedge funds, by definition, hedge long positions by going short to cover their exposure. Remove their ability to hedge and you invalidate the logic of the trade. In other words, if hedge funds can't go short, they might not go long either.

The result? After a huge short-covering rally, we suspect some stocks will go no bid. After all, who's going to want to go long in this environment (especially if you can't hedge your risk)? Markets are only markets when traders and investors are willing take up opposite views of what's going on. This is what makes markets, the willingness to take the other side of the trade.

By eliminating short seling, the regulators insure a short-covering rally in the short term. But in the long term? They've actually made the market even riskier. You have one remaining choice: long only, or out of the market altogether.

We reckon a lot of people will chose to liquidate their longs and get into cash, rather than being long only at a time like this. The irony then, is that the ban on short selling may actually instigate the market meltdown it's designed to prevent. Perverse, but perhaps true.

Institutional investors do have the alternative of hedging their longs in the options markets. Look for increased volume on put options. But this trade is rather obvious too, and the premiums on put options would be steep at this point. Again, the sensible (as well as panicked) position is the same: it is better to be out of the markets than in them.

Frankly we're not sure what would reverse this sentiment. But it's not our job to engineer sentiment, only to read it. Right now, confidence is on a knife's edge. And by banning short selling, quite unintentionally, Aussie regulators may have done precisely the thing to kick off a week of full-scale liquidation in global share markets.

Dan Denning
The Daily Reckoning Australia

• ODD THINGS Were Happening to the Price of Volkswagen
• The Practice of Naked Short-selling
• Nervous Investors ‘Short’ the Market By Buying Commodities
• Lehman CDS Auction Hammers Australian Resource Stocks
• Nationalised Banking System Will Come from Global Market Rout