This morning, the Federal Reserve said that they will pump as much money as needed into the U.S. financial system to stop the sub-prime mortgage-related credit crunch. Their brief statement used the same language as when they intervened in similar situations before: They will “provide reserves as necessary to facilitate the orderly functioning of financial markets.”

Translation: That means the discount window is open for banks to borrow as much money as they want at 5.25%. The Fed did not cut the discount rate, because that isn’t necessary. Cutting the discount rate would weaken the dollar, and the issue right now is not the price of money, it is the availability of money and credit. So right now, behind the scenes, the Fed is calling banks and telling them that they have to borrow. And that’s leaving the backs with two choices: one, the banks can either leave that money idle, costing them 5.25% and hurting quarterly earnings, or two, put it to work. If quarterly earnings are hurt, the stock might go down and the CEO’s stock options might be worth less. So the banks will put it to work.

Welcome to the real world of why it is so hard to be a secular bear — the guys who print the money don’t want the stock market, the economy or the society to collapse on their watch. There are voluble bears on all three of these stances, with all of them having excellent reasons as to why they are right. And, as I said at the recent San Francisco Money Show, many of them are right on the fundamentals. The sub-prime mortgage experiment is a disaster. Housing values are falling. Consumers are in hock up to their ears. The Clinton-era budget surplus is a fading memory, and the trade deficit is an intractable problem. Huge amounts of debt need to be liquidated around the world. There’s only one big issue that the bears are wrong about:

The stock market is going to go up anyway.

How? After listing all the fundamental reasons why the market should go down and after the topsy-turvy, gut wrenching week that we’ve had, it wouldn’t seem feasible for higher prices to be on the horizon. But there’s one little thing that the bears aren’t accounting for: The Fed.

“Don’t fight the Fed” is a market shibboleth that I only forgot once, during the S&L crisis in the 1980s, when I could prove to you that Wells Fargo and Citicorp were bankrupt if they marked their loan portfolios to market, as they were required to under the law. I was short Citicorp all the way down to $8 and waiting for the bankruptcy announcement when some sheik in the Middle East bought a couple of hundred million dollars worth of the stock. The Fed decided to “provide reserves as necessary to facilitate the orderly functioning of financial markets,” and that is why today that sheik is a multibillionaire and I am not.

The Fed did not say anything comforting on Tuesday, and that has proved to be a huge mistake. The shortsellers immediately began pounding stocks, but the Plunge Protection Team stepped in and turned the market up. On Wednesday, they rolled out President Bush to say that he believes the markets would have a “soft landing,” and the Dow rose 154 points.

But then the shortsellers regrouped and came back in force. After the Wednesday night/Thursday morning announcement by the French bank BNP Paribas that they could no longer value three large sub-prime funds due to a lack of accurate prices — convenient timing, wouldn’t you say? — the European Central Bank freaked out and pumped $130 billion into their financial system. Yesterday, our market opened down on the news, so the Fed pumped in $24 billion in temporary reserves. But the market dived anyway. The shortsellers finally won a round, as the Dow suffered its second-worst decline of the year.

The Fed does not like to lose, so today they opened the discount window. How much money will they pump in? Whatever it takes to stabilize stock prices and get the junk bond market operating again, so that almost all the leveraged buyouts can go forward. Remember that after 9/11, the Fed used the discount window to extend billions of dollars worth of emergency loans to banks to keep the financial system functioning. This is not new territory for them. And this marks the first time that the U.S., European and Japanese central banks have taken such action together since 9/11, plus the Australian, Hong Kong and Canadian central banks have also joined in this time around.

Also remember that this is the biggest test yet for Chairman Bernanke, and he can’t afford to lose, period. The ECB pumped another $83.8 billion into their system last night, and the Fed’s $19 billion injection this morning came in the form of an offer to buy mortgage-backed securities. I feel like I’m watching a surgeon wielding a very precise scalpel in a bilateral orchiectomy on the bears. The Fed refuses to lose this round.

So, what does this all mean for us? In yesterday’s Radar Report, I said that I thought we could see the S&P 500 back to 1440 or even last Friday’s low of 1433 pretty quickly. That happened this morning, as the S&P bottomed at 1429.74. The only question now is how far prices will slingshot to the upside from this level, pushed by a flood of Fed liquidity. The first 100 points to 1530 should be easy, just based on how much money is caught short or on the sidelines. And this could be the start of the big run over 1600, or maybe over 1700, with the parabolic move over 1800 still a possibility. As I said yesterday, once we see this rally get started, we’ll be selling a number of our holdings and rolling our profits into companies that will do well in a cyclically slowing economy. So stay tuned and remember:

Love ‘em or hate ‘em, don’t ever fight the Fed.

The stocks that will probably move first and fastest include:

• SXC Health Solutions (SXCI)
• Harmonic (HLIT)
• Quick Logic (QUIK)
• Silicon Image (SIMG)
• Intel January 2009 $22.50 LEAP call options (VNLAX)
• Energy Conversion Devices (ENER)
• U.S. Geothermal (UGTH)
• SiRF Technologies (SIRF)
• TowerStream (TWER)

But you should feel confident buying any recommendation below its buy limit, as even the non-cyclical areas like healthcare will rise on this flood of liquidity that lifts all the boats.