STATICRHETORIC

by C.S. Jefferson

When Stocks Trade Like Binary Options: Speculative Plays Under $10

While media will tilt their camera lens toward retail shopping on Black Friday to kick off the beginning of the Christmas holiday and the deep seasonal price tag discounts, you might actually witness better bargains in this stock market that will have lasting benefits long after the gift wrapping finds itself crumpled in the trash can and the discarded remnants of decorated evergreen trees litter the yard.

It was recently reported that nearly 20% of the S&P 500 was comprised of stocks trading below $10.00 per share. That is incredible to think how far and how fast this market has declined in a matter of months. It’s no big secret at this point that the market has been oversold and we continue to be in the process of formulating a bottom. There is tremendous value in the markets across all sectors as long as you don’t believe we are headed into financial Armageddon, in which case, no one profits up or down from a disastrous doomsday scenario.

But stocks that are trading at cheap valuations are there for a reason, make no mistake, a combination of forced liquidations, margin calls, panic selling and prospects of bankruptcy are all part and parcel to the catalysts that drove some marquis company names to incredibly opportunistic levels. When you sift through the carnage left in Wall Street’s wake, there are incredible bargains to be discovered but cheap doesn’t necessarily mean undervalued.

Some stocks may trade slightly above or below the $10.00 marker after I write this article which should not necessarily be a disqualification. But, to be fair, this wasn’t intended to be a slick marketing sales pitch, even though securities that begin to trade as if they were penny stocks entices many people’s interest.

Let me first state that no speculative position should constitute any more than 1-5% of your entire portfolio. These are speculative recommendations by definition and should not be thought of as core holdings or investments. It would be unconscionable for me to suggest that any of these stocks are to be substituted or considered as investments even though some, in my opinion, don’t deserve to trade at the bargain basement levels they’ve fallen to and reached amid widespread panic.

Please, do not over extend yourself on risky positions like these, especially with margin leverage. I am very reluctant to recommend plays like these because people have to know this is playing with fire and no one wants to get burned.

If you have less than $100,000 in your personal portfolio, buying 100 shares under $1,000 won’t make or break you. Expect and fully anticipate it can go to zero, but snatching a quick 100-200% return, or even a 10xbagger down the road is not out of the realm of possibility. But if the temptation of high returns undercuts risk discipline, then you’re asking for it if you exceed a position of more than $1,000, or more than 1-5% of a total portfolio allocation per each individual stock.

In fact, you can combine several positions with a medley of mix and match to increase the odds in your favor, but still not allowing one singular position to exceed the rule at 1-5% of your portfolio. If you do play multiple speculative positions, the cumulative total of all your bets must never exceed 15% of your entire portfolio allocation which should always remain structurally diversified and well balanced.

The interesting thing is that many of these positions can almost be thought of as “binary” in nature, that is they are either going to rise with substantial gains, or they are going to fall rapidly approaching zero and priced for bankruptcy. It truly reflects an all or nothing risk profile with only two possible outcomes. From a trader’s perspective, defining the risk as binary increases your ability to project clarity when so many of the events surrounding us remain obscure.

Unlike equity options that have expiration dates and require the speculator not only to be right on directional movement but, more importantly, able to gauge the timing known as Theta by utilizing front month, back month or LEAP positions, buying these shares outright removes the element of time decay.

Due to such a high implied volatility, it really isn’t cheaper to buy speculative upside call options on any of these positions when you can buy the shares outright for less than $10.00. Calls and puts are way overpriced and it’s one of the few times when stocks actually offer a comparable upside potential that usually only options can provide. If anything, I would prefer to be a seller rather than a buyer of options against these speculative underlying shares by implementation of a buy-write strategy.

For those poker enthusiasts out there, think of playing a sector or basket of stocks like going for a flush comprised of 5 cards of the same suit when you mix and match an assortment of cheap shares. You can have absolute junk with low denominated individual cards in your hand, unable to make a decent pair or straight. But when you play a flush you don’t need premium high cards or best of breed in sequence to bet a winning hand, right? At these price levels, all it takes is one company to rise out of the ashes and you are looking at a 10xbagger to offset other losses in the speculative portion of your portfolio allocation.

The Speculator’s Shopping List:

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by C.S. Jefferson

The Honeymoon Is Over: Gauging The Market In A Brave New World

Congratulations, Barack Obama on your Presidential victory. Thank you for restoring our trust and belief that votes do matter. Democracy is alive and well.

Having said that, put the party hats away and the champagne on ice, because America is in for a sober awakening. It is clear that the incoming Obama administration must not wait until the traditional inaugural swearing into office to put a mandate forward. Our country’s economy cannot afford the luxury of a post-election honeymoon period and extended jubilance or celebratory cheer.

I would thoroughly expect within the next several trading sessions and, perhaps, as early as tomorrow’s public address, the President-elect will not only display to the markets his newly assembled economic team but, hopefully, a formal announcement of deferring all capital gains tax raises due to hazardous and systemic risk to macro-economic conditions.

A suspension of any campaign promises to raise capital gains is absolutely necessary in a time of great economic crisis. If you want to shear a sheep, you better feed it and allow it to grow first. Wall Street is starving for stability and news of real encouragement to create an underlying bid in the market. Any potential tax raising is detrimental to economic recovery.

While the future of main street and Wall Street are inexorably tied like a perpetual loop, punitive decision making such as taxes will only curtail private capital injections and increase the liability of government bailouts to maintain liquidity in the markets and underlying economies of the world.

We have had two successive major sell offs in the market since the election has finally concluded, fast tracking a retest on October lows. While the cynicism in me would think, strategically, it would make sense for a Democratic administration to sit on the sidelines and let the markets wash out completely before assuming power, I would hate to think that such political calculations would place party interest before country.

There is not a singular moment to waste, time is of the essence and the risk of allowing assets to deteriorate further closing out the year could risk irreparable damage and, unnecessarily, forestall any possible hope of recovery for the economy in 2009.

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by C.S. Jefferson

I am a cynic. But today, there is renewed hope and for my beloved America, be proud and celebrate the election for change.

Thank you, President Barack Obama, for restoring my trust and belief in our Democracy once again.

As a man, I hide my tears whenever possible, but I am moved to have seen so many people from different cultures and religions come together in unity to support your candidacy, demonstrating to the world that the American dream is real. It makes me believe, as we were once told as children, that the end of racism, poverty, economic disparity and injustice is not impossible.

I am not a member of the Democratic party, but I became a reluctant and late supporter this election cycle because I could not morally, or in good conscience, vote to endorse the incumbent party for another four years. The future of our country, and a true change in the direction of policy is far greater than the man or the myth standing at the epicenter of the right place and moment in history.

It’s nice to belong and have a party affiliation of your choice, but if there is no underlying fundamental prosperity in the lives of those in our nation to support such ideology and rhetoric, red and blue states become meaningless, color blind demarcation lines on a geographical map.

We have all seen disappointment before, so it was difficult for me to believe this could be possible until it was finally realized.

America, be proud and support President Obama for the good of the country. Whatever misgivings or doubts we had, let them go. Give him the chance he has earned that so many people have trusted him in handling the leadership of our nation with responsibility and care.

Folks, the American dream is alive and well. Embrace it.

by C.S. Jefferson

When political commentators refer to an “October surprise” as the unquantifiable risk in gaming the election cycle, few could have predicted what the exact nature of the surprise would have been, even fewer could have anticipated the sustained pressure in the markets and underlying severity of the economy would ultimately be the reason to throw the election decisively in Barack Obama’s favor.

The effects were so dramatic that both candidates running for office were essentially, relegated and reassigned to the spectator seats as a political sideshow. In a time of unprecedented volatility and crisis in our economy, both candidates failed miserably to provide necessary leadership when the 3a.m. call rang. Surprisingly and to their credit, the bi-partisan Congress did more in response by finally showing they can work together outside of party ideology. Unfortunately, it took a situation directly effecting their own pocketbooks and not just their constituent’s concerns to forcibly mandate policy into action.

The true nexus of power that shapes our future as a nation was determined more by the policy makers in our banking and financial system, such as Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. It was an amazing display to witness the absolute impotence of the two party candidates unable to grasp the situation at hand, or even to orchestrate a legitimate policy and solution to avert imminent disaster.

The economy has been struggling for years if you ask the average middle class working person, it just mattered what part of the economy you were living in to accurately determine the definition of a recession. However, market volatility and the risk of complete credit default and asset deterioration made even staunch Republicans consider voting for Obama in the end.

I don’t know about “Joe six pack,” but I’m willing to bet there are more average “Joe six-kegs” with beer guts that are willing to break from traditional voting patterns. I’m half-surprised there hasn’t been larger coverage on the movement of “rednecks for Obama.”

It’s nice to belong to and have a party affiliation of your choice, but if there is no underlying economy to support such ideology and rhetoric, red and blue states become meaningless, color blind demarcation lines on a geographical map.

While it is increasingly unlikely that McCain can pull off the upset, nothing is final until the last vote is counted, misprinted, deleted or tossed out with a hanging chad. I care less if one particular candidate wins or not over the other; I care more that the election is legitimate, transparent, verifiable, and capable of being fully audited to reflect the will of the people.

And if the unthinkable upset did occur then Intrade, the legal betting venue on the elections, will probably pay out better than the ponies or this week’s football over and under spreads.

However, only one of the two candidates is running under the banner of the incumbent party and, therefore, the cost is severe in the mindset of most Americans as we seek to point the finger and blame those responsible for bad stewardship at the helm of our economy. By making career politicians pay with removal from office, maybe those that profess to serve the will of the people eventually get the message that origination of ideas by the founding fathers who believed in checks and balances didn’t, literally, mean legislating only for special interests or balancing their own own checkbooks by voting for pay raises and pork belly spending. Any career politician that receives taxpayer based salary is a bailout in my mind, and should be voluntarily serving the public trust without monetary compensation, let alone health care provisions that are denied to a growing population of Americans.

The mainstream media will record this election as historical in the context of both racial and gender barriers that were smashed and broken. And all of this is nice on a very superficial level, but fails to represent the true demographics of our nation that remain divided by the real chasm of class and privilege. Racial division has long been the misguided excuse for the disparity between prosperity and poverty.

Has political correctness simply gone too far during this election cycle? I hope that more qualified representatives of our democracy continue to step forward from all corners of our tribal heritage, not because they simply fulfill the role of being the first representative of a particular gender or culture, but because their political will and convictions serve the constituents of our nation as a whole.

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by C.S. Jefferson

“Buy American. I am.” To quote Warren Buffett’s opinion piece published recently in the New York Times.

Warren Buffett appears to be quite a decent man and, perhaps, his most admirable quality demonstrated in recent years is his personal charity underscored by a deep sense of humility. He certainly doesn’t live the lifestyle of most multi-millionaires and billionaire investors that tend to be far more flamboyant, if not entirely pretentious by recklessly self-indulgent, decadent behavior.

Warren Buffett is quite the savvy investor, not because of his personal considerations, but due to his shrewdness and business acumen. It would be more proper to characterize Warren Buffett as an opportunist which is a kinder, gentler way of describing a predator who stalks its prey and waits patiently for the moment to capitalize on other people’s distress.

It’s difficult to think of Warren Buffett in these terms because he is an affable and charming person but, in truth, he is no different than the archetypal Hollywood character of Mr. Potter in “It’s a Wonderful Life.” After all, what was Mr. Potter symbolic of if not the Wall Street titans of the world that, literally, followed the wisdom of Nathan Rothschild who was famously quoted: “buy when the blood is running in the streets.”

If you break down the terms of his recent buys such as Goldman Sachs (GS) and General Electric (GE), you understand that Buffett’s money costs more to borrow than a local bookie charging the going loan shark rate or ‘the vig” for betting on ponies. To call his terms with GS and GE a “friendly negotiation” is another euphemism for asking someone’s permission to borrow keys to the car while holding a gun to their head.

Buffett crafted quite the favorable contract terms by taking preferred shares in combination with warrants and a 10% dividend yield. Perhaps, his endorsement alone was worth more in public sentiment than seeking alternative financing through frozen commercial paper and credit markets. If the issues plaguing solvent companies was a crisis of confidence, who could be a better marketing tool to inspire trust than one of the most revered investors in the history of capital markets?

The irony throughout these notable cash injections is that he was wrong in his timing, not even the venerable voice of Berkshire Hathaway (BRK.A) can call the exact bottom. Those that wanted to follow him into the deep end of the pool have had ample opportunities to buy the same stocks at cheaper valuations due to extreme volatile aberrations of the market.

And certainly, as has been reported, Warren Buffett lost approximately 9.6 billion dollars in equity value due to decreases in company market capitalization and share prices. Of course, unlike the recent forced liquidation against CEO Aubrey McClendon of Chesapeake Energy (CHK), who involuntarily sold over 30 million shares due to excessive margin calls, Buffett’s holdings remain paper losses.

If the wealthiest individuals lost 90% of their wealth, they would still remain multi-millionaires and, more importantly, accessible to cash to take advantage of buying at fire sale prices. If you or I lost 90% of our income or wealth, we would be in the soup kitchen lines. So, there’s no comparison and very little reason to feel sorry for those that will navigate this crisis from the luxury of skyboxes and protected enclaves.

However, to be fair, a bottom isn’t necessarily a pivot point as much as it is a natural formation and process once the panic selling and forced liquidations hit their crescendo before tapering down to normalizing levels. Markets become exhausted because such volatility is unsustainable as weak hands are flushed from the system and earnings multiples collapse under their own weight.

If you’ve read my previous article on “How To Catch A Falling Dollar,” you can see that I was quite bullish despite the panic that ensued both before and during the week of option expiration. But I disagree with those that insist that we need to reach this technical bottom of absolute capitulation–whatever that term is supposed to mean. As if you need to see Wall Street brokers coming out of the trenches with their hands in the air to surrender before the all clear sign is put out to buy stocks.

If this massive sell off that has been orchestrated over the past year since the Dow was above 14,000, now hitting the inverted peak of disparity during the last month, then what would constitute a true sign of capitulation? Zero? One thing that has been proven throughout this calamity is that fundamentals, charts and rationale thoughts or behavior simply are out the window once panic ensues.

But I’m not Warren Buffett and, like most of you out there, I face similar daily stresses and concerns of being capable of paying bills and expenses. I have never seen markets behave like this and even professionals that have been involved for decades will admit this is unprecedented action where conventional rule books don’t apply anymore.

People continue to refer to the ’87 market crash as the signature comparable and yet, nothing compares to the volatility we’ve seen which has been the equivalent of more Black Monday’s than I can count. I fear no differently than most of you out there and remain very concerned for not just the stock markets, but the underlying economy that seems convincingly problematic for our generation going forward.

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by C.S. Jefferson

We all know and heard of the tired analogy “don’t try to catch a falling knife” to describe the temptation of jumping into a declining market. There are certainly too many analysts or money managers that have been completely eviscerated and butchered by calling the bottom prematurely in the financials and housing market since fall of 2007. Don’t like playing with knives? Here’s a better analogy to use instead of the requisite kitchen cutlery.

Remember when you were a kid and your smart-ass uncle would wave a dollar in front of you and say: “If you can catch the dollar as it falls between your fingers, it’s yours.”

The game was a simple one, you being required to hold your thumb and index finger outstretched as the dollar remained suspended in between. You concentrated, fixed on the moment by thinking the task was way too simple. But once your uncle let the dollar go, you just weren’t quick enough to snatch the bill out of thin air.

The reason is that by waiting to see when the dollar was finally released, neural-transmitters from the cognitive decision making process in your brain couldn’t telegraph the message to your muscles fast enough. So close, so far away…

However, there was a way to beat this game once you knew the trick. After a few incidents of trial and error, you could learn to anticipate the release and snap your fingers shut just in time to claim your prize.

This is the fundamental difference between a reliance upon reaction time and the ability to anticipate ahead of foreseeable events. If everyone is standing around waiting to react when the markets finally bottom out or recover, it will be too late and you’ll miss the trade you were looking for all along.

If you learn to anticipate ahead of the curve by wading into the waters and continue to add to or fortify existing positions of your core portfolio, you will learn how to catch a falling dollar…

YOU’LL KNOW WHEN YOU’VE BEEN SCAMMED

There is a very interesting situation that is being set up in the markets right now, in fact, it may be potentially the biggest pop you’ve ever seen in an option expiration week. I’m not predicting this will happen as a recommendation to act on my opinion, because I could be wrong and I would hate to offer bad advice, but the markets are severely oversold. Whether this move occurs next week or soon thereafter, there will be a lot of investors that feel cheated by being forced to liquidate or relegated to the sidelines as spectators.

It may not happen due to changing events on the ground day after day, however, the set up is clear if there are major announcements in a global effort such as the recent implementation of unified rate cuts. Continued cooperation in the upcoming G7 finance minister meeting or confidence supporting the Paulson T.A.R.P. (Troubled Asset Relief Plan) may begin to catch fire. Remember, there have been absolutely extra ordinary measures made by the Fed to inject liquidity into the markets to unclog the drain.

Don’t underestimate the potential effects this will have on the economy by amplifying the liquidity and capacity for financial institutions to make money–in other words, don’t underestimate Wall Street’s greed and temptation to utilize the advantage of a steepening yield curve, or the ability to borrow short-term funds cheap and lend long at a much higher rate. It may take time to reveal itself but when it does happen, the markets will have already made their move ahead of the curve.

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by C.S. Jefferson

THE 60 TRILLION DOLLAR NIGHTMARE OF CREDIT DEFAULT SWAPS

The 60 plus trillion dollar nightmare of the CDS (Credit Default Swaps) market is a dangerous anomaly of the tail wagging the dog, pushing risk premium higher against a downward spiral of collapsing market capitalization and lowered credit ratings for corporate debt.

Imagine, 60 plus trillion dollars in total existing liabilities in the unregulated OTC (Over-The-Counter) market of Credit Default Swaps means that our government, in fact, all governments interconnected in the global economy could not possibly “bail out” that entire amount if ever forced to claim. That’s more than the entire world’s GDP combined!

I am very pleased to hear that the Federal Reserve is taking measures to act as a potential counter-party to the commercial paper market that has remained frozen, as institutions are unwilling to lend short-term debt without a reliable bond insurance guarantee in swaps through the OTC market.

The Chicago Mercantile Exchange (CME) is the first major exchange taking initiatives to create a dynamic and transparent market for Credit Default Swaps and, most importantly, a clearing function that adds liquidity and accountability in a regulated forum. But we are up against the clock and in order to truly facilitate liquidity in the tight credit markets, there must be a viable alternative to achieve price discovery in guaranteed bond and debt insurance.

However, since these are unusual times when conventional rules don’t apply, I would like to see the Federal Reserve in combination with the proper regulatory body step in and disqualify all existing Credit Default Swaps in the OTC market. The OTC market is a rabid beast out of control that needs to be put down before the contagion spreads irreversibly.

For those that don’t know, Credit Default Swaps are essentially an insurance contract that company A would use to hedge against loaning money to company B in case the borrower, or Company B, were in default and unable to repay the existing loan.

The intention was good but we all know where that road leads…

The problem was that like any bubble reaching its elliptical peak, the CDS market became absolutely inundated with speculators that were flipping these insurance contracts in a very opaque, highly illiquid and non-transparent unregulated market.

When the economy was thriving, the risk of default was very low against corporate debt and it was an easy and understandably, lucrative business to “sell insurance premium” without undue caution or concern of paying out on the claim. This is the reason that A.I.G. was bailed out by the Treasury with an $80 plus billion dollar bridge loan. The risk of default was systemic and A.I.G. was sitting at the heart of this market as the premiere counter-party that sold insurance.

But, the problems were worse as hotshot speculators also jumped in selling these insurance contracts without any accountable requirement to maintain margins or the potential ability to pay these claims. This may be the worst example of free markets gone wild, when the money was free and no one was there to play babysitter and govern unquantifiable liability.

Since the CDS market remains an unregulated OTC market, in my opinion, there should be no reason that it can’t be shut down completely. Just disband the entire racket and have the dirty, smoke filled gambling den closed for business permanently.

This is the opportune moment to commit such drastic action and invalidate a monster liability on the entire global financial system that is dragging the markets down the drain. You could do this by, simultaneously, providing a regulated, transparent Credit Default Swap market on major exchanges like the CME and allow the transition to be as seamless as possible without incurring overwhelming risk to lenders by unhedged loans.

Perhaps, as part of the transition to a regulated swap market on an open exchange, you could stipulate and insist that all open or existing contracts are null and void, that counter-parties remain obligated to redeem the “insurance premium” paid and received only. By mandating some type of enforcement to this unregulated market, you could remove the potential liability from unrecoverable claims that hang like a noose around the neck of the entire economy.

Firms that sold premium or Credit Default Swaps were not even required to put up a substantial margin, less than pennies on the dollar, which means that any firm that bought bond insurance against potential default risk of debtors were basically uninsured if they ever had to make a claim. The entire market was so undercapitalized that it is nothing short of criminal neglect to have allowed this avalanche of default liability to escalate to levels that were reached. This was a scam no different than unscrupulous fly-by-night life insurance companies that sell innocent people a promise without the intention of ever paying a claim.

It’s speculative risk so out of control that it makes a crack addict with a stimulus check look like a savvy investor. This should never have been allowed to get where it has, completely over leveraged and threatening to bring down this house of cards. The spreads are so insane in risk premium that they are pricing solvent corporations to the point of bankruptcy or, even worse, the entire global economy heading into an unrecoverable and sustained depression. The unregulated OTC market of swaps is the smoking gun holding the entire economy hostage to unregulated credit risk exposure.

by C.S. Jefferson

Treasury Secretary Hank Paulson and Fed Reserve Chairman Ben Bernanke went all in by putting chips on the table. When this measure was proposed, the markets reflected the notable expectation by “baking in the numbers” ahead of the legislation’s passage. This is a dangerous way to play a poker hand because there is absolutely no room for error, and it becomes an all or nothing gamble with people’s pension funds, retirement accounts, IRA’s, 401k’s, money markets, and savings accounts on the line.

Now, I fully support the Paulson plan, but it was a weak hand to play from the onset, mostly because the success and failure depended exclusively on Congress to pass legislative action. And such preconditions ultimately mean you are not in control of your own destiny. We saw “the flop” last week in the first wave of capitulation and the political muddling that occurred as a result of too many cooks in the kitchen. Monday’s reaction saw “the turn” as the House Congressional members were unable to pass the desperately needed legislation.

Folks, we are now waiting for the final card known as “the river.” There are no more cards to be dealt from the deck and you can’t take your chips off the table now because it’s way too late. This is it, all in, the critical nexus point where you have no choice but to play the hand out in its full entirety.

Wall Street waits with nervous tension as Congress reconvenes to rework the legislation and appease bruised and battered egos. The casino lights are dimming because the House is about to go bust. We are all positioned to sit on the sidelines of the table as spectators, while Congressional members play political calculus by sticking their fingers in the air to see which way the wind is blowing–one might suggest a better place they could stick their finger if they really wanted to plug the leaking sieve of pork belly spending and earmarks.

This plan was never perfect to begin with and there are many measures that I would like to see, but the crisis demands and necessitates action, not empty rhetoric. I don’t understand why there continues to be this fundamental and irrational disconnect on explaining this crisis and why it matters to everyone now. You don’t punish the innocent people just to get at the few that are responsible.

I had an argument with a friend of mine because he, dismissively, presumes this crisis doesn’t effect his family. And I explained, even though he is actually gainfully employed, don’t think that your employer keeps your checks from bouncing by stashing a huge wad of cash in a safe somewhere. If employers can’t fund payrolls due to a freeze in the credit markets, every working family will, unfairly, feel the direct connection to this Wall Street bailout.

Everybody likes the ideological rhetoric of “free markets,” but nobody likes the harsh reality of “markets in free fall.” There’s a difference and ideological rhetoric is a luxury we can’t afford to have when markets are crashing all around us. Most people hate the police when they don’t need them, but when an emergency crisis occurs, the police are the first ones that people call for help because they are the only ones that will come to the rescue.

The idea of bailouts incites a vomit inducing aversion to the prospect of cleaning up someone else’s mistakes. It’s like going on a date with a bulimic person to a restaurant, and having to foot the bill on the taxpayer’s dime after they just returned from regurgitating the meal in the bathroom.

POLITICAL POSTURING

They either pass this legislative vote or they don’t. I’ll say this, if those pandering Congressional members worry that their constituents wouldn’t vote them back in their respective offices if they supported the bill, I can damn well guarantee they won’t vote them back in if they don’t pass legislation and the markets collapse sub-10,000 on the DJIA and S&P 500.

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by C.S. Jefferson

THE $700 BILLION DOLLAR DISCONNECT

There is a serious, fundamental disconnect between the reality and the perception of the Hank Paulson plan. Treasury Secretary Paulson, who I admire along with Chairman Ben Bernanke, are not politicians. Make no mistake about it, their stature is enormous, but their ability to “sell policy” like a used car salesman to the public is second-rate at best. By comparison, Congressional leaders who stay in perpetual office by peddling themselves every election year on empty rhetoric, are much more able to convey sentiment but often fail in delivering real solutions.

Lack of eloquence does not mean that Paulson and Bernanke are wrong in what they are proposing. In fact, I truly support what they are trying to accomplish here, but the risk of allowing this political posturing by Congress to continue only exacerbates the problem in the economy because time is running out and we are deep in this mess, so check your shoes just so you know what we may have stepped in.

This is the reason that the power of language and the ability to communicate effectively matters and why, unfortunately, the most qualified people for the job are often passed by for the most personally appealing. Most people have no idea of how the economy and financial system functions beyond payment of basic bills and the tangible reality of how much, or how little money they have in their wallets. And even more scary than that could be what was made patently clear, that most Congressional leaders, even those in the Senate banking committee, have less understanding of the economy than their constituents.

Never underestimate the stupidity of Congressional leaders to play political football and grandstand once the lens of the camera turns in their direction. Their inane line of questioning revealed how little they actually know, and I was truly frightened by the fact these were the people in charge and tasked with the responsibility to effect change or confidence at a time when it is needed most of all. Seriously, folks, is it too much to ask Congressional leaders to stand in unison, a bi-partisan consolidation, and tell America they will do whatever is necessary to save our economy and instill confidence in the markets?

Not to mention, the most obvious hypocrisy of all, was that Treasury Secretary Paulson and Chairman Bernanke are relatively new and have been in their appointed positions of authority less than any of the elected officials trying to blame them as being responsible for the origins of this particular crisis. In fact, attempting to humiliate in public the very people that have been the most actionable persons motivated to fix the problem at hand, and remain the very last guardians of our global financial system, really demonstrated a lack of class.

I really found it personally offensive that Congressional leaders, who have the power to legislate and presided over the creation of this potential and looming debacle the past several decades, want to blame the two individuals such as Paulson and Bernanke that seem the most committed to saving and fighting to defend the American way of life.

LOST IN TRANSLATION

In my own frustration of describing how serious the problem is to friends of mine, I finally came up with the best way I can break down the proposal so that it makes sense. Perhaps, it was because I was writing about subject material on liquidity providers in the stock and options markets that it became clear.

Essentially, Paulson’s plan is about stepping in to a very opaque, non-transparent market for mortgage and debt securitization and providing the absolute floor in price discovery. This is about the Treasury actually being the world’s largest “market maker” and liquidity provider, so that the clot in the arteries of the financial system can be removed and the money can begin to flow again.

They don’t want, or intend, to spend $700 billion recklessly or blindly throw into a black hole of bad mortgage debt, in fact, they want the show of force to absorb and maintain the bid and ask to facilitate transactions in the financial sector. And they need the flexibility to demonstrate confidence, trust and solvency in the financial markets.

I use the analogy of a market maker because think about the role and function that is performed in the stock markets. They essentially create the underlying bid and ask, or buy and sell points of the trade. Market makers provide the necessary transparency to order flow by absorbing the volume as a counter-party which creates liquidity. They carry the trade on their own accounts and books temporarily, and begin to trade out of their held positions into the continued demand or order flow. The very reason the Treasury is right to ask for $700 billion up front is the same reason a market maker has enormous margin capabilities, so that they can be a liquidity facilitator.

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by C.S. Jefferson

I cannot believe that commentator and media analyst alike, one after the other, is publicly professing outrage over the new short selling restrictions recently implemented by the SEC emergency action. They smirk and seem to take great pleasure at pointing to the 300 plus, nearly 400 point sell off on Monday, and the follow through on Tuesday’s trading sessions as proof and example that short selling restrictions don’t work. Really?

You don’t mean to say that you actually believed that by removing the ability to short stocks that the market couldn’t trade down, did you? Because if you did, then none of these so-called “experts” even deserve to have the pulpit or mouthpiece to speak with any measure that is credible beyond a bedtime fairytale.

If you watched the selling on Monday or Tuesday, it was the first time I had ever seen such an orderly sell off without the panic inducing disruptions of forced liquidations across the board. And that’s how markets should behave, orderly, not necessarily up or down with directional bias.

In addition, the overall market was trading on relatively light volume and because of that, the price action could be arguably more exaggerated by the move. But what you didn’t have was short sellers and funds coming in and pounding the markets by aggressively amplifying the downside pressure. I would also say that another reason for a sell off, and why there weren’t that many buyers in the market, was that they were the very same ones that bought last week and Monday was more or less “profit taking,” if you could call it that, from the huge recovery late last week.

Remember back to ancient history of, let’s say last week, when we were in serious crisis Thursday morning, sub 10,600 on the DOW and plummeting fast with no end to be seen? Goldman Sachs (GS) and Morgan Stanley (MS) were on the verge of going under like their predecessors in the investment banking sector, despite the fact they just reported net positive earnings. And the viral contagion of the credit collapse was about to spread to the other pillars of our financial system. Something had to be done to save our economy from a complete and systemic disaster.

We didn’t get back to where we are without the largest “short squeeze” ever in history orchestrated by the Treasury, Fed and SEC in conjunction with global short selling rules and restrictions. Short selling restrictions brought an end, as intended, to the bank run on the markets last week. This doesn’t mean that everything is finally resolved back to normal levels of confidence in the markets, but it did buy time to pass legislation for the Paulson plan.

Now, to be clear, if Congressional leaders fumble the ball and don’t support a plan of action to address the current credit crisis, then we have serious problems and, at that point, I would have to reevaluate my optimism in the markets.  And, surely, if the SEC lifts the restriction on short selling by allowing the ruling to expire in October, look out, ’cause short sellers will try to hit the markets with a vengeance.

THOU DOTH PROTEST TOO MUCH

Don’t be fooled, short selling restrictions do work. In fact, before Monday’s trading session, the argument against short selling restrictions was that prices would be artificially inflated or that it would be impossible to determine price discovery. And that short sellers provided a service to the markets by revealing overvalued companies so that investors wouldn’t overpay.

Right, should you believe the very same hedge funds that complain about something when they have so much to lose? I hope professional short sellers get blown out of the markets and locked out of the casino from further manipulation or capitalizing on other people’s misery. Think about it, logically, and consider the source. When professional short sellers start complaining about the rules, then they must be working. Who cares, it’s payback for bulls and what’s wrong with trampling on a “bear-skinned rug?” If very successful professional short sellers like Jim Chanos and Doug Kass complain the loudest, Shakespeare would suggest: “thou doth protest too much.”

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by C.S. Jefferson

WHERE THERE’S SMOKE, THERE’S FIRE

I thought it would be interesting to give a personal account of the events that transpired last week. Normally, I would tend to write more objective and less introspective articles, but these were abnormal deviations from anything seen before and, from my own perspective, it would be a way of venting the intense anxiety and stress levels that built up during the course of monumental and historic volatility. Even my own experiences didn’t prepare me for the intensity that I felt during these extreme volatile rides in the markets. The portfolio that I manage was stress tested to the maximum inflection point. And a feeling very unnatural and discomforting was settling in, a feeling that things were beyond what I could control and that the disastrous spiral of deleveraging was unwinding at an accelerated rate of speed, as if you were tethered to the end of a bungee cord without any elasticity left in it to bounce back and recover.

I had to to trust my own risk metrics and models that I use to mitigate portfolio deconstruction, but I have never seen volatility like this ever. While I wasn’t in the market on Black Monday of ‘87, most professionals that I know will tell you that the comparison doesn’t hold up–this was worse and, potentially, on the brink of being a global crisis not seen since the Great Depression. This was, in fact, the proverbial “precipice of disaster” with the credit markets actually freezing up and the arterial conduits of our economy seizing into cardiac arrest.

People not directly invested in the markets that mistakenly think Wall Street has nothing to do with main street, were about one or two days away from no longer being able to swipe their credit cards at the local grocery store to buy basic necessities, and the historical annals of long lines and rioting in the streets at the scene of bank runs was about to become history repeating itself. This was about a complete erosion of trust in the financial markets, a seismic shockwave causing instability and unrest to the fundamental basis of our entire global economy. Even the safety net of FDIC insured bank deposits were about to evaporate into thin air along with pension funds, money markets and retirement accounts. Sounds scary? It should be.

I think, even though we have no public transcript, this is exactly what Treasury Secretary Hank Paulson and Chairman Bernanke conveyed to make evidently clear to the leading bi-partisan panel of Congressional members that attended the emergency action meeting on Thursday night. Make no mistake about it, folks, this was a 3 a.m. moment. But Congress needs to follow through by supporting Hank Paulson and Bernanke’s plan and not politicize the required necessity of action with cries of “bailout” or “moral hazard” and other empty, rhetorical euphemisms.

I like to use this analogy: If you stand by and watch your neighbor’s house catch on fire while people are trapped inside and say, “it’s a moral hazard if you act because these are the consequences of playing with matches,” you are “immoral” to do nothing and not grab a bucket of water to help put out the flames. And to carry the analogy further, while you may think a fire in your neighbor’s house is not your immediate concern, once that fire spreads like a contagion, your house will burn down along with everyone else’s. Folks, “inaction” or being a spectator on the sidelines when you had the chance to act is immoral.

If you’re a firefighter or a police officer, it’s your job to act and do something, not make judgment calls on how the fire started. Can you imagine if a firefighter stood by because they wanted to teach a homeowner the lesson for not properly installing a smoke alarm? It’s the job requirement of elected officials and leaders to act when crisis occurs, not to stand by and moralize, or hold “hearings” after the fact. Before they blame anyone they need to look in the mirror first and hold themselves accountable. Of course, that won’t happen because that would mean not being reelected.

I’d be lying if I said I wasn’t scared. The markets were getting pounded worse than a pornstar in a Bukkake video. The whole week was wrought with sleepless nights and complete detachment and isolation from personal affairs. I was, literally, gargling the ol’ pink elixir, Pepto Bismol, like it was happy hour at the local corner tavern and pub. Like most others gripped and paralyzed with apprehensive displacement, I couldn’t walk away from the monitor for one minute because fortunes in the overall global markets were being erased tick by tick and the surmounting fear was palpable, very real and manifesting incarnate.

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by C.S. Jefferson

TOO BIG TO FAIL

I’ve said this before and I’ll say it again, students of economics will study these moments in time as we are witnessing history. Unprecedented volatility in the markets and a very dangerous deleveraging process that continues to erode equity, wiping assets clean from once lofty secure valuations to now, what could be characterized as, nearly worthless confetti run through the office shredder. I’m not sure what’s cheaper anymore, shares of Lehman, Freddie, Fannie, or a wholesale bundle of toilet paper at your local Costco.

The recent “conservatorship” (it’s gotten so bad that we have to make up words to explain financial remedies) of Fannie Mae (FNM) and Freddie Mac (FRE) was absolutely necessary and inevitable. I applaud the effort by the Treasury Secretary, Hank Paulson, even though there are some that would argue in the safety of lecture halls, or the world of academia and economics classes, that the massive bailout will only encourage risky and reckless behavior in the future and continue this “moral hazard” by not allowing free market discipline to take effect.

It’s disingenuous to me that self-serving analysts on mainstream media are allowed to carry on about hypothetical and, completely impractical, “free markets” when they ignore how serious the implications were if Fannie Mae and Freddie Mac were allowed to go insolvent. After all, we are talking about more than 50% of all mortgages and homes outstanding and, even more surprising, 70% of all recent home loans in the last 5 years.

Is it a taxpayer burden? Absolutely. But before I hear the cries of “why should I have to pay my taxes to bail out some speculator that shouldn’t have been in a home to begin with,” let’s be honest and consider that the wave of concentric circles caused by the initial ripple effect of the sub-prime mess has far reaching implications that extend well beyond the initial impact zone.

And another thing, let’s not forget that one of the ways our economy continues to extend credit is by selling Treasuries and government secured paper to sovereign wealth funds and other participants in the global markets. If we allowed these gigantic beasts to become slayed and defaulted on our debts, no country would buy T-bills again and that would wreck the entire financial system. I’m glad that Paulson came out publicly and indicated that the bailout of Fannie and Freddie was contractual in nature and could not be dismantled by some change in office. It’s one of the main reasons that our Federal Reserve and monetary system remains, for the most part, independent of whatever regime is elected into power.

Unless you’re a short seller with uncanny timing–many short sellers have been blown out by mistiming the bounces–who benefits from a systemic collapse of our financial system, then why would you root for a wipe out? Not only is it unpatriotic, but it is intellectually dishonest. Seriously, how much do we want to talk the markets down? After all, every single stock trades for more than what the true value is based on a p/e multiple. Do we really want to open Pandora’s box and write everything down to true asset value? If this is the case, we are not talking about a ripple effect, we are talking about a seismic shockwave on the Richter scale of 10 that would wreck the markets–and this, folks, cannot be allowed to happen because the consequences are too severe for everyone.

And these ridiculous rating companies that failed to expose the risk to the balance sheets early on due to complicity, have now twisted the knife in the backs of these financial firms in a way that exacerbates the damage without allowing any capital raising to be enough. Now you want to cry wolf? The wolf has already come and gone after slaughtering the sheep.

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by C.S. Jefferson

NAVIGATING THE CREDIT CRISIS

The current credit crisis and liquidity crunch has made even the professional investors balk on calling a bottom, one stomach churning event after another has proven the most optimistic analysts to not only be wrong, but little more than contrarian indicators.

Asset revaluations and write downs are placing tremendous strain on determining book value and earnings projections for financial companies, making it extremely difficult to determine proper multiples and P.E.G. ratios. What looks cheap may actually be the classic value trap. I’m quite sure very smart people dollar cost averaged all the way down on the, not-so-distant, Bear Stearns debacle.

The lack of transparency for the investment brokers and banks really makes it guesswork based on historical valuations. No question, once the current credit crisis dissipates and the economy moves ahead, financials will be the vanguards that lead the market forward. But even the strongest engine of our economy is still anchored to all the train cars in between and even the caboose at the back of the line. You feel like getting “all aboard?” I know I don’t.

The risk of new regulation also means that earnings drivers for the last several years at the peak of a housing bubble are all but gone, and certainly bundling mortgage paper as liquid assets is a broken business model. Structured investment vehicles such as CDO’s, CMO’s, tranches, and Level 3 assets have now become part of the vernacular pulled from the nascent shadows of Wall Street.

We may think we know the story because of the news coverage that has brought the issues to the light of day, but this story is far from over and risk is very relevant even at bargain basement prices for financial stocks. In a sense, it reminds me of a perverse game of chicken in a dangerous head on collision between institutions like Freddie Mac or Fannie Mae looking for a bailout and the career politicians trying to save their jobs come reelection. Who will flinch first? Either way, something has to be done and soon to restore the confidence and transparency in asset valuations.

Is there reason to be optimistic? Of course, whether or not we’ve hit the true bottom in the financials recently or anytime soon, at some point there will be an absolute entry point and nothing but upside. The dilemma is when and what companies will survive the impact and splash damage that ruptures, once seemingly, rock solid financial companies.

In this respect, you have to be disciplined to stay away from stocks that look cheap by dollar amount per share and focus on investing in companies that are well capitalized and sufficiently less exposed to collapsing real estate values. If your risk tolerance is high and you are well versed in trading the pops and drops, you can potentially make money in the volatility of this market, but for the retail trader this is only inviting serious damage to your portfolio equity.

Of course, logically, it makes sense that the underlying assets behind all this leveraged paper can’t possibly be worth zero at the end of the day, but logic has little to do with a forced liquidation crisis where financial institutions are desperate to raise cash on their books. It doesn’t matter what an account ledger says an asset is worth as much as what someone is both willing and capable of paying for it, and that is further compounded by the stricter lending standards that have created a vacuum of buyers on the open markets.

But I am afraid that a similar issue is occurring in the residential and commercial real estate market. People continue to make false assumptions on what their homes are worth based upon the appraisal values their mortgages were originally underwritten. Basic supply and demand economic principles will be the overriding factor that ultimately determines what the current market value of any asset is, and in the case of leveraged assets like homes and real estate, it matters less what a person is willing to pay as much as it matters what amount a bank will lend a borrower.

Look no further than the recent auction rate securities market that almost collapsed from a lack of buyers. These were debt instruments that were sold and packaged as “cash equivalents” to high net worth investors. If not for the pressure by New York State’s Attorney General Andrew Cuomo, who forced settlement by culpable brokerage houses, I doubt investors would have been reimbursed.

But don’t expect the same treatment for average Americans that face foreclosure risk or the inability to liquidate properties–their primary assets, savings and retirement–in a stagnant and frozen real estate market. I doubt there will be any knights in shining armor that will come to the rescue and force settlement, so that the original underwriter or lending institution would be required to buy back the mortgage on a house just because there is no available demand, or that the current market value of the home has fallen well below what the original appraisal price was.

VISA AND MASTERCARD

Visa (V) and Mastercard (MA) are two of the best ways to play the financials while navigating the current credit collapse. While Mastercard is cheaper on a valuation basis, I prefer Visa because it is has a larger share dilution based on the total amount of outstanding shares, but this may not be such a bad thing because it knocks some of the volatility out of the stock. Mastercard is less diluted in comparison, but a retail trader may have more risk exposure simply due to volatility and, especially, if they were unnecessarily exposed by trading on excessive margin.

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by C.S. Jefferson

GOING FOR GOLD

What an event, what a show it was in celebration of the Olympics in Beijing, China. This was a peaceful event that transpired amid turbulent times for the entire world to share and participate in what seemed, by all measurable accounts, the public coming out party that lived up to the hype and far exceeded what most imagined.

Unquestionably, it was the most spectacular opening ceremony to kick things off in the, aptly named, “bird’s nest” stadium that featured artistic and mirror-like precision, synchronized to choreography that was truly daunting and pushing the standard well beyond the usual tedious fare of sleep inducing inaugural ceremonies that normally play out as little more than gratuitous parades of mascots for the host country. This Olympic event was truly one to watch and the best that most people have ever witnessed in history.

The viewing audience shattered previous records and helped reignite Olympic fever that seems to have been missing from many previous events. And in an internet age of downloadable and streaming content available in unprecedented quantity, embrace of new technology and methods of online distribution made the events accessible with limited advertising intrusions.

I must admit, begrudgingly, that these Olympics were by far the most interesting and compelling that I have ever seen, and caused me to spend many late nights due to time zone difference during the two-week rotation, streaming live events that would fail to get prime time coverage. Like any sports event, somehow watching a taped delay replay is just not the same as being broadcast live.

While I enjoy sports and athletics, I am not a “fan” of professional sports. In a day and age with so many other issues that we face for the sake of humanity, prima donna attitudes by ridiculously overpaid athletes truly distorts the value system for young people growing up. The conflict of interest between commercial endorsements and the athletes that hawk their wares like a used car salesman is really despicable, especially when we consider that the target audience centers on the most impressionable youth of our society.

I find it deplorable that mainstream media continues to fan the flames of celebrity worship and pop culture, daring to call an athlete a hero considering that each and every day there are unnoticed acts of true courage by police officers, firefighters, EMS drivers, soldiers, doctors, nurses, school teachers and every unnoticed individual that resides in the shadows of society.

But the Olympics are something different, something special because they tend to focus and highlight more obscure sports that offer far less in monetary award than the usual television dominated pampered athletes in baseball, basketball, soccer, football and other professional sports. And even those professional athletes tend to put their egos to rest for a moment and participate for country over self. Unfortunately, if you didn’t have access to cable or were aware of the NBCOlympics.com website, you may believe the Olympics were about nothing more than swimming events. But, thankfully, access to some of the less primetime featured events were able to be viewed live and without tape delay like Judo, Gymnastics, Wrestling, Badminton, Ping Pong, Shooting, Archery, Track and Field offered some truly incredible moments.

Having said all that, I must admit that watching competitive athletic events in the Olympics has really been a celebration of national pride and mutual respect among different countries. And with few exceptions, I think most of the athletes from all over did an outstanding job of diplomacy by behaving in a public forum that did not bring shame or embarrassment to their own respective countries.

The Olympics tend to remind us all of our own attraction or “love for the game” that we played as children which requires nothing more than the simplicity of pure enjoyment. And there are always some very touching background stories that seem to trump the individual sporting event. Yes, China did win the most gold medals by significant margin, and while accumulation of gold medals may have significance to the participating athletes, I have enjoyed the spirit of the competition. For all those that didn’t accomplish what they expected and for the many more that didn’t even medal, you should be proud for even making it to the highest level of competition. In truth, there were no losers, only winners.

But this article is not just about a single athletic event as much as it is about celebrating the common ground that all nations and all countries share. This Olympic event captured for the most part and, in spirit, our potential as a global community to both compete and participate on level terms when the rules are fair, and the game isn’t rigged.

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by C.S. Jefferson

The question isn’t “Can we afford to insure all Americans?” Rather, the question is “Can we afford not to insure all Americans?”

Frame the question correctly, and the answer becomes apparent. Solutions are found when necessity dictates the agenda. If we continue to allow the political discourse to simply punt the ball, no one will ever cross the goal line. Some of the most important innovations come from recognizing that there is actually a problem that needs to be solved. And changing the debate is the first step in addressing the issues.

I believe, strongly, that America’s most valuable and precious treasure is its people and the measure of our success as a nation is how we take care of our own citizens. Nothing depletes the wealth effect of middle-class and working families as much as health care expenses. It remains the number one reason for household bankruptcy (at least prior to the current implosive real estate debacle) and, unfortunately, is often neglected until you need it most of all at a time when you can least afford it.

No one thinks of universal health care as a necessity when you are young or when you are better situated in a profession that includes provisional health care as part of your work benefits. But as people age or endure job and career transition, any lapse in coverage can spell financial disaster and wipe out everything you sacrificed and saved for so many years.

Proponents of a health care program for all Americans are often trapped by the wrong questions and the wrong arguments determined by a subservience and false allegiance to conflicting interests. It’s political distraction and sleight of hand. Don’t be fooled by the knee-jerk Q&A sessions that deflate the momentum from gaining any real traction by political debates that play out as nothing more than infomercials.

The coming election season is important for so many reasons, not only to correct the wrongs and mistakes set upon a dangerous and treacherous path, but to set the tone and correct direction for America as a global leader into the 21st century. And I am afraid that neither of the two-party candidates still standing have the political will or moral conviction to prioritize the value of life as being the number one issue we face in America.

The argument and issue of current debate must stand upon its own merits and not be redressed or assaulted in divisive labels of “liberal” or “conservative.” The issues should be judged on one criteria alone, with the most unassailable definition and conviction: Is such issue at hand ultimately for the good of the people? If it is yes, then the answer cannot be distracted or dismantled by common rhetoric; and, if the answer is no, the question no longer has foundation.

Health care is not a liberal or conservative issue, it is, by right, a humanitarian issue and as Americans, it is, perhaps, the most important issue that we face collectively as a nation.

VALUE LIFE, LIBERTY AND THE PURSUIT OF HAPPINESS...

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by C.S. Jefferson

IS THE 3G IPHONE THE NEXT EVERLASTING GOBSTOPPER?

After such an incredible recovery for Apple’s stock since the sell off in the early part of the year, any careful investor should reconsider the lessons of a cautionary tale and ponder if, even Steve Jobs, must eventually surrender to Isaac Newton’s law of gravity and eventually fall back to Earth. Or, can Steve Jobs continue to surprise investors and Wall Street analysts alike as the modern day version of Willy Wonka reincarnate by producing the next version of the everlasting gobstopper?

It’s finally here with the official debut of the 3G iphone available in select retailers nationwide. Will there be lines and crowds clamoring to buy the next-generation iphone beyond the initial hype? You bet there will be, no question. Will there continue to be a demand that legitimately carves competitive market share against other players in the so-called “smart phone” sector, despite the pressures of a credit contraction and consumer slowdown? Absolutely. But no matter how much Apple does to take the lead over industry peers, you can always here the naysayers calling out, “what’s next?” Is the bar set that high for any other company we know of out there today?

SHORT SELLERS AND NAY-SAYERS, BEWARE OF THE BUCKING BULL

Any fool can tell you, “buy low, sell high,” but remember, a stock’s story is not told by the start and finish; rather, it is told in the battle around mid-field and the scrimmage line. It’s the volatility or the erratic swings along the journey and, as in any bull market ride, be prepared to get thrown off the bull because the bull does buck when it tosses and tangles.

If you’ve been following or investing in the stock for some time, you probably have mused over the “wonkiness” of the stocks behavior. No other CEO commands the attention of the press or the ability to inspire a grassroots legion of followers and attendees by simple rumor-mongering and whispers of speculation on the next product roll out. Pull up an overall stock chart over the last year and the results look phenomenal, go further back a few more years and it’s ridiculous. If people rooted for Rocky, then no one else in corporate history could be a better comeback story than Steve Jobs, a man that was once forcibly removed and extricated from the very company that he founded.

But that fails to convey the real story because my concern, primarily, is with the average investor and how many retail investors were literally blown out and ejected from good positions due to over-extended margin calls and chasing momentum; or how option volatility rocking the market to the point where regurgitation and capitulation were a means of complete surrender. Not even a clean up bucket and a mop can help repair the damage done to some people’s portfolios that were purged worse than a New Year’s Eve hangover.

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by C.S. Jefferson

Any murder or crime scene starts with the initial body of evidence. It is from this point that a detective can use a method of deductive analysis to determine the motive and parties responsible. In the world of finance and Wall Street, the same use of logic and deductive reasoning can be an enlightening endeavor to determine the who, the how and the why you may have been washed out and shaken from a position; or, perhaps, why a seemingly solid trade sold off so heavily the moment you finally decided to jump in, causing you to second guess yourself later on the core fundamentals. For many retail investors, the deck seems stacked and the game rigged. The problem is that the who, the how and the why may be a very inadequate consolation prize when you see substantial savings or a retirement plan you counted on flushed down the drain with little hope of recovery.

A crime has occurred against average retail investors who are increasingly dependent upon mainstream media and financial news feeds such as CNBC, Bloomberg, or Fox that 99% of the time are way too ineffective and late to the punch to trade reactively upon–in fact, it is the lack of actionable news gathering that sets the retail investors up for the scraps left on the table while the pros and institutional investors position themselves accordingly beforehand, and then offer pearls of wisdom and hot stock tips through sell-side analysts that are little more than bread crumbs.

While real time quotes and updated information really are a much needed improvement over the former dependence on print media–I can’t even imagine relying on day old news from the morning paper anymore–the truth is that mainstream financial news seems to be a way to justify or explain erratic movements in the market after the fact, rather than being anticipatory in terms of real directional predictions. It’s like a police officer coming to take a report as a matter of routine after your home was burglarized and making your feel better about what happened, even though you know that you’ll never be able to get your possessions back again.

How many “breaking news” stories cause you to rush to your trading platform or broker only to find the news already priced in the stock? Or if a trading session is suddenly halted because of an impending buyout the betting window is closed and you can’t take a position? Didn’t we see this same scam pulled off in “The Sting?”

With the possible exception of key economic data such as the FOMC meeting decisions, labor statistics or CPI/PPI numbers, very little mainstream financial news is actually worthy of consideration or being actionable, tradeable intelligence. And the disparity between those with real-time information and those without, differentiates an institutional player’s concept of “investing” from a retail investor’s experience of “gambling.”

Are we so naive to pretend that the institutional players were limited by the same siphoned off news items as average retail players face and rely upon for so-called wise investment decisions? Maybe the packaging and label on the snake-oil salesmen has changed over time, but the “cure-all, get-rich-quick scheme” still remains the same ol’ con game.

Nobody epitomizes the singular embodiment of a media personality when it comes to offering investing recommendations as does Jim Cramer. Love him or hate him, his sphere of influence is a force to reckoned with that retail investors should recognize. He has a lasting appeal that can make a person believe he is the champion of the average investor by spinning yarns and anecdotal tales as disciplines of how to stay in the game. On the other hand, he is, I believe unintentionally, a very controversial advocate that encourages fresh meat to be dangled in the markets like bait in a feeding frenzy of sharks; and the average, retail investor is exactly the type of victim institutions prey upon.

CRAMER KNOWS MORE THAN HE PRETENDS TO KNOW

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by C.S. Jefferson

Boeing is one of the most successful companies in American innovation and engineering that demonstrates our ability, as a nation, to push beyond the threshold of current technology and remain competitive in this global economy. Despite the recent debacle surrounding the bid for the tanker refueling contract to supply the U.S. Air Force, Boeing remains resilient with a well diversified strategy that makes a recent decline in share price one of the most undervalued stocks in the market.

What is most disturbing is that we are facing an economic crisis and anything that helps to create buoyancy for income earning careers in America should be encouraged and supported. Instead, through a joint-venture of Northrup Grumman and EADS/Airbus, Boeing lost out on a 35-40 billion dollar contract. True estimates carry the loss of revenue closer to 100 billion and up when you factor repairs, servicing and spare parts in the deal over the duration of the contract.

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by C.S. Jefferson

Those of you that are trying to rework your home loans or refinance might find a difficult time due to changing lending standards. In fact, even though mortgage applications are on the rise while home sales are declining, the inverse relationship proves that mortgage applications are being rejected wholesale across the board due to banks unwilling to take on additional risks. And even if you are one of the more fortunate with the most credit worthy standards, you will find a “reverse sticker shock” when it comes to refinancing your home or attempting to draw equity lines of credit from being upside down in debt. Collapsing equity only exaggerates the debt ratio, maybe not in principal, but certainly in terms of money owed by percentage relative to the value of the property.

As far as I can tell, the untold story in the media is that banks will not appraise your home or property at previous levels and, perhaps, not even at fair market values. Even if you were fortunate to have a buyer interested in your property at an agreed upon price, there is no guarantee the transaction will take place because the banks may be unwilling to finance and write a mortgage without a drastic reduction in the appraisal. The sad effect is that this is forestalling the housing recovery by creating a major “choke point” on available credit. In order to facilitate any housing or economic recovery, you need to inject liquidity to move markets.

Rate cuts punish the dollar and purchasing power of the majority of Americans by increasing inflation risk. Because, let me make this clear, liquidity and access to capital is far more important than lowering or raising rates. Without the flow of money, the arteries of economic stability harden up and coagulate which causes pulmonary cessation.

It is clear that the Federal Reserve under Mr. Bernanke has tried some very innovative ways to inject capital into the markets and prevent a catastrophic meltdown. And I applaud them for their efforts because I do believe that Mr. Bernanke is a good man along with Treasury Secretary Hank Paulson. Working in conjunction with each other, they are managing a crisis in extra ordinary times despite pressures to stabilize the dollar while, simultaneously, stimulating the economy.

INCENTIVIZE LIQUIDITY IN THE MARKETS THROUGH CONDITIONAL RATE CUTS:

However, more is needed and I believe that Mr. Bernanke and the FOMC should make current rate cuts in the prime lending rate “conditional.” This means that rather than banking and financial institutions assuming the rate cuts to do with as they please, it would incentivize them to actually help stimulate the economy as intended by lending money to qualified borrowers. By not doing this, the banking and financial institutions are primarily focused on reworking their own debt to capital ratios.

Interesting things have come to light since the most recent and historic cuts on the prime lending rate with regard to significant and worrisome inflationary risks. But, I believe, this is an idea that would help to stimulate our economy and have lasting positive effects on the mortgage and credit markets; more importantly, without pushing us beyond the threshold of comfortable levels in the costs of goods and services. And I believe they could do much better by imposing rate cuts only as an incentive to increase liquidity in the system to those lending institutions that seek to participate in the economy, as opposed to those financial firms that are simply relying on survival and self-preservation instincts by only working out their own loans risks.

For example, remove the stigma of the “discount window” as being the arbiter of last resort for banking institutions at risk for default and insolvency. Instead, RAISE the prime rates steadily for the overall market which would boost the dollar and take the pressure off the American consumer by falling oil prices and commodities; but maintain the low rates for the discount window to allow any qualified financial institution to access in exchange for actually going out and actively lending money in the markets.

Yes, I accept this will probably never occur, but I do believe it would be the answer to mitigate inflationary pressures in the economy, boost the U.S. dollar and, equally important, help stimulate the overall economy and stabilize the declining real estate market. The other benefit is that it would not impair the American consumer by creating a government bailout for the impending foreclosures. Instead, it would translate into allowing the capital markets to take on the risk of assuming mortgage loans, as opposed to the taxpayers, in return for “discounted rates” below the prime rate.

Of course, there would be an incredible arbitrage opportunity for those capable of doing so, but the desperately needed liquidity infusion for those that need it most–the average American consumer–would help sustain our economy moving forward and help reduce the fears of recession that seem to be so pervasive that they may actually manifest into reality by default.

LOWERED RATES WERE NEVER ABOUT THE HOMEOWNER, ONLY ABOUT WIDENING THE “SPREADS”:

The reason I so strongly urge Chairman Bernanke to incentivize economic stimulation through “conditional rate cuts,” is because, as it stands, the banking community is only using the lowered prime rate to widen their own profit margins of existing loans to help cushion the impact of credit defaults. That means, simply, by not even bothering to refinance loans they have the ability to drastically reduce leverage exposure and capital requirements. This is because, in principle, financial institutions borrow at short-term rates based on the prime and, in turn, lend long-term debt. While you may have a fixed rate on your 15 to 30 year mortgage, the lending institution must maintain access to short-term credit and liquidity which creates the spread. Understand that the long-term lending rates retail borrowers use on the home mortgage have not fallen, in fact, they have risen despite the prime rate falling to record levels–not the way it’s supposed to work, is it?

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by C.S. Jefferson

Now, I do not believe that oil companies are just the big bad wolf in the room because that is far too simplistic of a notion, like pointing your finger at the boogeyman who exists in name only. They do what they are designed to do–make profits. And there are certainly admirable efforts made by companies such as British Petroleum and Chevron who have substantial investments in alternative energy. But, most importantly, they are doing this voluntarily, rather than by coercion through legislation, because of profit incentives that allow solar, wind and other forms of renewable energies to actually become cost-effective in the long run. In a capitalistic structured economy, we should embrace the idea of free markets by never underestimating a person or corporation’s motivation to make money.

But, “free” does not mean without responsibility. Freedom does not mean do whatever you want without consequence. Freedom is about the preservation of liberty and, thereby, the recognition and mutual respect of individual sovereignty. And such freedoms only exist, insofar, as they are never subjugated by divisive means to inhibit and force subservience.

You are, as I believe, free to do as you choose–as long as whatever you do does not infringe upon the rights of others. I don’t judge people for what they do with their own lives or whatever personal indiscretions lead them to be who they become; no, I judge people on the lasting impact and effect they have on others both directly and indirectly, and by the nature of who we are as creatures on this shared planet.

THE SYMBIOTIC RELATIONSHIP BETWEEN CORPORATE CULTURE AND COMMUNITY CONSCIENCE:

Corporate responsibility is a necessity and one that must be guarded vigilantly through transparent oversight in line with the communities they serve. After all, no corporation can exist without customers to service as clients. It is, in effect, the symbiotic relationship between corporate culture and consumers, one cannot exist without the other.

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by C.S. Jefferson

On the record, I have never voted for a Clinton and I have no blind allegiance as a supporter or advocate of their administration. What was good was good; what was bad was bad. I had no intention, whatsoever, to vote for Hillary in the early part of this primary season, so, no one could ever accuse me of being a disgruntled supporter of the democratic party base. However, having said all that, she has come a long way to prove to me and many others that she does, indeed, have the fortitude to, rightfully, deserve the democratic nomination by virtue of electability and legitimate votes counted in her name. I wouldn’t presume to make this argument if Obama won all the big states convincingly or if he managed a significant majority of both the popular and electoral votes by such a wide array that any dispute would ultimately be indefensible.

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by C.S. Jefferson

email: contact@staticrhetoric.com

I wanted to personally thank everyone that has come to visit and express my appreciation for your help in promoting and recommending this website. While we are just starting out, I realize that continuing to publish content often conflicts with my personal schedule and precludes me from posting material as frequently as I would like at the moment. I will do my best to provide quality over quantity, first and foremost, with a sincere approach toward objective analysis.

INVESTING PHILOSOPHY

I am a strong believer and advocate in the strength of the U.S. capital markets amid the global growth story.

The high degree of extreme volatility over the course of the past year has been unprecedented. We are, indeed, facing a credit crisis due to extreme pressures caused by forced liquidations and wide scale deleveraging.

But what we are witnessing, folks, is history in progress…it is not something that we can ignore or something that we can run away from.

And as such, there are tremendous buying opportunities that are occurring for the long-term investor mindset. There is no question that retail investors playing the markets now must have a high capacity for risk tolerance but, fundamentally, I do believe that the United States economy is strong, vibrant and adaptable to the current credit contraction and decline in housing assets.

My intentions are to focus on investments with a long-term perspective. Personally, I am an advocate of dynamic hedging and risk mitigation with any portfolio. However, I recognize that many people are not familiar or entirely comfortable with using derivatives and options to manage risk.

So, from that perspective, I try to maintain a focus on recommendations that are less speculative and are suited to meeting a strict criteria of fundamental analysis and relative presence that defines the sector as a leader or best of breed; or that the particular security and underlying instrument trades within reasonable valuations as opposed to chasing momentum or day trading scenarios.

I will maintain a current conviction buy list with the strict understanding that investing recommendations are only that, and any such investments based upon recommendation are at your own discretion, both voluntary and with the full understanding of risk in any investment strategy.

Personally, I stray away from trend dependent retail stocks or small market cap names. I prefer large market cap companies that pay dividends and the only exception to this would be strong ipo’s or well capitalized growth companies that offer a return that justifies the risk to reward ratio.

FOCUSING ON THE POSITIVE

There is plenty to criticize in this world and criticism comes easy. It is clear that pundits, media analysts and mainstream news makes a living pointing out what’s wrong in the world, while rarely offering a solution. It’s irresponsible to simply criticize and point the finger without having to fix the problem.

There are times when certain people need to be called to the carpet, but I will primarily focus on articles that highlight the positive aspects of companies I believe in, or issues that are most important to all of us while attempting to raise awareness and proper concern for what matters most in America and the world we share.

My regards to all….