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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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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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.

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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“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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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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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.

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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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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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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