Buy, Hold, Or Fold?

As we sit at consolidation levels around 1,000 on the S&P 500, we are witnessing the critical nexus point of a binary event waiting to happen…

If you want to be invested in the market now after such an incredible run up from the lows, then you better buy only what you are willing to own even if the market collapses and sells off again.  Don’t chase anything and definitely don’t hold high beta junk unless it’s speculative money you can truly afford to lose.  Personally, I wouldn’t touch 80 plus percent of the S&P 500 as I really try to streamline my portfolio to story specific stocks against the backdrop of an overall macro-economic theme.   Within my own portfolio, I continue to hold a substantial overweight position in commodities, more specifically, base metals that I’ve written about previously and played very aggressively since the collapse in the markets last year.  In particular, stocks such as Freeport McMoran (FCX), BHP Billiton (BHP), U.S. Steel (X), Anglo-American (AAUKY), Alcoa (AA), and Aluminum Corp. of China (ACH) have never looked back by trading anywhere near their 52-week lows, most of these companies hitting that bottom mark in the fall of 2008, despite the much deeper overall index lows this past March.  With respect to commodities in general, the real bottom in the market was in the fall of 2008, not March of 2009, which is why I continue to argue that there were no less than two market bottoms within the last year depending on what your positions and specific exposure to risk were.

These stocks in particular are viewed as long-term positions that have made triple-digit returns off their lows and  may still continue to run higher if we are in a recovery cycle.  While I haven’t closed out any of these core positions, nor do I intend to, I maintain a defensive posture by implementing hedging strategies to protect against any potential or impending selloff.   I cannot, in good conscience, recommend to anyone that isn’t already invested in these sectors to chase performance.  This being especially anxiety ridden the more I hear analysts coming on late to the trade which begs me to question:  Are we nearing a blowoff top in the commodity trade?   The run has been incredible, but buying now is tremendously risky unless you enter the trade as a collar (buy shares against covered calls to finance put protection) or, at a minimum, add-in protective puts along the way.  I think these stocks can go much higher, no question, but the risk to reward ratio must be respected to the downside at these levels from this point forward.  I won’t go so far to say they are overpriced at current market levels, but they certainly aren’t cheap like they were last fall, even though I am biased to the upside by not being remotely tempted to close out the positions.

In fact, the weaker dollar, higher commodity theme based on global infrastructure demand and China stockpiling commodities in lieu of currency weakness is one of the main drivers in the market since last year.  Since commodities tend to be dollar denominated, stockpiling not only serves as a currency hedge against inflationary policy, it also underscores savvy asset allocation by utilizing universal resources and raw materials as a currency in of themselves.  These are all high beta plays based on actual fundamentals and the market, overall, is doubtful to continue higher if this theme is ever broken.  Dollar denominated commodities, including petroleum, have truly become a means to stockpile global currency protection and may be less about actual infrastructure demand.   Somewhere down the line, supply and demand must be in synchronicity, otherwise, the commodities could crash just like they did last year–and that would not portend well for the entire overall market.  So, if you’re looking for leading indicators up or down watch commodities like a hawk; until then, even though I hope this negative scenario never winds itself out, play what works until the game is broken.

To be clear, I would characterize the March lows as a deeper financial sector sell off which I really tried to minimize by limiting exposure to the payment processors, and not the credit issuers.  I’ve written about this in an article previously, but the only “safe financials” to me are the payment processors that don’t hold direct  consumer debt exposure.  More specifically, relating to stocks such as Visa (V), Mastercard (MA), and, of course, the exchange  bourses:  Chicago Mercantile Exchange (CME), InterContinental Exchange (ICE), New York Stock Exchange (NYX), and the Nasdaq (NDAQ).  Other than that, banking stocks don’t interest me other than an option trade and certainly not as a long-term hold.

Allow me to list several more stocks I believe are worth owning long-term and that I continue to hold no matter where the market trades on any given day.  In addition to those aforementioned holdings, stocks such as Dupont (DD), Dow Chemical (DOW),  Boeing (BA), and Lockheed Martin (LMT) are also major components of my core portfolio.  All of which, despite moving higher, still remain at very attractive entry levels to long-term investors.  Chemicals, Agricultural-Sciences, and Aerospace-Defense are worthwhile themes that inject stability and long-term growth with appreciable dividend yields to a well balanced investment portfolio.

If I were to advise someone who was itching to play catch up to the markets and didn’t know where to place money by being unwilling to stand on the sidelines anymore, these four stocks would allow conservative participation if the market continues higher without chasing, or worse, overpaying for momentum.  More specifically, Boeing (BA) and Lockheed Martin (LMT) offer a serious defensive posture outside of the obvious nature of their business models with an extremely positive cash dividend.  Boeing, in particular, is probably one of the best plays to the long-term investor by being undervalued anywhere below 55 dollars.  While it isn’t as cheap as it was in the low 30’s recently, the downside seems limited now to the mid-40’s unless the entire market breaks down or fundamentals change radically.  As far as (LMT), this stock is underpriced below 85 dollars where it seems to find resistance.

Boeing (BA) positions itself as an interesting option play due to the implied volatility being so low relative to other momentum based stocks.  It remains as one of the few option plays I’m willing to go long on in a market climate that has run so far, so fast.  There are not that many long call option plays that look cheap to me anymore as investors are scrambling to participate in the market with upside call volume.  Just within the last several weeks, we saw a nice intraday pop based on announced scheduling of the 787 Dreamliner.  It paid off handsomely on some front month options I was holding–ironically, I had applied this same trade several months ago and, mistakenly, left a lot of profits on the table when they disappointed the markets by delaying their test flight prior to the Paris Air Show.  Not wanting to repeat this mistake again, I immediately sold off 2/3 of my front month September call options and 1/3 of my back month November contracts on the initial pop, simply to take the entire cost of the trade and significant profits off the table.  This still kept me in the trade, but maintained the discipline to take profits when they are dangled in front of your face like a carrot on a stick.  With only several trading days until September option expiration, premium decay is no joke and unless it continues to move higher within the next several trading sessions, my remaining front month calls would most likely have become ripped up tickets at the race track.  Rather than watch the September calls expire worthless, I rolled the remaining front month positions forward into October.  However, I did not sell out of any LEAP positions because I truly believe there is serious upside in this story that may take longer than my ability to precisely time the trade in the near-term.

As far as the underlying security itself, I continue to hold (BA) stocks as a long-term investment and have no inclination whatsoever to sell out of this position.  My cost basis is low and the dividend yield is significant when you consider many other companies in the S&P 500  have suspended or reduced their cash payout as a result of the crisis since last year.  The only reason I am not adding to this position in shares is because I already made my commitment throughout the last year and remain overweight.  If you don’t play the options, keep it simple and buy the stock by averaging in over time, regardless if we face an up or down market.  Or, add some inexpensive put options against purchased shares simply to protect your positions.  If I were making a projection on where this stock will trade, you have to rule out short-term volatility, or worse, stagnation.  However, 75 is a target I think it can achieve with relative ease by mid-2010 and, if you press me on the long-term, I don’t think crossing the century mark above 100 is out of the realm of reasonable expectation if, and only if, our global economy truly recovers into 2011.   

Unlike many of the commodity stocks I hold in the core portfolio and can’t recommend people chasing if they aren’t already invested at this point, Boeing has tremendous, yet sustainable, upside whenever they have a successful test flight of the Dreamliner and ramp up  production for their scheduled 2010 delivery.  Unfortunately, timing this trade has been very difficult due to multiple delays and one let down after another,  but you will see another major upside move in this stock and the options based on two conditions:  The first being the successful test flight of the Dreamliner with strong  affirmation of guidance for existing orders on their books and, second, a continued run higher in the overall market.   Remember, (BA) is a major S&P/DJIA component and aside from aberrations due to intraday pops like several weeks ago, Boeing cannot move higher with an inverse relationship to the overall market.  It represents a play on expanding global economic demand, a replacement cycle in the airline travel industry, and capital goods strength which require better and more favorable market conditions.

While I believe there are at least several more significant moves in the stock down the line, the stock could easily drift lower which means these pops will be on a relative basis from where the stock settles over a period of time prior to headline breaking news.  The test flight will be a catalyst, but you must recognize that  their delivery schedule isn’t slated until late 2010.  Of course, if markets are behaving, then the stock will run well ahead of schedule.  And don’t forget that (BA) is still the second largest defense contractor behind (LMT) so, to be sure, this company is not a one trick pony which is further validated by pretty impressive earnings reports.  If you are not a day trader or tempted to time this stock to perfection, you will be afforded opportunities of multiple entry points along the way. 

Filtering Out The Noise

Ask yourself the question:  If the market sold off again anywhere near the bottom, what would you do and how would you trade it?  More importantly, if you want to be long the market, ask yourself what stocks are you willing to own long-term no matter where the market trades?

I tend to believe if you listen to too much background noise you can become distracted and lose focus, perhaps even trade yourself out of a good position, or miss opportunity as fear takes grip and refuses to let go of its hold.  You can watch a trade move higher waiting for a pull back or sell off that never comes.  Regardless, try to pick your positions based on companies you have conviction about buying and holding, or are simply willing to own regardless of the price action during crisis and volatility.  I have not sold any of my core holdings despite the market crisis throughout the past year and, in fact, made very aggressive accumulations of stocks throughout this debacle to bring my cost basis down considerably.  While I will trade in and out of options and speculative stocks in a heartbeat, I believe that as a long-term investor you continue to hold certain stocks with solid balance sheets, fundamentals and projected dividend yields that comprise your core portfolio if, and only if, you can effectively manage the risk to the downside.

While any stock is good for a trade, I would repeat, in my opinion, that more than 80% of the entire S&P 500 is not even worth holding as a long-term investment.  Many have had their dividends shredded and retain significant credit risk exposure, on top of which, the landscape is much more competitive for fewer consumer driven spending dollars, such that this is about an almost dystopian Darwinistic survival of the fittest.  Namely, those with bailout TARP money, and those without; those with access to the Federal Reserve’s balance sheet, and those without; those too big to fail, and those that simply aren’t.  And since I don’t, as well as most retail investors, have to mimic the underlying performance of the entire S&P 500, you can be more of a discretionary and selective stock picker rather than a broad based participant. 

After all, for a money manager to say they beat the S&P 500 last year doesn’t mean they made money–it just means they didn’t lose as much on a percentage basis as the overall index.  Losing less money was the new mantra and threshold of financial genius until the market started performing.  Now, with the S&P 500 up significantly, a lot of last year’s geniuses that went to cash on the sidelines will be underperforming the benchmark index.  Make no mistake, this is a stock picker’s market.  And those that need to hold baskets of stocks or broad based index trades will probably underperform nimbler and swifter hedge funds.  In this respect, retail investors can serve themselves up much better performance by picking best-of-breed stocks in each sector and ignoring anything less.  Add to this cocktail recipe a tight dose of basic hedging with put protection, covered calls and collars, you should be able to ride the bull kicking and screaming all the way up without being too afraid of being tossed amid short-term volatility.   This is why even long-term holders of index or sector specific ETF’s may be less appropriate for retail traders who may try to opt for safety and, instead, find that like any cumulative, pre-digested basket fund, there’s a lot of garbage collecting  going on with only a few remaining diamonds in the rough.

Author’s disclosure:  Long BHP, FCX, AAUKY, AA, ACH, X, V, NYX, NDAQ, DOW, DD, LMT, BA.

Market Memory:  An Abbreviated Tale Of Two Bottoms

As we sit at consolidation levels around 1,000 on the S&P 500, we are witnessing the critical nexus point of a binary event waiting to happen…

It seems that every single trading session bares witness to commentators and analysts on the financial news infomercials promulgating this idea of retesting the market bottom in order to validate the run to the upside.  Perhaps, it highlights the conversation as a major benchmark and level of theoretical risk to the downside.  Market memory, anniversaries and the unknown will always cause varying degrees of consternation that provokes one to question reflections seen in the rearview mirror.  However, there are so many traders that have missed capturing the upside and full potential move off the lows that a viral contagion of sour grapes has spread in hopes that the market will sell off, simply to allow a safe entry point or second chance “once in a lifetime opportunity” for all those that missed the move to begin with.

This, in of itself, is very disingenuous and suspect analysis by many reasoned professionals that have motive to draw this market down again either by being unbearably short against the rising momentum, or by having itchy trigger fingers waiting for opportunities to buy.  I’m not entirely convinced they’ll get an easy entry point anytime soon, which actually can cause this market to push much higher long before there is complete confirmation of a sustainable economic recovery.  In fact, if you ever wanted a catalyst to push these markets even higher, it would be that fund managers are underinvested and being forced to chase performance to close out the year.  Six months ago fund managers could get away with adopting the mantra “less worse” while losing money by a smaller percentage than the drop in the S&P 500, or being on the sidelines with cash; but now with the last quarter of the year approaching, those that missed the move and have underperformed are feeling the squeeze to demonstrate positive returns, otherwise, face the certainty of redemptions and withdrawals.   

But being a contrarian does not mean you can afford to stand against the tide when the market does shift dramatically and finally sell off into a major correction.  Not if, but when we sell off and, without question, there are legitimate reasons to doubt this market going forward,  for fear of the unknown is only part of the major headwinds that we face.  The real albatross hanging over this market is continuing job losses and deteriorating consumer spending that has the potential encumbrance to stall out any positive momentum.  Tax selling may be another real driver toward the end of the year with the guaranteed prospect of  capital gains rates expiring.  Probably, more concrete, is the changing sentiment when macro-economic numbers can no longer sustain the unrealistic expectations and traders begin to pay attention to a struggling recovery.  I, personally, don’t see how job growth–let alone job replacement–can even occur anytime soon, and playing these monthly unemployment lottery numbers as the economic bellwether sets the market up for a serious move up or down.  

What is impaired may be forever damaged, and what has changed may have forever changed us all.  I hope I’m wrong on this issue, but in a global financial system the changing dynamics in our competitive landscape makes those that yearn to turn back the clock to yesteryear incapable of direct participation, who will only find themselves as relics in the context of history.   Yes, the overall economic data is showing signs of improvement off the bottom, but where is the sustainable growth coming from?  People still refuse to accept that we are in a credit contraction worsened by deflationary pressures  and that the old rules of borrowing equity off leveraged assets in home values has all but disappeared from the market.   The operational mechanics that provided this supplemental household wealth has simply evaporated into someone else’s pockets–let alone thin air–as this global paper asset Ponzi scheme unraveled and seems less likely to return wholesale anytime soon. 

Of course, earnings power by companies left standing will handily beat lowered expectations even with margin compressions due to a greater percentage of overall market share, or aggressive shredding off liabilities through labor cuts and less competition which will make best-of-breed stocks very good investments based on survival, not necessarily growth.  It seems very likely we will see this divergent pattern to the overall economic conditions for some time to come.  However, these are merely my  assumptions based on events that are yet to fully transpire with definitive results and, regardless, as a trader you must be willing to maintain risk protection while navigating a course through uncharted territory.  

So when we continue to hear hyperbolic references to the absolute market bottom on the financial news, and as reported in most financial journals, keep it in mind to ask which bottom are they referring to?  Look, I’m still shocked the market fell as low as it did back in March, breaking the October and November lows of last year which I believed and still maintain were the true bottom. However, to be clear, it was a very misleading decline that took the S&P in the 660 range back in early March of this year compared to what occurred during the calamity of last year when no one could guarantee an absolute end to the madness.   For me, personally, the market truly bottomed last fall throughout the crisis in October and November of 2008, even as the overall indices were trading much lower several months later in March 2009.   Look at the performance of some of the individual companies as validation when it was estimated nearly 40% of the underlying stocks within the S&P 500 were higher in March of 2009, despite the overall index itself being lower–mainly due to weak counterparts in the financial arena.   This was a critical inflection point that demonstrated strength and real buying support in specific sectors without regard to the same financial media crying about another meltdown and scaring people out of the market.  It’s important to understand that while the S&P 500 is highly regarded as the overall market barometer, or the benchmark to measure a fund manager’s performance, this market rally has proven to be much more specific to individual stocks, sectors and themes.  

I’ve been very bullish on the stock market since the collapse last year because, to me, that was the “once in a lifetime buying opportunity.”  But such opportunities occur more frequently than we’d anticipate, and I do feel much more trepidation as cheerleaders in the media start waving their pom-poms by calling the end of the recession.  Of course, history tends to repeat itself and there are always moments of opportunity which all depends on which stocks you’re  buying.    Which is why I say, contrary to how the financial news seems to characterize their version of the market bottom, there were really two different market bottoms depending on which stocks you were playing.  From a technical point of view, it would be more accurate to state those March lows were the proverbial “retest”–make no mistake about it that was a market crash in 2008–that many myopic professionals have been looking for and missed by shorting, or staying on the sidelines since then as the market rallied higher!

I think too many people in the media were continually miscalculating the strength in the market as it afforded tremendous opportunities throughout the crisis.  By relying on the major indices as a whole, it became a matter of convenience to tell the story through the generalized market averages as front page news or breaking headlines, and by exploiting this defect the financial media was neglecting overriding facts that sector specific performance within the S&P, DJIA and Nasdaq told a completely different tale than the numbers printed across the tape on the big board.  The weaker speculative plays and injury prone, financially maimed stocks were definitely capped with constricted p/e multiples, but real earnings power plus revenue growth was always in play no matter how catastrophic it seemed. Money has been put to work since the debacle began by initiating a buying spree on companies trading at historic discount prices.

The rise since pushing the S&P 500 back up across 1,000 and daring to break higher on the upside has been dramatic, but it cautions people to believe we have achieved too much too fast, such that we’re due for a serious meltdown or pullback in the markets.  I assume there are a lot of professionals that are trying to be too cute in timing the markets and have completely missed the majority of the move to the upside.  Their bearish sentiment and pessimism strikes as covertly insincere, but you cannot ignore their presence or manifesting ability to eventuate desired outcomes.  If you can listen beyond the white noise, many fund managers admit at certain price levels they would be licking their chops as buyers of the market which implies they are currently underinvested and are begging for a retest, just so they can have a second chance opportunity.  I hope they never get that chance because it would only mean an outcome of more chaos and panic after working so hard to stabilize the global financial  markets.  And since the political rhetoric has reached a deafening crescendo of bailout fatigue, it would be difficult to orchestrate another wave of wide scale monetary injections to boost the economy and prop the markets with cartoon, superhero-like “plunge protection ninja teams” in the cover of darkness.  This means that any potential retest of the March lows would only result in further deterioration of the economy and disastrous results in the market that could send the S&P 500 well below 600–forget the notion of a retest, it would be financial Armageddon.  Let’s hope this is not the outcome because it would mean that all the stimulus and monetary easing has failed such that even the bearish argument is inadequate in recognizing the severity of what may come. 

Can we have another major sell off that exceeds everything we’ve seen so far?  Absolutely.  I don’t deny it and have had many sleepless nights about playing Bear market limbo:  How low can you go?  There are plenty of soothsayers calling for markets to revisit the March lows  hoping to make a name for themselves by saying, “I told you so.”  I think the percentages are far less in favor of anything close to a significant market retest of the lows, but still the possibility exists and we have yet to fully recover with respect to the “real economy,” despite some very effective consolidation in the market.  I suppose what I’m really suggesting is that these so-called “market bottoms” are headline worthy news items, but don’t necessarily convey individual stories of stocks and serve as distractions more than anything else.  We could pull back dramatically in the S&P 500 while certain stocks would hold up better than most others which suggests, quite confidently, there is money that can be put to work with the correct asset allocation.  And as a long-term investor, there isn’t any time that I am not invested in the market.  I don’t run to cash by liquidating everything as the market sells off, nor do I feel complacent or compelled to chase when things rise.  The difference is that in order to manage a portfolio, I must maintain hedging strategies that allow me to stay invested in the market no matter where it trades. 

But as stated before, calling the exact bottom of any market is a fool’s game because it is not a singular reflexive pivot point–the bottom of the market is a process that is formulated over time.  Looking through the rearview mirror is easy to mark a moment in history, or graph it on a chart, but the struggle to endure and stay in the game so that you can actually exploit opportunity is the true measure of calling a bottom that can only come by realized returns in your portfolio; otherwise it’s all just conjecture and academic conversation.

 Author’s disclosure:  Long BHP, FCX, AAUKY, AA, ACH, X, V, NYX, NDAQ, DOW, DD, LMT, BA.

 Buy, Hold Or Fold?

As we sit at consolidation levels around 1,000 on the S&P 500, we are witnessing the critical nexus point of a binary event waiting to happen… 

It seems that every single trading session bares witness to commentators and analysts on the financial news infomercials promulgating this idea of retesting the market bottom in order to validate the run to the upside.  Perhaps, it highlights the conversation as a major benchmark and level of theoretical risk to the downside.  Market memory, anniversaries and the unknown will always cause varying degrees of consternation that provokes one to question reflections seen in the rearview mirror.  However, there are so many traders that have missed capturing the upside and full potential move off the lows that a viral contagion of sour grapes has spread in hopes that the market will sell off, simply to allow a safe entry point or second chance for all those that missed the move to begin with.

This, in of itself, is very disingenuous and suspect analysis by many reasoned professionals that have motive to draw this market down again either by being unbearably short, or by having itchy trigger fingers waiting for opportunities to buy.  I’m not entirely convinced they’ll get an easy entry point anytime soon, which actually can cause this market to push much higher long before there is complete confirmation of a sustainable economic recovery.  In fact, if you ever wanted a catalyst to push these markets even higher, it would be that  fund managers are underinvested and being forced to chase performance to close out the year.  Six months ago fund managers could get away with adopting the mantra “less worse” while losing money by a smaller percentage than the drop in the S&P 500 or being on the sidelines with cash; but now with the last quarter of the year approaching, those that missed the move and have underperformed are feeling the squeeze to demonstrate positive returns, otherwise, face the certainty of redemptions and withdrawals.   

But being a contrarian does not mean you can afford to stand against the tide when the market does shift dramatically and finally sell off into a major correction.  Not if, but when we sell off and, without question, there are legitimate reasons to doubt this market going forward,  for fear of the unknown is only part of the major headwinds that we face.  The real albatross hanging over this market is continuing job losses and deteriorating consumer spending that has the potential encumbrance to stall out any positive momentum.  Tax selling may be another real driver toward the end of the year with the guaranteed prospect of  capital gains rates expiring.  Probably, more concrete, is the changing sentiment when macro-economic numbers can no longer sustain the unrealistic expectations and traders begin to pay attention to a struggling recovery.  I, personally, don’t see how job growth–let alone job replacement–can even occur anytime soon, and playing these monthly unemployment lottery numbers as the economic bellwether sets the market up for a serious move up or down.  

I hope I’m wrong on this issue, but in a global financial system the changing dynamics in our competitive landscape makes those that yearn to turn back the clock to yesteryear incapable of direct participation, who will only find themselves as relics in the context of history.   What is impaired may be forever damaged, and what has changed may have forever changed us all.  Yes, the overall economic data is showing signs of improvement off the bottom, but where is the sustainable growth coming from?  People still refuse to accept that we are in a credit contraction and that the old rules of borrowing equity off leveraged assets in home values has all but disappeared from the market.  The operational mechanics that provided this supplemental household wealth has simply evaporated into someone else’s pockets–let alone thin air–as this global paper asset Ponzi scheme unraveled which seems less likely to return wholesale anytime soon. 

Of course, earnings power by companies left standing will handily beat lowered expectations  even with margin compressions due to a greater percentage of overall market share, or aggressive shredding of liabilities through labor cuts and less competition which will make best-of-breed stocks very good investments based on survival, not necessarily growth.  It seems very likely we will see this divergent pattern to the overall economic conditions for some time to come.  However, these are merely my  assumptions based on events that are yet to fully transpire with definitive results and, regardless, as a trader you must be willing to maintain risk protection while navigating a course through uncharted territory.

So when we continue to hear hyperbolic references to the absolute market bottom on the financial news, and as reported in most financial journals, keep it in mind to ask which bottom are they referring to?  Look, I’m still shocked the market fell as low as it did back in March, breaking the October and November lows of last year which I believed and still maintain were the true bottom.  However, to be clear, it was a very misleading decline that took the S&P in the 660 range back in early March of this year compared to what occurred during the calamity of last year when no one could guarantee an absolute  end to the madness.   For me, personally, the market truly bottomed last fall throughout the crisis in October and November of 2008, even as the overall indices were trading much lower several months later in March 2009.   Look at the performance of some of the individual companies as validation when it was estimated nearly 40% of the underlying stocks within the S&P 500 were higher in March of 2009, despite the overall index itself being lower–mainly due to weak counterparts in the financial arena.   This was a critical inflection point that demonstrated strength and real buying  support in specific sectors without regard to the same  media crying about another meltdown and scaring people out of the market.  It’s important to understand that while the S&P 500 is highly regarded as the overall market barometer, or the benchmark to measure a fund manager’s performance, this market rally has proven to be much more specific to individual stocks, sectors and themes.  

I think too many people in the media were continually miscalculating the strength in the market as it afforded tremendous opportunities throughout the crisis.  By relying on the major indices as a whole, it became a matter of convenience to tell the story through the generalized market averages as front page news or breaking headlines, and by exploiting this defect the financial media was neglecting the fact that sector specific performance within the S&P, DJIA and Nasdaq told a completely different tale than the numbers printed on the tape at the  big board.  The weaker speculative plays were definitely capped with constricted p/e multiples, but real earnings power and revenue growth was in play and money has been put to work since the debacle began by buying companies trading at historic discount prices. 

The rise since  pushing the S&P 500 back up across 1,000 daring to break higher on the upside has been dramatic and cautions people to believe we have achieved too much too fast, such that we’re due for a serious meltdown and pullback in the markets.  I assume there are a lot of professionals that are trying to be too cute in timing the markets and have completely missed the majority of the move to the upside.  Their bearish sentiment and pessimism strikes as covertly insincere, but you cannot ignore their presence or ability in manifesting eventual outcomes.  If you can listen beyond the white noise, many fund managers admit at certain price levels they would be licking their chops as buyers of the market which implies they are  currently underinvested and are begging for a retest just so they can have a second chance opportunity.  I hope they never get that chance because it would only mean an outcome of more chaos and panic after working so hard to stabilize the global financial  markets.  And since the political rhetoric has reached bailout fatigue, it would be difficult to orchestrate another wave of wide scale monetary injections to boost the economy and prop the markets with cartoon, superhero-like “plunge protection teams” in the cover of darkness.  This means that any potential retest of the March lows would only mean further deterioration in the economy and disastrous results in the market that could send the S&P 500 well below 600–forget the notion of a retest, it would be financial Armageddon.  Let’s hope this is not the outcome because it would mean that all the stimulus and monetary easing has failed such that even the bearish argument is inadequate in recognizing the severity of what may come.  Since I’m actually bullish on the markets such that I really don’t subscribe to the March retest idea and, personally, give it a less than 10% chance of  happening, as an investor I can’t afford to be wrong so  I will never underestimate the risk, no matter how slight.  In fact, I distrust my own optimism to remain cautious enough to always maintain active hedging strategies intended to mitigate risk to the downside.

Where I’m Invested Long-Term

If you want to be invested in the market now after such an incredible run up from the lows, then you better buy only what you are willing to own even if the market collapses and sells off again.  Don’t chase anything and definitely don’t hold high beta junk unless it’s speculative money you can afford to lose.  Personally, I wouldn’t touch 80 plus percent of the S&P 500 as I really try to streamline my portfolio to story specific stocks against the backdrop of an overall macro-economic theme.   Within my own portfolio, I continue to hold a substantial overweight position in commodities and base metals that I’ve written about previously and played very aggressively since the collapse in the markets last year.  In particular, stocks such as Freeport McMoran (FCX), BHP Billiton (BHP), U.S. Steel (X), Anglo-American (AAUKY), Alcoa (AA), and Aluminum Corp. of China (ACH) have never looked back by trading anywhere near their 52-week lows, most of these companies hitting that bottom  mark in the fall of 2008, despite the much deeper overall index lows this past March.  With respect to commodities in general, the real bottom in the market was in the fall of 2008, not March of 2009, which is why I continue to argue that there were no less than two market bottoms within the last year depending on what your positions and exposure to risk were specific to sectors.

These stocks in particular are positions that have returned triple-digit returns off their lows and I continue to hold them as long-term investments.  While I haven’t closed out  any of these core positions, nor do I intend to, I maintain a defensive posture by implementing hedging strategies to protect against any potential or impending selloff.   I cannot, in good conscience, recommend to anyone that isn’t already invested in these sectors to chase performance.  This being especially anxiety ridden the more I hear analysts coming on late to the trade which begs me to question:  Are we nearing a blowoff top in the commodity trade?   The run has been incredible, but buying now is tremendously risky unless you enter the trade as a collar (buy shares against covered calls to finance put protection) or, at a minimum, add-in protective puts along the way.  I think these stocks can go much higher, no question, but the risk to reward ratio must be respected to the downside at these levels from this point forward.  I won’t go so far to say they are overpriced at current market levels, but they certainly aren’t cheap like they were last fall even though I am biased to the upside by not being remotely tempted to close out the positions.

In fact, the weaker dollar higher commodity theme based on global infrastructure demand and China stockpiling commodities in lieu of currency weakness is one of the main drivers in the market since last year.  Since commodities tend to be dollar denominated, stockpiling not only serves as a currency hedge against inflationary policy, it also underscores savvy asset allocation by utilizing universal resources and raw materials as a currency in of themselves.  These are all high beta plays and the market overall is doubtful to continue higher if this theme is ever broken.   Dollar denominated commodities including petroleum have truly become a means to stockpile global currency protection and may be less about actual infrastructure demand.   Somewhere down the line, supply and demand must be in synchronicity, otherwise, the commodities could crash just like they did last year and that would not portend well for the entire market overall.  Until then, even though I hope this negative scenario never winds itself out, play what works until the game is broken.

To be clear, I would characterize the March lows as a deeper financial sector sell off which I really minimize by limiting exposure to the payment processors, and not the credit issuers.  I’ve written about this in an article previously, but the only “safe financials” to me are the payment processors that don’t hold direct  consumer debt exposure.  More specifically, relating to stocks such as Visa (V), Mastercard (MA), and, of course, the exchange  bourses:  Chicago Mercantile Exchange (CME), InterContinental Exchange (ICE), New York Stock Exchange (NYX), and the Nasdaq (NDAQ).  Other than that, banking stocks don’t interest me other than an option trade and certainly not as a long-term hold.

Allow me to list some more of the best stocks I believe are  worth owning long-term that I continue to hold no matter where the market trades on any given day.  In addition to those aforementioned holdings, stocks such as Dupont (DD), Dow Chemical (DOW),  Boeing (BA), and Lockheed Martin (LMT) are also major components of my core portfolio.  All of which, despite moving higher, still remain at very attractive entry levels to long-term investors.

In fact, if I were to advise someone who was itching to play catch up to the market and didn’t know where to place money by being unwilling to stand on the sidelines anymore, these four stocks would allow conservative participation if the market continues higher without chasing by overpaying  for momentum.  More specifically, Boeing (BA) and Lockheed Martin (LMT) offer a serious defensive posture outside of the obvious nature of their business models with an extremely significant  cash dividend.  Boeing, in particular, is probably one of the best plays to the long-term investor by being undervalued anywhere below 55 dollars.  While it isn’t as cheap as it was in the low 30’s recently, the downside seems limited now to the mid-40’s unless the entire market breaks down or fundamentals change radically.  And (LMT) is underpriced below 85 dollars where it seems to find resistance.

Just last week we saw (BA) make a nice  intraday pop based on formally announced scheduling with respect to the 787 Dreamliner.  It paid off handsomely on some front month options I was holding–ironically, I had this same trade applied a few months ago and mistakenly left a lot of money on the table when they disappointed the markets by delaying their test flight prior to the Paris air show.  Not wanting to repeat this mistake again, I sold off 2/3 of my front month 50 and 55 strike September call options and 1/3 of my back month 60 and 65 strike November call options, simply to take the entire cost of the trade and some significant profits off the table.  This still keeps me in the trade, but maintains the discipline to take profits when they are dangled in front of your face.  With less than three weeks until September option  expiration, premium decay is no joke and unless it continues to move  higher within the next several trading sessions, my remaining front month calls will most likely be ripped up tickets at the race track.  However, I did not sell any of my 2011 55 strike LEAP positions because I truly believe there is serious upside in this story.  There still is a relatively lower implied volatility in the options when you compare them to other storied stocks, and remains one of the few long call options positions I’m willing to take in this current market climate that has run so far so fast.  Very few long call option plays look cheap to me anymore the higher the market climbs.  In fact, writing covered calls and buying puts on most sectors of the market becomes strategically defensive and more appealing day by day if you haven’t done so already.

As far as the underlying security itself, I continue to hold (BA) stocks as a long-term investment and have no inclination whatsoever to sell out of this position.  My cost basis is low and the dividend yield is significant when you consider many other companies have suspended or reduced their cash payout as a result of the crisis.  The only reason I am not adding to this position in shares is because I already made my commitment throughout the last year and remain overweight.  If you don’t play the options, keep it simple and buy the stock by averaging in up or down.  Or, add some inexpensive put options against purchased shares simply to protect your positions.  If I were making a projection on where this stock will trade, you have to rule out short-term volatility, or worse, stagnation.  However, 75 is a target I think it can achieve with relative ease by mid-2010 and, if you press me on the long-term, I don’t think crossing the century mark above 100 is out of the realm of reasonable expectation if, and only if, our global economy truly recovers into 2011.   

Unlike many of the commodity stocks I hold in the core portfolio and can’t recommend people chasing if they aren’t already invested at this point, Boeing has tremendous, yet sustainable, upside whenever they have a successful test flight of the Dreamliner and ramp up  production for their scheduled 2010 delivery.  Unfortunately, timing this trade has been very difficult due to multiple delays and one let down after another,  but you will see another major upside move in this stock and the options based on two conditions:  The first being the successful test flight of the Dreamliner with strong  reaffirmation of guidance for existing orders on their books and, second, a continued run higher in the overall market.   Remember, (BA) is a major S&P/DJIA component and aside from aberrations due to intraday pops like last Thursday, Boeing cannot move higher with an inverse relationship to the overall market.  It represents a play on expanding global economic demand, a replacement cycle in the airline travel industry, and capital goods strength which require better and more favorable market conditions.

While I believe there are at least several more significant pops in the stock down the line, the stock could easily drift lower which means these pops will be on a relative basis from where the stock settles over a period of time prior to headline breaking news.  The test flight will be a catalyst, but you must recognize that  their delivery schedule isn’t slated until late 2010.  Of course, if markets are behaving, then the stock will run well ahead of schedule.  And don’t forget that (BA) is still the second largest defense contractor behind (LMT) so, to be sure, this company is not a one trick pony which is further validated by pretty impressive earnings reports.  If you are not a day trader or tempted to time this stock to perfection, you will be afforded opportunities of multiple entry points along the way.

Filtering Out The Noise

I tend to believe if you listen to too much background noise you can become distracted and lose focus, perhaps even trade yourself out of a good position, or miss opportunity as fear takes grip and refuses to let go of its hold.  You can watch a trade move higher waiting for a pull back or sell off that never comes.  Regardless, try to pick your positions based on companies you have conviction about buying and holding or are simply willing to own regardless of the price action during crisis and volatility.  I have not sold any of my core holdings despite the market crisis throughout the past year and, in fact, made very aggressive accumulations of stocks throughout this debacle to bring my cost basis down considerably.  While I will trade in and out of options and speculative stocks in a heartbeat, I believe that as a long-term investor you continue to hold certain stocks with solid balance sheets, fundamentals and projected dividend yields that comprise your core portfolio if, and only if, you can effectively manage the risk to the downside.

While any stock is good for a trade, I would repeat, in my opinion, that more than 80% of the entire S&P 500 is not even worth holding as a long-term investment.  Many have had their dividends shredded and retain significant credit risk exposure, on top of which, the landscape is much more competitive for fewer consumer driven spending dollars, such that this is about an almost dystopian Darwinistic survival of the fittest.  Namely, those with bailout TARP money, and those without; those with access to the Federal Reserve’s balance sheet, and those without; those too big to fail, and those that simply aren’t.  And since I don’t, as well as most retail investors, have to mimic the underlying performance of the entire S&P 500, you can be more of a discretionary and selective stock picker rather than a broad based participant. 

  After all, for a money manager to say they beat the S&P 500 last year doesn’t mean they made money–it just means they didn’t lose as much on a percentage basis as the overall index.  Losing less money was the new mantra and threshold of financial genius until the market started performing.  Now, with the S&P 500 up significantly, a lot of last year’s geniuses that went to cash on the sidelines will be underperforming the benchmark index.  Make no mistake, this is a stock picker’s market.  And those that need to hold baskets of stocks or broad based index trades will probably underperform nimbler and swifter hedge funds.  In this respect, retail investors can serve themselves up a much better performance by picking best-of-breed stocks in each sector and ignoring anything less.  Add to this cocktail recipe a tight dose of basic hedging with put protection, covered calls and collars, you should be able to ride the bull.   This is why even long-term holders of index or sector specific ETF’s may be less appropriate for retail traders who may try to opt for safety and, instead, find that like any cumulative fund there’s a lot of garbage collecting  going on along with the few remaining diamonds in the rough.

I’ve been very bullish on the stock market since the collapse last year because, to me, that was the “once-in-a-lifetime buying opportunity.”  But such opportunities occur more frequently than we’d anticipate,  and I do feel much more trepidation as cheerleaders in the media start waving their pom-poms by calling the end of the recession.  Of course, history tends to repeat itself and there are always moments of opportunity which all depends on which stocks you were buying.    Which is why I say, contrary to how the financial news seems to characterize their version of the market bottom, there were really two different market bottoms depending on which stocks you were playing.  From a technical point of view, it would be more accurate to state those March lows were the proverbial “retest”–make no mistake about it that was a market crash in 2008–that many myopic professionals have been looking for and missed by shorting, or staying on the sidelines since then as the market ran to the upside!

Can we have another major sell off that exceeds everything we’ve seen so far?  Absolutely.  I don’t deny it and have had many sleepless nights about playing  Bear market limbo:  How low can you go?  There are plenty of soothsayers calling for markets to revisit the March lows  hoping to make a name for themselves by saying, “I told you so.”  I think the percentages are far less in favor of anything close to a significant market retest of the lows, but still the possibility exists and we have yet to fully recover with respect to the “real economy,” despite some very effective consolidation in the market.  I suppose what I’m really saying is that these so-called “market bottoms” are headline worthy news items, but don’t necessarily convey individual stories of stocks.  We could pull back dramatically in the S&P 500 while certain stocks would hold up better than most others which means, quite confidently, there is money that can be put to work with the correct asset allocation.  And as a long-term investor, there isn’t any time that I am not invested in the market.  I don’t run to cash by liquidating everything as the market sells off, nor do I feel complacent or compelled to chase when things rise.  The difference is that in order to manage a portfolio I must maintain hedging strategies that allow me to stay invested in the market no matter where it trades. 

But as stated before, calling the exact bottom of any market is a fool’s game because it is not a singular reflexive pivot point–the bottom of the market is a process that is formulated over time.  Looking through the rearview mirror is easy to mark a moment in history, or graph it on a chart, but the struggle to endure and stay in the game so that you can actually exploit opportunity is the true measure of calling a bottom that can only come by realized returns in your portfolio; otherwise it’s all just conjecture and academic conversation.

Author’s disclosure:  Long BHP, FCX, AAUKY, AA, ACH, X, V, NYX, NDAQ, DOW, DD, LMT, BA.

There is an interesting trade that has presented itself by utilizing both FAS and FAZ in combination, the Direxion 3x triple leveraged financial bull and bear ETFs.  I thought I might share my thoughts on the application of this particular trade as primarily a hedging instrument and, secondarily, a speculative position.

Usually, pairs trades are sophisticated techniques applied by professional money managers, quant and hedge funds.  They rarely justify the risk for retail traders because it will require you to be both long and short two corresponding positions with the intention to offset and neutralize risk.  The problem is that what may be initially viewed as a balanced hedge, can ultimately force a nasty unwinding of the positions when both sides of the trade move against you.  Disruptions and price dislocations in the marketplace, or the collapsing of risk arbitrage because of what seemed like a sure bet fell apart when the buyer walked away due to “material adverse change.”

Normally, I would prefer to hedge out the individual risk of each portfolio holding by utilizing a variety of put and call combinations, or even collars.  While many seem to use indices as a type of broad based portfolio insurance, it can be rudely ineffective in terms of hedging individual stock holdings when matters of urgency are particular to one company outside the framework of overall market conditions.

Broad based portfolio insurance may cover intraday swings and market corrections in normal behaving markets, but it is woefully inadequate and insufficient in covering downside losses of individual stocks.  The obvious examples would be if you had thought you were covered with index insurance but held positions in companies like Lehman Brothers or Bear Stearns. 

A Trade Too Good To Be True?

Whenever anything seems too good to be true, it often is.  So what’s the catch, I ask myself?  I began looking at this particular trade recently when the FAS and FAZ crossed in terms of price action, both trading in the $8 dollar range.  It seemed like an appealing trade to capture the binary effect of the markets based on the ultimate success or failure of the financial banking sector.  

You would have to assume that the design of both FAS and FAZ was to provide divergent instruments, both moving in opposite directions.   However, due to extreme volatility and price dislocations in the markets since the fall of 2008, this financial crisis has presented opportunities that were unintentional.  These ETFs were not designed to trade in tandem on a parallel course and trajectory rapidly approaching zero as they have recently.  Interestingly enough, we now have a crisscross intersection of lines if you graph both positions to suggest extreme price dislocation.

Back in early March, I opted to enter a trade of writing naked equity puts which initiated my first entry on the FAS ETF.  I didn’t buy the shares outright, but was willing to take in the premium by writing the risk of exercise.  The trade worked well specific to the conditions of the market at the time and has remained on my radar since then waiting until opportunity presents itself. 

As the markets continue to formulate a bottom and price action consolidates well above liquidation levels on most stocks deemed worthy to survive this financial debacle, there remains tremendous opportunity on valuation long before the p/e multiples and guiding metrics are allowed to expand into an inevitable recovering economy.

Because this trade seems almost too good to be true, I have to consider where the downside risk lies.  One thing that immediately presents itself is that if you follow up on Direxion’s website, you’ll notice something very interesting.  They plainly state that this 3x leveraged ETF is not designed for long term holders and, more specifically, it is intended to be more of a day trading instrument.  In fact, they openly discuss investment goals determined by daily benchmarks.    However, this was clearly calculated before the complete disruption in the marketplace and, therefore, even they could not have predicted where price action would have ultimately followed.

The other important thing to remember, especially with these 3x leveraged ETF products  in particular,  it is better to think of them as a cash settled instrument.  Comparable to a futures contract with the additional benefit of not having to rely on specific timing of  expiration dates.   You don’t own or retain any right to the principal underlying equities or instruments being traded.  In fact, it would probably be more appropriate to think of these ETFs as a fund dealing in “managed futures” rather than an ETF that attempts to mimic overall index performance.  In this way, you should have little or no attachment to these ETFs like you may for a particular company stock you can identify with more readily because you like the product  that is being sold on retail store shelves.

Another risk is the outcome of new SEC rules regarding short selling.  We have yet to hear the final determination and implications many of the managed ETFs will incur that focus on downside returns by utilizing short selling techniques.  Unquestionably, short ETFs have been used as surrogates to increase volume and pressure to the downside.   Will they be allowed to exist in current form without increased regulation?

The most realistic scenario for potential risk I can come up with on this trade is a failure of management or forced liquidation of assets that causes the fund to be closed.  We don’t really have full transparency on the management’s strategy as they attempt to mimic performance objectives.  The same perilous issues of leverage, margin calls, positional limits and counterparty risk may effect liquidity.  Like any mutual or hedge fund, the ultimate arbiter of  success and failure will be the net result produced by the management team running the show.

Again, ETFs may trade as stocks, but they are still managed funds that have been created out of the same Wall Street brilliance and genius that concocted the now infamous toxic cocktails of mortgage securitization and  tranched debt instruments–we all know where that ultimately led in the current housing debacle and credit collapse.  Having said all that, utilizing these 3x leveraged ETFs as either a supplemental hedging instrument or outright speculative bet, they present an interesting risk to reward calculation–especially at these price levels where entry points may be deemed attractive.

Strategy And Application Of The Trade

To be clear, my initial interest in this trade was strictly as a supplemental hedging instrument against core financial holdings I retain in the portfolio.  I don’t want FAZ to increase in value because it means that other positions in the core portfolio are decreasing.  So my interest in FAZ is structured as insurance attempting to countermand issuance of risk.  Regardless of your reasons to enter this trade, it is essential to remember that there have to be specific limitations in the total amount invested because no matter how interesting it may be, this is speculation at best and it would be unacceptable to push more chips on the table than you are willing to lose.

I’ve written about this previously from my own playbook, but it is worth repeating:  Speculative allocations combined should not constitute more than 10-15% of an entire portfolio; of which, individual speculative positions alone should not comprise more than 3-5% of the total portfolio allocation.  Any violation of this criteria is risking unnecessary money no matter how good the returns may seem so, please, proceed only if you can afford to lose on any given speculative trade.

To keep it relatively simple, I would initiate a trade on a 1:1 ratio.  That is,  for example, 100 shares long of FAS against every 100 shares long of FAZ.  Whatever your allocation may be in total dollar amount and shares to your portfolio, keeping it simple and well balanced will facilitate the effectiveness of the trade so that you do not exceed a predetermined percentage of your total net holdings.   

FAZ is, in effect, a synthetic short position without the risk of actually shorting the underlying position.   Because of the crossing in price action of both positions, your capital outlay is almost equal to take both sides of the trade making it very clean and streamlined  to initiate.

In options trading, this would be somewhat reminiscent of trading a long “strangle” or “straddle” position by buying volatility.  The fundamental difference is that in theory, unlike options facing expiration dates,  you are not exposed to timing it to the moment the market makes its move.   Not only that, but the options are incredibly overpriced, and for good reason.  Usually, price distortions and high premiums invite sellers of options, but no market maker is willing to take on the risk without being ridiculously overcompensated.  In this scenario, outright purchases of ETF shares are more cost effective than options. 

The real potential outcome and goal is that the multiplier effect should push either side of the trade much higher with returns outpacing the downside losses.  Because of these current price levels, your maximum loss on either side of the trade should be capped at approximately eight dollars or less per share if one approached zero, while the inverse correlation on the other side of the trade has unlimited upside.  And, throughout their cycle, they have traded at a glaring disparity in terms of price relationship to one another until recently.  It would seem that this dislocation of both ETFs trading with relative price parity is unsustainable once the market breaks in either direction.  And in this scenario, you can have a non-directional bias on the markets.  While I certainly wouldn’t have recommended or applied this trade earlier on much higher price action, maximum gains and limited losses predicated on a binary event is a compelling trade to me.

It’s bizarre, but if you had tried to apply this same strategy upon inception of the newly devised ETFs in the fall of last year, the outcome would have been brutal had you held and you would have taken a major beating on both ends of the trade.  Clearly, the ineffectiveness of some of these similarly leveraged and inverse structured ETFs do not perform as promised.  In fact, in hindsight, the ultimate trade on some of these newly issued ETFs may have been to short both sides of the trade from the get go.  But without the luxury of hindsight, I would never have made that trade anyway.

You could also apply a covered call position by owning the underlying shares and writing the premium, but that would almost defeat the purpose of hedging portfolio risk.  The market remains skittish and selling is panic impulsive, not rational and considerate.  Of course, it all hinges on your objectives.

In my opinion, financial Armageddon is less likely now and while I can’t say for absolute certain that we won’t have a complete meltdown in the stock market, I think we came damn close and the risk of systemic collapse is finally off the table.  However, the risk of pandemics, insurrections and global financial instability will always be out there, no matter what the odds say and no matter how clear the blue skies appear on the horizon.   It’s sad and I would love to see a day when these risks no longer exist in the world, but that day has not yet arrived.  Until then, the winners and losers in the financial banking sector have been chosen and if you step back you’ll recognize that individual insolvency risk should almost be completely disregarded by observing their dependence on government guarantees that back stop them.  In other words, the trade on major institutional “too big to fail” banking stocks going toward zero like Bear Stearns or Lehman Brothers is most likely over; instead, it is now a macro-specific trade betting on the success or failure of the entire economy as a whole. 

If you are more bullish by believing the run isn’t over yet in the financials, you could more aggressively adjust your ratio 2:1 to amplify returns on a bullish outcome and actually buy 200 shares of FAS against every 100 shares of FAZ.  This would still hedge out the potential loss on the bullish side of the trade because whatever risk that is potentially caused by another panic ensuing sell off in the financials, it will inversely push returns on the synthetically short position by being long FAZ.  By having a 3x multiplier, the only thing that may disappoint would be a flatlined market reduction in volatility and that, my friends, is a welcome scenario in any book.

Again, the other trade I have applied previously is specific with FAS, and that is to write naked equity puts which is a neutral to bullish position.   I would not advise applying this particular trade at the moment since  the financial sector has had quite the run.  However, if the market collapses toward a directional retest of March lows, then this trade would be very appealing to me once again.  

The thing about buying FAZ is that to do so as a hedging instrument against long positions is probably a worthwhile defensive strategy.  However, if you are of extremely  bearish  sentiment and inclined to believe the markets will return, perhaps, violate the lows in early March then you should not be long the market.   In this pessimistic scenario, buying FAZ only is viable as a speculative bet on an entire market collapse which seems ridiculously unlikely, but not an impossible bet in my opinion.   

We all know the underlying conditions of the economy and financial system are perilous and wracked with danger going forward.  But I think the dichotomy is becoming clear:  Professional money managers that missed the move up who are begging for a second chance to buy on a retest, and those that remain short convinced the market has overplayed its hand and will dump on any given notice.  I’m an optimist for the most part, so you see where my directional bias remains.  However, that does not mean that I take any of the risks for granted to the point that I would trust the market to treat my portfolio with fragile care and consideration. 

The old axiom of “sell in May and go away” actually presents an interesting contrarian position to remain relatively neutral to bullish.  Tremendous pessimism and too many professional traders attempting to be too cute with timing the market.  In this respect, technical indicators can be very misleading because they can be largely driven by the momentum of day traders gaming the system rather than the fundamentals of good companies that produce real earnings poised to survive this debacle not only stronger, but even capturing more market share through acquisition, consolidation or weaker hands folding.  Long term shareholders should ultimately do well if they can avoid the risk of destructive leverage and forced liquidation in the short term.  Proceed with caution.

Author’s Disclosure:  Long FAS and Long FAZ.

The media and talking puppet heads have wrongly characterized AIG as the poster child for the mysterious black hole that TARP funds have been dumped into with bailout money.  I’m glad that some Congressional leaders finally stepped up to ask the correct questions and apply enough political pressure to force CEO Liddy’s hand and reveal who the actual recipients were on the back end of the pipeline called AIG.

Like a confidence game of three card monte, approximately 180 billion dollars in taxpayer funded TARP money has vanished before our eyes in a delicate maneuver and sleight of hand.

Now, with recent disclosures, we finally were told how some of the money was utilized.  All in all, approximately $120 billion was spent to cash in on the winnings by large institutional firms such as Goldman Sachs (GS), Citadel, and Bank of America (BAC).  Familiar European banks such as Deutsche Bank, UBS, Barclays and Societe Generale cashed in billions as well while other allocations were spent to pay out municipalities.  While the composition of money spent is divided between collateral postings and payouts, it is very damning evidence of suspicions raised by many in the public eye that have been demanding answers.

I find it interesting that this public disclosure was released at the same time it was announced that over $450 million in employee bonuses are being doled out.  Hmm…sleight of hand?  $450 million with an “m” is nothing compared to the billions with a “b” being shoveled out the back door.  We will see what stokes more public outrage and garners media scrutiny.  I tend to believe it will be the relatively paltry $450 million underscored by the media tagline:  “bonuses”.

I remember the scene from Martin Scorsese’s movie masterpiece “Goodfellas,” where they talked about running up tabs on the business with debt obligations by moving inventory in the front door and out the back door until it got to the point where the only thing left to do was “bust the joint out” by burning the business to the ground and collecting the insurance money.

I truly hope that this is not the case with AIG because too many innocent people would be unduly affected by the unintended consequences.  Consider the real world economic impact of not only the employees directly tied to the corporation, but what about all the individual policy holders that depend on AIG to remain standing as a solvent company?

The irony in the feigned outrage against AIG is that, in truth, AIG isn’t the one being bailed out.  The real question was never about bailing out AIG; instead, it was always about who AIG was bailing out on the other end and where all that money was really going.

Now that the curtain has been pulled back ever so slightly to reveal a sneak peek into the inner corridors of Wall Street financial alchemy, the public is outraged but our entrance to this opaque world will always be access denied.  It’s a private club and we simply don’t belong.

AIG was never the intended target of the bailout money from TARP.  AIG has really been the adopted surrogate to bailout the banks, financial firms, and speculators operating like Wild West gunslingers in the arena of credit default swaps.  This is as ridiculous as bailing out a bankrupt casino with taxpayer dollars to pay off winning bets to gamblers.

Actually, it’s worse.  This is like utilizing taxpayer money to pay off an illegitimate smoke filled, back room, gambling den of criminals because the cops came in and raided the nest.  If the bets weren’t legal to place, how can anyone claim to cash in their chips?  So, why is an unregulated insurance derivative and swap market being bailed out  if it never should have been allowed to exist in the first place?

Now, let me clear, I have no problem with honoring the contracts that were written and purchased by the debt issuers that needed the protection of insurance swaps to offset the risk of potential borrower default.  Loan origination and lenders have valid reasons for participation in the CDS market.  However, if taxpayer funds were used to pay off speculators and hedge funds that had zero stake in the loan origination and were actively spreading malicious rumors while shorting the underlying securities to capitalize on rising insurance premiums, then the SEC and Justice Department needs to be all over this.

Fed Chairman Ben Bernanke, who I believe to be doing an incredible job, even stated that he was concerned about revealing the information on recipients publicly because it might undermine confidence in the named institutions.  I believe they were more concerned that it would incite additional public outrage and potential clawbacks rather than being a solvency issue due to counterparty risks.

Legitimate loan default risk that was hedged throughout the CDS market justifiably needed to be stabilized by government intervention due to the systemic nature of the risk.  But, if firms and hedge funds that are being celebrated as financial heroes because they “shorted” sub-prime mortgages by buying swaps and drove premiums upward for collection without actually owning any of the original risk through debt issuance, how is that legitimate?

That is like paying off the arsonist that burns the neighbors house down to collect the insurance money even though he doesn’t own the property.    There are some real winners in the calamity of financial wreckage, and yet, is it fair at the expense of the entire system?  We have been on the verge of financial Armageddon for months now and the people that may have benefitted the most seem to have escaped without scrutiny and full disclosure on the degree of their trading activity.

I applaud the intention by firms like Goldman Sachs, Morgan Stanley, Bank Of America and others who publicly stated they intend to pay back their TARP money.  But is it sincere for executives to suggest that they were forced to take the TARP money as if it were an inconvenience and not a necessity to their solvency and ability to continue as institutions?  Will they also volunteer to repay the additional billions of dollars gleaned from the TARP via AIG?  I doubt it.  The question is whether or not this latest disclosure will have incited further scrutiny on some of the financial firms and banks that were the “indirect recipients” of the AIG bailout money.

For this reason, with a climate that has created political jockeying and a lynch mob mentality, I would suggest caution on all of the named financial firms by the latest AIG disclosure.  The bank stocks and, in particular those named, GS, MS, BAC, etc. have all had significant moves over the course of the last week and will continue to run on any suspension of the mark-to-market FASB ruling that seems imminent.  Hedge your risk by adding in put protection against your long positions on any continued or sustained upward movement in the market.

Core Assets Deserve To Be Rescued

Structurally, AIG has core insurance businesses which remain intact and deserve to be rescued or spun off as separate companies without the stress of toxic liabilities.  The very foundation that AIG was built upon has, singlehandedly, been put at risk by playing outside the boundaries in the CDS market.   The current CEO has already expressed publicly their intentions to dismantle the once great conglomerate and spin off its core assets piece by piece.

My actual greater concern is for all of the ordinary Americans and people that have existing life insurance policies, annuities and principal investments tied to AIG and the underlying components.  I would hope that Congress and Democratic leadership recognizes the responsibility to guarantee existing contracts with so many everyday working people that depend on the ability for AIG’s property, casualty and life insurance divisions to be financially solvent.

Perhaps, it is time for insurance to no longer be state regulated and allow federal regulation to oversee all insurance companies so that Americans who have entrusted their estate planning can be guaranteed similar to the F.D.I.C (Federal Deposit Insurance Corporation) we have with banks, or even the P.B.G.C.(Pension Benefit Guaranty Corporation) that exists for pension funds.

There truly needs to be a centralized oversight and regulatory body that applies to the insurance industry and, more importantly, the ability to fund and honor all existing policies in good standing.

Ultimately, if financial institutions can be bailed out with little disclosure or accountability, I hope the systemic risk of individual policy holders and the entitlements of families depending on the ability for insurance contracts and annuities to be honored is recognized.  Otherwise, it would make the entire insurance industry look a giant Ponzi scheme and the recent Bernie Madoff scandal just a drop in the bucket of scammers.

How To Play It

I have held long positions on Morgan Stanley by owning the underlying stock with, essentially, a “collar trade” that utilized both covered calls and puts.  BAC is heavily diluted and no longer sustains a viable dividend yield, so owning shares is less appealing and the reason I opted to write “naked equity puts” to capture premium when it traded in the $3 range.  Rather than applying cash to buy BAC, I’d rather take in premium with the potential risk of owning shares in the unlikely scenario that BAC would be allowed to go bankrupt.  GS is still the main player on Wall Street and retains the title of “Alpha dog”.  I don’t own GS stock, but if the market continues upside movement then GS will outperform on any economic recovery–in fact, it will continue to move just in anticipation of any sustainable recovery.  GS is high beta and I prefer to take a vertical call spread position to limit some of the risk exposure.  Once the market begins to stabilize then the long leg of the option spread allows exercise if conditions are favorable to take ownership of equity shares.  This would, in effect,  convert a call spread into a covered call position which can be rolled.

But I simply don’t feel complacent enough with existing headline risk to own these particular banking stock positions long term.  It is clear that while there is tremendous upside potential in the financial sector, you have to remain nimble due to existing volatility.

Interestingly enough, the AIG debacle reveals the necessity for the entire financial industry to mitigate risk through derivatives markets and swaps.  Out of every market collapse comes opportunity and, if nothing else, AIG points us in the direction of regulated and transparent exchanges to trade these obscure products and financial instruments.

Approval has been granted to most of the major participants in the regulated exchange sector to operate clearing for credit derivatives.  NYSE (NYX), Chicago Mercantile Exchange (CME) and InterContinentalExchange (ICE) are poised to compete in the next transition towards transparent and regulated default swaps.   I am sure that  the Nasdaq (NDAQ) will also make a strong move into the credit derivatives arena.   While some seem to argue that the market share isn’t large enough to divide amongst the major exchanges or  significantly make an impact on revenues, I disagree when you consider the CDS market held approximately $60 plus trillion dollars in notional risk.   I think that if clearing and transparency works as well as it does for both the futures and equity options market, which continues to be in a growth cycle, then it would be foolish to underestimate where the road will ultimately lead.  Especially, after this financial debacle and collapse of the markets, institutional lenders and investors alike will be scrambling to enhance adequate risk management.

I actually believe there are more fundamental reasons to own the exchanges than additional revenue generated from potential credit derivatives.  I believe the exchanges are among the best way to play the financial sector by minimizing direct balance sheet exposure due to loan origination.  They also have the added benefit of trading in tandem with the markets similar to an index that is pegged to overall sentiment.

Author’s Disclosure:  Long NYX, NDAQ, MS, short BAC equity puts, long GS vertical call spreads.

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:

Do you feel like gambling? Las Vegas Sands (LVS) and MGM Grand (MGM) should entice you as a speculative gamble. Both stocks, along with the casino sector as a whole, have been obliterated with recessionary worries but, last I checked, Vegas was still standing and will remain as a destination spot for the world.

Of course, history has recorded the hubris of Mankind before when colossal monuments such as the Great Pyramids were once swallowed by the sands of time. Until then, I think there is still a lot of gambling and decadent behavior to be pursued under the bright lights of the strip, accompanied by Elvis impersonators and drive-thru, impromptu shotgun weddings.

LVS actually offers substantially larger exposure to Macao with the development of the Cotai Strip. Despite recent suspensions of construction, you can extrapolate that some portion of the $600 billion dollar stimulus package by China will be apportioned to continue development in such a globally visible region. I highly doubt that China would allow decaying landmarks and symbolic eyesores of unfinished construction projects to continue much longer, if for nothing else, pride alone.

Solar, as I’ve mentioned in previous articles, should be part of a portfolio during the Obama led Democratic administration. I hope Democrats are serious about implementation of alternative energy and this time, I actually believe them. While other prominent companies such as First Solar (FSLR), SunPower (SPWRA) and, my favorite, Energy Conversion (ENER) are always worth a look, they don’t qualify–at least not yet–as stocks that trade under $10.00. However, if ENER ever falls below ten dollars for reasons not related to fundamental or structural change, consider it a gift.

Suntech Power (STP) trading around $6.00 is flat out cheap and LDK Solar (LDK) would be worth a look as second best. The rest of the high flying solar companies such as Evergreen (ESLR), Yingli Green Energy Holdings(YGE), China Sun (CSUN), Renesola (SOL), Canadian Solar (CSIQ), Solarfun (SOLF) and Trina Solar (TSL) are less favorable to me, but look attractive at these price levels.

What interests me most about some of these companies like LDK and STP, is that they have a relatively small float of shares out there and haven’t incurred significant share dilution which truly maximizes the upside potential. Let’s not forget to mention, most important of all, they actually make a profit.

Compare and contrast this to some of the financials such as Citigroup (C), AIG, Fannie Mae (FNM), or Freddie Mac (FRE) that look cheap by dollar amount, but remain heavily diluted due to government orchestrated bailouts and preferred share restructuring. The same is true with General Motors (GM) and Ford (F) which look cheap by share price, but shareholders can have their equity completely wiped out by massive share dilution with impending bailouts around the corner. Perhaps, F is the better play out of the automotive sector at $1 per share, but there seems to be better lottery tickets out there right now.

Solar was heavily traded by hedge funds as a commodity pairs trade or substitute for direct exposure against rising and falling crude oil prices. Now that the solar sector has been decimated, it has potentially been dislocated from being dependent on rising crude prices if the impetus to legislate energy independence is carried through to fruition.

Technology stocks such as Nvidia (NVDA), Sandisk (SNDK), AMD (AMD), Rackable Systems (RACK) are all at levels that look attractive. It’s also very possible that Intel (INTC), Akamai (AKAM) and Cisco (CSCO) may fall below $10.00 which would make them even more compelling going forward.

Yahoo (YHOO) looks like a losing proposition because it is so hated on Wall Street, but it still manages to produce more overall eyeballs than Google (GOOG) by being the most visited and trafficked website in the world, even though it’s ability to monetize and expand search business has fallen dramatically. At some point, its value will be realized by someone if not Microsoft (MSFT). If you go beyond the headlines, there are substantial internet properties that can be piecemealed out as individual prizes that Yahoo has failed to fully integrate, or translate into the bottom line such as their webhosting services, Alibaba, Flickr and others not directly mentioned.

Video game stocks are also very compelling and tend to be more recessionary proof than most bread box retail consumer led stocks. Activision Blizzard (ATVI) and Take Two (TTWO) are very interesting at their price points. ATVI has now become very competitive to Electronic Arts (ERTS) with multi-platform franchises and continues to dominate the PC MMOG market. THQ (THQI) is really more of a less relevant producer of entertainment, but consistently does well with licensing mediocre games based on popular movie, television and other media titles. Midway games (MWY) is really trading in the toilet, but has some interesting legacy and franchise titles.

Etrade (ETFC) was hammered with mortgage risk exposure, but has worked out much of their direct liability and continues to increase volumes of transaction fees from new and active accounts. Of all the discount brokerages benefiting from increased volatility and transaction fees, one has to wonder how long this company can trade here without being swallowed by someone else?

Smith and Wesson (SWHC) has actually made capable directional changes by producing a competitive polymer framed firearm that is being adapted by some very high profile law enforcement agencies. While the Glock firearm still dominates in this particular market, the MP models are ambidextrous and demonstrate a commitment by SWHC to reclaim a portion of their once highly regarded stature.

While there are many more bargains around the $10 range out there, I realized my list was getting longer than I anticipated. I may at some point follow up with this article and add more to the shopping list, especially if some other quality companies fall within the boundaries.

I did want to close with three stocks under $10 in what I feel is one of the best sectors to invest in any diversified structured portfolio. Alcoa (AA), Aluminum Corp. of China (ACH) and Titanium Metals (TIE) are extremely cheap and, honestly, undervalued. These are three stocks that don’t deserve to be trading like speculative positions, but have been decimated along with the entire commodity sector.

While inflationary risk is completely off the table in the near-term, at some point on the back end there will be consequences to all the cash infusions and liquidity being pumped into the global system. This would be an ancillary benefit to the commodity sector as industrialized nations are handcuffed from being able to raise interest rates to protect against inflationary currency pressure.

However, even more important, is the fact that it has become increasingly clear that real job growth will have to come from our own government initiated infrastructure plan. China’s recent stimulus package of $600 billion dollars seems to be the model for industrialized nations to follow when the void of private capital fails to deliver results, by injecting investment that promotes real job growth. Despite the recapitalization of banks to shore up balance sheet risk, it has failed to translate into tangible results for most average Americans.

The Democratic led incoming administration is already signaling a comparable stimulus package directed at infrastructure that subsidizes local municipal programs. This would have a real world stimulus to fund jobs and contractor work that actually enables people to pay mortgages and stabilize the housing market. Although I don’t think it’s reasonable to assume the entire real estate bubble can be easily reinflated like before, it is viable that regional areas anchored around major government subsidized programs will provide an upside to local economies.

Have a Happy Thanksgiving holiday to everyone and hopefully this market will turn around with a sustainable and imminent economic recovery.

Disclosure: Author holds speculative long positions in ENER, STP, LDK, MGM, LVS, ATVI, TTWO, ETFC, SWHC.

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.

Good things have been put in place by Fed Reserve Chairman, Ben Bernanke and Treasury Secretary, Hank Paulson that have not yet fully met market expectations. But they need a chance and considerable time allotment to work effectively.

Today it was reported that the Fed has assumed over 2 Trillion dollars on it’s balance sheets and continues to be the lead purchaser of commercial paper that is absolutely necessary for corporations to fund payrolls and operations with short-term debt instruments. This is a record that will probably be broken again which makes the heavily politicized Treasury TARP plan look like a pittance of $750 billion by comparison.

There is no backing out now, it’s too late for all that nonsense because the only option is muddling forward. So if the spigot is open then let the money flow, after all, it’s only paper anyway, right? Deficits only matter if the confidence and stability of our own economy is gone and no one is willing to buy our Treasuries and debt. And the only way to effectively pare down a burgeoning deficit is to have a thriving economy with sustained job growth and rising asset valuations. Reinflation of the economy is the only answer, once things are better then you can reduce spending and talk about deficits.

All this enormous liquidity being pumped into the global financial system along with coordinated rate cuts predicates its success on if, and only if, there is a seamless transition between the outgoing and incoming administration. If the markets continue to interpret mixed messages, everything that has been going well to induce a recovery will simply be all for naught.

One thing that did disturb me in, what was quite a brilliant victory speech, was the mention that issues we face in our economy and nation may take more than one term in office. I’m sorry, but the American people no longer have the patience for inaction by policy makers to drag out the change we voted for.

While mainstream media will characterize the Democratic victory as historical in the context of superficial barriers being broken, the truth is that it was more of a referendum on the Republican incumbent party and wide scale frustration by the American public.

More than anything, this election proved and allowed American citizens to trust that their vote really does count. And I tend to believe that people will be more motivated and inspired to vote their conscience in future elections.

No matter who is in office, people are starting to believe they have the power to not only put candidates in office, but the power to remove them from office if they fail to deliver on promise. If there is no stability in the underlying economy within months of inauguration, not just the stock markets, people will not only be disappointed, but even angrier watching retirement savings, 401k’s, pension funds and the most precious asset for most Americans, the home, deteriorate further.

It is only a couple of years until the mid-term election, so the consequence and repercussions of not creating real economic stimulus will be substantial. All of this liquidity that is being pumped into the system will begin to flow on the back end of things and it may, ironically, benefit a Democratic administration and Congress by early 2009. This is if, and only if, they don’t do things that undo or actually stifle investment and economic growth.

TRADING THE  OBAMA ELECTION

A substantially bad job report is expected tomorrow. If such impending news is countermanded by a welcome announcement from a new Obama administration on suspending any potential raises of the capital gains tax, there is a very probable rally due to occur that may actually be sustainable.

In addition to such, it is also equally important to display a competent advisory panel that inspires trust and confidence in the markets. Showcasing all your heavy hitters means nothing unless they can hit the ball out of the park, and you can only get that home run if you step up to the batter’s box and swing.

While I am hopeful of such an announcement to allay and calm fears of nervous investment houses, we still have skittish and manic-depressive behavior by fund managers trying to game the market. Volatility has turned strategy from long-term investment into day trading instincts that are reactive as opposed to proactive.

I would reiterate buys I’ve mentioned in previous articles for the long-term on commodities with high dividend yields such as BHP Billiton (BHP), Freeport McMoran (FCX) and Vale Dolce Rio (RIO). It may sound contraindicative to recommend a global growth play amid this worldwide recession but, as I’ve mentioned before, you are being paid to wait until they ignite a staggering economy.

Despite the commodity collapse and fall in petroleum prices, Obama’s win will be good for alternative energy. No question, the time for true energy independence has finally found the political will to back it up into policy. You have to have solar exposure in your portfolio.

Solar was a heavily traded sector and ridiculously overbought during the crude manipulation of several months past and, certainly, fund redemptions have absolutely contributed to selling pressure in this sector, knocking valuations down to more reasonable levels.

Despite some early anticipation of this trade and bounce off recent bottoms, select solar companies still remain below tradable expectations. It’s not too late but there is no reason to rush out and chase, only buy based on company specific selection because there are too many that seem less competitive going forward.

Energy Conversion Devices (ENER) is probably one of the best plays out there. This is no start up company that lacks a credible track record like some other fly by night solar companies. Headquartered in Michigan, this diverse company structure not only leads with some of the premier innovation in thin film solar, but it’s ovonic battery division is well positioned for integration with the very next generation of hybrid, fuel cell and emission free cars.

Suntech Power (STP) is probably one of the better solar companies in China along with LDK solar (LDK). First Solar (FSLR) is heavily traded but the beta in this stock makes it too risky for the average investor and, in my opinion, makes it extremely difficult to actually gauge a safe entry and exit point. I would prefer to recommend ENER and STP over this choice. Additionally, the solar ETF (TAN) is also one among many solar ETF’s to hit the market as a broad based play.

Natural gas is a domestic winner and the T. Boone Pickens plan is a viable conversation starter to get politicians committed to energy independence as a matter of urgent political will. Clean Energy (CLNE) is, interestingly enough, a bargain with Pelosi, the Speaker of the House having personal investments that make it likely she has a committed bias toward this company in particular.

Chesapeake Energy (CHK) is cheap enough to buy, either with development of liquified natural gas as a viable transportation energy source, or as part of a buyout and consolidation in this industry. And don’t forget wind turbine power makes even General Electric (GE) look compelling as a conglomerate, especially if you consider it pays a hefty dividend yield.

Payment processors are the only stocks of the financial sector I would invest in right now. The exchanges such as Chicago Mercantile Exchange (CME), New York Stock Exchange (NYX), Nasdaq (NDAQ), and, perhaps, Intercontinental Exchange (ICE). Also, the two credit card companies of Mastercard (MA) and Visa (V).

All of these aforementioned are, to me, worthwhile holds as long-term investments, despite the prospect of a sustained and enduring recession or not. For those that are more interested in short-term trades and look to fade the market, it may be more prudent to trade ETF’s on the indices instead. The S&P 500, DJIA and Nasdaq can be bought long or short with options on shares of the ETF’s if you want to create leverage with defined risk exposure, limited to the premium paid for the derivatives.

SPY, SSO, QLD, are examples to play the upside. SDS, QID, DXD are ways to play the downside. Keep in mind, and I hate to confuse anyone, if you play the options you can take either direction in the market on any long or short structured ETF position, depending if you are using puts or calls and, whether or not, you are buying long or writing short.

Personally, and I recommend options only for experienced investors with higher risk tolerance, utilizing a “strangle” of both out-of-the-money long calls and long puts on index ETF options is not a bad way to maximize the effect of volatility.

If you feel inclined to actually gamble, look at Las Vegas Sands (LVS). I bought some speculative positions when it was recently trading in the 4 dollar range. It bounced all the way back to 15 before coming down to today’s levels. If you look at the put options, of which I own against my shares, they are trading with the idea of LVS going into bankruptcy. It could happen, we shall see, but I think it’s an interesting speculative play.

And by speculative, I mean no more than 1-5% of your entire portfolio. This is a trade, not an investment. Please, do not over extend yourself on a risky position like this. I am very reluctant to recommend plays like this because people have to know this is playing with fire. 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.

The success or failure of LVS seems to hinge on capital injections, but I tend to believe someone is watching this closely for an acquisition if they are unable to meet and fulfill credit requirements. Ironically, as a person that doesn’t like to gamble, I am making a bet on a casino. Since you must treat it as a bet, it can be no more than the total amount you can afford to lose.

DISCLOSURE: Author holds long positions on BHP, FCX, RIO, STP, ENER, NYX, NDAQ, MA, V and LVS.

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.

VOTE YOUR CONSCIENCE, NOT YOUR PARTY

The argument that voting for Obama over McCain is a better choice may be inevitably true, but only because it’s the frustration by the “lack of choice” that we have in our current two party political system. It is perhaps the reason that the polls remained so close within the statistical margins of error, until the recent debacle in the credit and stock markets. I still contend that if Hillary Clinton had either won the primary or had been chosen as the V.P. running mate, the margins would be much wider with an overwhelming 60-80% popular vote in favor of change. It is the uncertainty and distrust that even makes it a horse race during this final lap around the track.

I support Barack Obama and the Democratic party in this year’s election not because I feel inspired by the individual, or believe in this myth that he is a candidate representative of substantive change, but only by the Republicans losing this election in a lopsided event will true Conservatives have a chance of reclaiming their party based on the core values, principles and legitimacy of not catering to a fringe wing any longer.

I am hardly a typical Barack Obama supporter and I am certainly not a member of the Democratic party, but I have come to the undeniable conclusion that some change must occur for the good of our country if we truly care about the future. It is our responsibility, it is our obligation.

It is important to recognize that Obama is the beneficiary of circumstance and as traders in the markets know, timing is everything. Standing at the right place, at the right moment in history may be much more determinate of legacy than the individual that rises up to the occasion.

My heart would prefer to vote for someone like Ron Paul, Bob Barr or even, yes, Ralph Nader because at least I believe they believe what they are saying based on their convictions and principles, as opposed to simply pacifying the sheep by continuing to promise empty campaign slogans time after time.

In fact, contrary to what the misleading mainstream media would like us to believe, Barack Obama and Sarah Palin are not the only ones making history by definition of race and gender barriers soon to be broken.

Did you know that there are two other prominent black political candidates running for the same office? Alan Keyes for one and Cynthia McKinney, who is running at the top of the ticket for the Green Party. The irony is that unlike Barack Obama who ran on the platform that he had the foresight and wisdom to vote against the war, even though he was an Illinois state senator and not a Congressional Senator–a requirement to actually have your vote count–Ms. McKinney actually did vote on record against a war resolution more than once and it counted.

I hope this turns out to be the most lopsided election in years just to validate that the Republican party must reform itself for the good of the nation. Extreme idealism on either side of the aisle in both parties is not good for the legitimacy of a democracy. We must have a system of checks and balances that weighs equally on the side of justice, transparency, and truth.

Ideological enclaves of free markets and deregulation can only exist in a vacuum, unaffected by the intrinsic nature of greed and corruption. Without transparent accountability to adhere, the path of least resistance will always be the guidance for those that have the capability to exploit others.

For those of us that lean more Conservative, this is not the year to pledge false and blind allegiance to a Republican ticket. We don’t need to renew the cynicism that our nation has incurred over recent years. Hope may not be a reassurance, but it is the beginning mechanism and formulation to develop real change.

If the Paulson bailout was about restoring confidence in our financial system, then the election of Obama would go even further to restoring the trust in our political system after two very contested and questionable election results.

I guarantee if Obama wins the election, there are many people that will feel celebratory and this will help consumer confidence and spending in America. People will feel, perhaps, foolishly optimistic again and, as such, it just may be enough to pull off the same magician’s trick once more to boost a buying spree in all asset classes.

I am not naive enough to believe that things will change greatly because the underpinning of our economy is suffering through risks of systemic deleveraging. Obama may very well go in with good intentions, but end up as a victim of circumstances well beyond his control such as Jimmy Carter did during his one term in office. This looming recession may be more difficult to reinflate our way out of than past recessions and, if so, could make reelection impossible four years down the road.

But let’s remember, there are some major Wall Street players of significant and important influence that have moved away from their Republican roots to support a Democratic administration. John Mack of Morgan Stanley, Jamie Dimon of J.P. Morgan Chase, and, of course, Warren Buffett. Not to forget former Fed Chairman, Paul Volcker along with other unmentioned prominent figures of Wall Street, all who add credibility and moderation to an Obama administration.

I have to believe with so many Republicans and conservatives advising Obama’s campaign with regard to economic policy, prudence and pragmatism may win over his platform stump speech on raising capital gains taxes. I believe that the current economic conditions are enough to allow Obama a back door escape from bad policy implementation during a time of crisis.

It would seem plausible that behind the scenes, there must be a wink and nod to the business community because with so many global liquidity infusions into the marketplace, everything would be wasted and all for nothing if Obama stifled investment when our economy needs it most.

THE BET I WILL BE HAPPY TO LOSE

I’ve had a running lunch bet with someone since the Democratic primary season that if Obama were the nominee, the Democratic party would risk losing the most winnable election in the history of politics and Republicans would prevail. I still contend that this election was far closer than it ever should have been, had it not been for the weakness in the candidate of the Democratic party.

But this is one bet I am happy to pay up on for being wrong. Our country, our nation cannot afford to continue the same course of failed policy unabated.

Despite liking Senator McCain overall, there is absolutely no way I could vote for him morally by rewarding continued bad policy that has cost average Americans greatly. Yet, throughout this election season since the primaries, I have had continual struggles to find reasons to vote for Obama.

However, the reality is what it is and while I truly feel that both candidates are not up to the task at hand, a decision has to be made, like it or not. While I am probably more skeptical about “change we can believe,” I do hope that an Obama administration is successful.

Let me be clear, this is not about Obama as much as it is about the future direction of our country, there are larger issues much greater than the man as an individual or the myth. I don’t think Obama is experienced enough and many issues don’t sit well, but whether you personally like or dislike him, this is about pragmatism and reality that a choice must be made.

There are many reasons that I don’t feel the same vibe that others do about Obama. Celebrity endorsements and the Oprah effect were a complete and utter turn off to me and many others. Close personal friends, even some involved in the black community have argued on Obama’s behalf in heated conversations with me. Sure, if I close my eyes and pretend that facts don’t exist there is a certain charm to his demeanor. But overall, his speeches didn’t impress me because they failed to extend beyond the surface of empty rhetoric.

Seriously, what track record is there as a policy maker or citizen of our nation that makes him the most qualified? Political correctness and a mainstream media that refused to ask questions? It’s not that Obama is a new senator that lacks a track record, it is the fact that he spent the majority of his term in office running a campaign rather than actually serving his obligations to his constituents.

New York Governor David Paterson who is both black and blind is far more qualified as a candidate on the economy and, contrary to other politicians, he does not share the luxury of reading from teleprompters to recite scripted lines. When the crisis was unfolding with the CDS (Credit Default Swap) market, I was impressed to hear Paterson speak astutely on the issue at hand as he tried to remedy the AIG situation by reducing capital requirements. But, most importantly, it’s not his race or disability that make Governor David Paterson qualified to lead New York, it is ability alone that deserves measure.

I was also bothered by Obama’s awkward strategic point attempting to appear more tough than McCain in the debates with his continual insistence of catching a six foot six inch boogeyman strapped to a dialysis machine in the mountains of Pakistan. Rather ironic that a man that based his entire primary season campaign on being the “anti-war” candidate, has now resorted to displays of inauthentic toughness against a real American hero such as McCain.

Mr. Obama, people from both liberal and conservative leanings supported you based on the hope that you are diplomatic and the era of cowboy diplomacy or pre-emptive doctrines are a thing of the past. If toughness or military experience were the only prerequisites for obtaining the highest office in power then, for example, Senator Inouye from Hawaii, recipient of the Congressional Medal of Honor for service in World War II, is far more qualified on merit alone.

But the importance of serving the office of President is more about diplomacy and delegating authority to a team of qualified cabinet members that can manage and facilitate handling all events as they unfold.

We don’t need a “tough guy attitude” in office, we need someone that is intelligent, reasonable and willing to compromise by bridging the gap toward peace and economic prosperity. Let military commanders be tough because it is their job. As an elected representative of a free nation, you need to broker peace through the strength of forging allies and restoring America as the respected leader of the world.

Obama is winning not because he hit the home run out of the park or scored a late game breaking touchdown in the end zone; no, Obama’s campaign is winning because they are essentially stalling the ball in the last remaining minutes of the fourth quarter, putting their knee down to artificially draw down the clock because the McCain campaign has run out of time before the game is finally over.

And while many political promises remain empty campaign slogans, if Obama achieves nothing else other than fulfilling the long overdue obligation of providing health care he will be a success. The one thing that I think is more important than any other promise is heath care and access to medical coverage for all Americans. While I am skeptical if the political will is there to solve this crisis, nothing could be more important. This would also be a big bounce for corporate America by reducing their exposure to legacy costs of providing insurance for employees.

Despite the global nature of the sell off in the stock market, one thing you can be sure of is that our European counterpart economies may have seen similar retirement savings and investment accounts depreciate by comparable amounts, but at least no one was worried about losing their health insurance which still remains the number one reason for bankruptcy filings in America.

WHAT WENT WRONG IN THE MCCAIN STRATEGY?

As much as the economy has actually been the true choreographer for Obama’s victory dance, it is difficult to deny the missteps by the tale of two McCains. It is hard to imagine that McCain, who I believe to be a good man, has distanced himself so greatly from the persona that made him likable for years. McCain is a good Senator, but as a candidate running in very serious times, he has seemed completely out of touch with reality.

It’s almost a shame that his better one on one personality has failed to show during this campaign. I’ve seen him in many sit down interviews and he seems very charming when he lets his guard down and discusses issues outside of the scripted framework we hear repeated during stump speeches.

He does have a sense of humor and, to his credit, I respect him more for not following down the path of continuing to personally assault Obama’s patriotism. When he stood up to offensive audiences that made deplorable comments about Obama, it made me respect him more as a good man struggling to please discord within his own party. While it would have clearly been a better political strategy and expedient to go after Obama’s character, lack of experience and affiliation with Reverend Wright, it wasn’t the honorable path. It seems clear that McCain was only willing to go so far over the line, even if his surrogates didn’t respect the same rules.

But there is more to it than that and the debates that occurred were embarrassingly formulaic, polluted with rhetoric and sound bites. And the last one topped them all with more references to a political plant and fictitious plumber than I could could count.

The SNL parodies were very effective throughout the primary season and Tina Fey hit a gold mine with her sketch on Governor Palin, you couldn’t tell who was parodying who. Was it Tina Fey that was parodying Palin; or was it, ultimately, that Governor Palin ended up being a parody of herself?

When McCain first announced Palin as his running mate, I was excited initially because it really exposed an arrogant political miscalculation by the Obama campaign to disenfranchise Hillary Clinton supporters. But it really wasn’t McCain that picked Palin as much as it was Barack Obama choosing Biden. There was a moment of lost opportunity due to the jilted Clinton supporters, and choosing the first woman V.P. candidate since Geraldine Ferraro was long overdue. But the excitement began to wear thin after I heard canned rhetoric, no different than anyone else and expectations were dwindling back to Earth.

When Governor Palin said she wanted to “send a shout out” in the debates it wasn’t cute. Can you imagine if Barack Obama said he wanted to send a shout out to all his homies? You would have never have heard the end of the stereotypes. When white people from the suburbs use urban colloquialisms like “dissed,” “shout out,” and “wassup,” it’s not hip, cool or authentic, in fact, it’s downright offensive and completely inappropriate for representing the highest office of America.

Unfortunately for McCain, he was never a very popular candidate within the circles of the Republican party and will probably be used as the scapegoat for losing this election. And, further to the point, Palin will probably pass unscathed even as there continues to be some grand illusion that she is next in line for the ticket in 2012.

I would expect a very sincere and gracious concession speech by McCain, and I have no doubt that McCain would be proud to serve as a Congressional Senator under an Obama administration.

HOW TO TRADE THE ELECTION

Okay, I had my rant and I apologize for venting, but if you made it this far it is time to bring this conversation home on strategy and how to trade the markets post-election. While the very remote possibility exists for an upset, I would feel comfortable with these same recommendations in the belief that markets would rally even more in an unlikely McCain win, simply on the reassurance that capital gains won’t increase.

Prior to the last two months of volatility and decline in the markets, I would have told you it was a sure bet to see a major sell off in a post-Obama win. The most obvious risk would have been the impending capital gains tax increase which would have guaranteed funds selling into the close of 2008.

I can’t predict what direction markets will trade on any given day and remains the reason I am a proponent of portfolio hedging; however, there has been such a dramatic decline accelerated through hedge fund and mutual fund redemptions, it seems less likely that this same risk of tax selling remains a major factor. I really don’t know the statistics to back this up, but I would have to imagine that a lot of the risk of tax selling has been forcibly done by involuntary liquidations.

This positions the market in a very interesting and contrarian setup. While the indices have rallied since mid-October lows, individual sectors still remain oversold with respect to energy, metals and commodities. Emerging markets are still well below record highs and pockets within financials are screaming bargains.

Perhaps, more than anything, the markets will be relieved once the election results are finally determined and the unknown doesn’t hang over everyone’s head anymore because it is easier to deal with the known quantifiable risks already priced in the market. And history is worth repeating when you consider that some of the most prosperous times in our economy have come under a Democratic administration.

No matter how much “free market radicals” like to protest the mere mention of possible government intervention, real change is needed in the form of infrastructure renewal that will spur legitimate job growth, wage creation and boost consumer spending power in our economy. Seriously, after a $750 plus billion dollar bailout on top of everything else, is there any legitimacy to denying help to American citizens?

The markets need a reason to rise based on returning consumer confidence. Most Americans might find at least a temporary rise in optimism restored simply by the belief that international diplomacy is back on the table and the prospect of global stability is on the horizon.

Let’s be honest here, a recession is already priced into the markets and then some. Not a sustained recession of retreating earnings for a period of years, but a mild one with expectation of recovery. The markets will do whatever they want in the short term, but over time things revert to the mean and fundamentals will prevail.

The other possibility is that Obama, or any elected candidate for that matter, is not a king and, therefore, power is delegated to appropriate authority when necessary. There are very competent advisors within the Obama administration and there is the distinct possibility that if the economy continues to struggle, raising capital gains will be deferred because he is a pragmatist and if for no other reason than ego alone, who would want to be the one responsible for tanking the economy into a depression? Especially, if Obama intends to win a reelection.

Despite the commodity collapse and fall in petroleum prices, Obama’s win will be good for alternative energy. No question, the time for true energy independence has finally found the political will to back it up into policy. You have to have solar exposure in your portfolio.

Solar was a heavily traded sector and ridiculously overbought during the crude manipulation of several months past and, certainly, fund redemptions have absolutely contributed to selling pressure in this sector and knocked valuations down to more reasonable levels.

Despite some early anticipation of this trade and bounce off recent bottoms, select solar companies still remain below tradable expectations. It’s not too late but there is no reason to rush out and chase, only buy based on company specific selection because there are too many that seem less competitive going forward.

Energy Conversion (ENER) is probably one of the best plays out there. This is no start up company that lacks a credible track record like some other fly by night solar companies. Headquartered in Michigan, this diverse company structure not only leads with some of the premier innovation in thin film solar, but it’s ovonic battery division is well positioned for integration with the very next generation of hybrid, fuel cell and emission free cars.

Suntech Power (STP) is probably one of the better solar companies in China along with LDK solar (LDK). First Solar (FSLR) is heavily traded but the beta in this stock makes it too risky for the average investor, in my opinion. I would prefer to recommend ENER and STP over this choice. Additionally, the solar ETF (TAN) is also one among many solar ETF’s to hit the market as a broad based play.

Natural gas is a domestic winner and the T. Boone Pickens plan is a viable conversation starter to get politicians committed to energy independence as a matter of urgent political will. Clean Energy (CLNE) is, interestingly enough, a bargain with Pelosi, the Speaker of the House, having personal investments that make it likely she has a committed bias toward this company in particular.

Chesapeake Energy (CHK) is cheap enough to buy, either with development of liquified natural gas as a viable transportation energy source, or as part of a buyout and consolidation in this industry. And don’t forget wind power makes even General Electric (GE) look compelling as a conglomerate, especially if you consider it pays a hefty dividend yield.

General Motors (GM) is difficult to recommend because it’s like a lottery ticket, but there is no way under a Democratic administration will GM be allowed to go under. It is disingenuous for some people to argue there is not similar systemic risk to the economy as we faced with the bailout of the financial industry. Too many suppliers are tied to the success and failure of the automotive industry and, thus, middle class jobs in the real economy.

In addition, GM has already positioned itself to remove many of the legacy costs by allowing unions to manage their own health care. However, we are in a transition period of a difficult economy and the ability to bring next generation vehicles off the assembly line makes short term risk appreciable.

One of the interesting winners that may seem less obvious is Boeing (BA), remember it was McCain that was influential enough to actually turn the bidding contract upside down and push the award toward Airbus a while back. You can laud his attempt to weed out any conflict of interest or corruption, but to punish the entire company and successful program because of a few bad weeds is not correct–especially when it comes to the sacrifice of American jobs.

Despite the recent call by Goldman Sachs to add BA to its conviction sell list, I strongly disagree with this analyst call. It is all but guaranteed that under an Obama administration, BA will pick up the tanker refueling contract. In addition, under a Democratic administration, the struggling airline industry will probably receive some bailout package or favorable financing that allows them to participate in the next generation of Dreamliners off the assembly line.

Regardless, BA’s strength, along with Lockheed Martin (LMT) continues to be international demand combined with domestic tier one supply and the fears of military spending declining is way over done. I am quite sure that an Obama administration will look favorably on hometown favorite BA as well as the idea that any government contracts should be obligated to look to domestic companies first.

I don’t like the idea of trade protectionism and I agree that any private or publicly traded company has the right to seek the best price points for labor and outsourcing, however, any taxpayer funded government programs should be obligated to support the U.S. domestic job market and economy.

In closing, if you do nothing else, take advantage of lowered implied volatility in equity option premiums. Add defensive put protection to existing shares in your portfolio. The VIX is still historically high, but as markets rise and volatility comes down, the cost to insure your portfolio will become more reasonable. You will always give up some gains by implementing hedging to your portfolio, but staying in the game should be the first survival instinct.

For those that don’t utilize options, please, reduce or eliminate any existing debt or margin. I don’t think it is the time to be in cash on the sidelines. I think you have to be invested, but with the reassurance of not being pegged to volatility risks of dreaded margin calls.

Lastly, seek dividend paying stocks to anchor your portfolio diversity and pay you for the time it takes to wait until markets recover. Best to all…

DISCLOSURE: Author holds long positions in LMT, BA and ENER

“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.

REAL ESTATE IS THE UNDERLYING CRISIS OF CONFIDENCE

Asset devaluation is a systemic risk in the global economy. Many people that you would consider rich not that long ago, were considered as such based on their equity holdings and combined leveraged assets. In effect, they were “paper valuations” waiting to become whacked with a sledgehammer like a pinata.

The real estate bubble has created vast illusions of equity and fictitious degrees of separation from achieving true wealth and prosperity. Those that would like to believe housing is beginning to bottom seems disproportionately premature, disconnected from the reality of vacancies and the incomplete construction projects that were unable to retain financing to finish the job.

Most people don’t own stocks directly and the home has been the largest source of wealth and prosperity for the average American household. This story is broken for at least a generation. And by generation, I really mean an entirely new wave of buyers that are willing to bid on the market which can only come from sustained job growth and the willingness for lenders to pump money into circulation to qualified borrowers.

How many people own multiple homes and property, each leveraged on top of the other asset like a house of cards? How many people bought that expensive car through tapping the equity in their home? How many people’s credit cards and HELOC’s were based on perceptions of net equity in a property that has evaporated into this vortex of wealth destruction?

We forget that for the majority of people real estate is a leveraged asset, more than the normal 2:1 ratio on a margin account, or even 4:1 for those day traders out there. And no different than a house call on a brokerage account, once market value drops in real estate you have a systemic deleveraging process of a rising debt to equity ratio.

For the past decade, no one assumed the fatal flaw in their metrics was based on the rising value of home prices and not the possibility of a depreciating asset. The reason why a car is considered a depreciating asset and not an investment, is because the underlying value deteriorates at an accelerated rate of decline. If there is no underlying price stability in our housing markets, then every dollar spent for renovation, maintenance, property taxes and insurance erode net equity. When an asset costs more to keep than the value you could receive, it no longer is a good investment, even if you have to live in it.

Where are all those con artists that prostituted their “get rich quick schemes” on no money down seminars in real estate? Or those Tony Robbins style paid speakers that tell you that not being rich is based on your negative attitude of not being positive enough? Do we really need Suze Orman wannabes to tell us what we can or cannot afford? Are all these seemingly helpful news specials that have sound bytes on how to manage this unfolding crisis really conducive to prosperity, or are they fueling the fire?

Because, folks, it’s not your lack of positive attitude that prevents people from paying bills as much as it is the reality of the situation changing all around us. A positive attitude won’t determine whether or not a bank lends money, nor will a higher FICO score when the presumption is that asset valuation continues to fall much further amid a rampant global recession.

What makes it worse is that we all have this fixed price in our heads of what a property is worth based on the last appraisal when the markets were peaking. It is psychologically disturbing to even admit to ourselves what the markets are telling us.

The same may be true with how we perceive stock prices. There is absolutely no question that stocks look cheap on a relative historical basis. But you must wonder if stocks look cheap only because we still have those fixed prices in our head when the market was up.

The multiples are extremely low but that is only predicated on continued net earnings growth. If the earnings continue to slide, then multiples are not low enough to be considered a bottom. Cheap? Yes, but not necessarily an absolute bottom.

Because you have to ask yourself why aren’t more companies buying back their stock at these low levels? If you are looking for a signal of a true bottom it would probably occur when companies start to acquire others, but this can only happen when the financing is available in vast, ample quantity.

The reason I am bullish on the stock market is less to do with the underlying struggles of our economy because I recognize that, unlike the stalled real estate market, the equity market is the last and only viable asset class that remains liquid and, for the most part, transparent.

Money has to be put to work in one asset class over another and fund managers or private equity cannot remain hidden in their respective foxholes indefinitely. Money has no value if it ceases to flow in one direction or another, and this is why the stock markets will always run ahead of the curve in anticipation of what is to come…

But, what if I am wrong?

In a sense, the economy would only have to mimic the 70’s and early 80’s to feel like the Great Depression, because our generation has been so spoiled by material wealth and excesses that any draw down on consumer purchasing power will drastically alter our perception of what it means to be rich and poor.

THE TOOTH FAIRY EFFECT

I ask myself this daily, wondering if the market truly is oversold? Yes, in technical terms based on how fast and how far the markets dropped we were due to bounce. But was I bullish because I was tempted to fade the market, or was I bullish based on a hopeful and blind assumption in regard to history? These are the internal dialogues that I struggle with, but I am quite sure they reflect some of the sentiments others feel.

As I’ve stated previously, I am a huge proponent of Fed Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. What they are doing is absolutely necessary to restore the trust and solvency of the financial markets. However, just because I want to believe it will work does not mean that it will work. And although I hope these liquidity injections will take effect as intended, I realize that in the back of my mind it is more due to the fact that I’m trying to convince myself it will work.

The nagging issue is not so much about the individual companies we choose to invest in as much as it is the overall feeling that the “Emperor has no clothes.” This entire deleveraging process has uncloaked the naked truth about wealth creation over the last several decades.

To describe this ordeal as a crisis of confidence is an understatement. The real problem is that once people no longer believe in mythical fairies and dragons, it’s hard to get people to sleep at night with the same ol’ bedtime story.

In terms of the credit markets, it will be extremely difficult to get banks to lend money based on projected asset valuations or simulated mark-to-model metrics. The system works well when people believe it, but when people lose their belief criteria hope cedes to despair.

Think of yesteryear when you believed in the Tooth Fairy. This was one of the very first introductions to basic economics. Each dollar placed under your pillow at night was exchanged for the asset valuation or current market value of each tooth. Or at least that’s how it seemed, but the real system of exchange depended exclusively on your belief in the Tooth Fairy and the guarantee of your parents to back stop the fabrication. Hence, if you no longer believe in the myth of our financial system or the obscure ability for Uncle Ben and Big Daddy Hank to reinflate us out of this crisis, there is no buyer for assets even if you were willing to sell all your teeth and wear dentures.

The craziest thing about all this volatility and market panic is that it has become more evident than ever that asset value was predicated on perception and not intrinsic value. The exaggeration of wealth was created through leverage tied like a noose around our necks, waiting for the day people hang themselves out to dry.

The earnings multiples across the board have come down to very, very attractive levels. Yet, this oversold theory only holds true if we are facing a liquidity crisis based on deleveraging and not a fundamental breakdown of the drivers in the global economy.

A short-term recession is priced into the markets. But a sustained chasm and black hole is not factored into the markets and, thereby, would mean that stock prices would be far from reaching a bottom. Again, this is only if all the liquidity being pumped into the system fails to deliver proper resuscitation to jump start the economy.

And this draws me to the inevitable conclusion that if Warren Buffett were truly wrong and the economy reached a real depression, all bets are off the table and the consequences of such an economic demise would mean that no municipal bonds, Treasuries or cash holdings would protect you. In other words, the actions by the Treasury and Federal Reserve better work otherwise it will look like a George Romero horror movie with zombies running in the streets looting for survival.

This is unthinkable in reality but remains the very fear that draws near. But if you play your most wild fears out in your mind, you may find a calming sense of peace in your existence by the knowledge that things cannot possibly be allowed to get that bad, can they? Because if they did, money would cease to have value and the last thing anyone would be thinking about would be bills, mortgages and frozen credit markets.

THE BUFFETT CLARION CALL TO ARMS

Warren Buffett is, undoubtedly, an American success story and many would welcome a mere slice of his performance as they try to mimic his portfolio but fail to achieve equal measure.

The difference for the average investor is that while it’s common for legendary traders of Wall Street to mock how the sheep get sheared by buying at the top and selling at the bottom, they neglect to remember that most people sell not because they want to, but because they have to make bill payments and pay for basic necessities such as food and shelter. Sound advice by professional money managers falls on deaf ears when the margin of error means being able to feed your family or not.

Warren Buffett can buy with impunity, unlike the rest of us with limited resources. Because he is rich enough that whatever decision is made to invest, he can, literally, afford to be wrong until the markets turn around and agree with him at some point or another.

This is not a criticism of the man or the individual, rather, this is more about a growing disparity between those with money and those without. The advantage is that the money he puts to work doesn’t need to be pulled out or withdrawn to feed a family, pay a utility bill, or keep the mortgage going for one more month.

It’s arrogant to presume that the sage’s wisdom applies to the average American investor that isn’t necessarily looking to get rich, but simply hoping for a nest egg to supplement a retirement income.

Warren Buffett is right to buy stocks and equities after the markets have been utterly obliterated. But he is wrong to assume that everyone else can enjoy the same luxury of spending free cash flow on anything beyond basic necessities, let alone investing in the market once their 401k’s and retirement funds have been cut in half or more.

But, in truth, Buffett’s op-ed piece was not intended for the majority of average American investors. Instead, it was the clarion call meant to trumpet a message for the professional money managers that ran to the sidelines in cash during this massive deleveraging and liquidation cycle.

A call to arms so that a support level or underlying buy exists in the markets that can help stabilize price volatility to inspire confidence in a broken system. While many professional money managers are seeking cash reserves to cover a potential rising redemption period, without their underlying bid in the market there continues to be a systemic free fall of stocks.

I’m very appreciative that Warren Buffett did make public statements during this crisis because his words do carry weight. And since the dislocation between fundamentals and perception has been largely exaggerated during this volatility, it is prudent for the sages of Wall Street to commit both words of wisdom backed by real capital into the equity markets.

While we all like to believe we can be whatever we want or do whatever we desire, the truth is that the American dream is an illusion for many, smashed and broken on the backs of taxpayers that will always get less than what they paid or bargained.