Monday, March 31, 2008

Chicago PMI Throws a Monkey Wrench Into the Market

The Chicago Purchasing Managers report confirmed the Philadelphia manufacturing number from March 20th and the Bulls are celebrating. The reading came in at 48.2 for March, much better than the 44.5 in February, but the "prices paid component" (PPC) came in at 83.9, MUCH higher than 80, a number that the bulls didn't want to to see broken. Inflation in the PPC may hold back a lot of buying, so we recommend exhibiting caution until the PPC is reported in Tuesday morning's ISM data. See our explanation on the ramifications of this data on your investment strategy for this entire week in "The Psychology in the Upcoming Week's Data" below. Thanks for your continued support.

The Psychology of the Call team.

Friday, March 28, 2008

The Eleven Commandments of Trading

We want to say "Thank You" to our loyal readers in no fewer than 53 countries across the Globe for coming back to the Psychology of the Call. We are working dilligently to build out the most forward-looking financial portal on the internet; our dot com aspirations are just days away! We believe the 11 Commandments are so critical to your investing/trading success, we provide a link to them every Friday afternoon for good reason. We wish everyone of you a happy & health weekend and we leave you with a wise French proverb: "Money doesn't always bring happiness, but it calms the nerves".

Dems Press President Bush to Pull the Rug from Under the Yuan, Chinese People & Hillary

The Congress, led by Democrats Charles Rangle (NY), and Sander Levi (MI) are blowing their ‘peace pipes’, calling for President Bush to pull the rug from under the Yuan, the Chinese economy, and its hard working people just days ahead of the Beijing Summer Olympics. Is this traditional democratic philosophy or merely political posturing during an ugly looking election year?

Many have blamed the Chinese Yuan for being undervalued and hurting the U.S. trade deficit. This economic nugget has been a well known fact for over a decade. Many insist that if the Yuan were to float freely, rather than being pegged to the U.S. Dollar, the U.S. economy would rise up. (A belated Democratic Easter?) A lot of that makes sense, but how did the U.S. and China get in to this predicament in the first place? Why suddenly such a ruckus in the 2008 general election home stretch? Anyone? We’ll try to explain…

Ironically, it was the Democratic administration of Bill Clinton circa 1994 that allowed the People’s Bank of China (PBOC) to peg the Yuan to the Dollar. Quite simply exchange rates and the global macro economic landscapes were set in motion.

Wal-Mart metamorphosed from David to Goliath over night, and the retailer based in the former Governor, now President’s state of Arkansas cheered loudly and lustily. See our article "The 2008 Animal Tug of War" in which the WMT connection is elaborated upon.

Robert Rubin, a Citigroup (C) recruit, was the Secretary of the Treasury: ( Another prominent Robert, this time Robert Reich was the Secretary of Labor at the time ( We wonder if these two gentlemen would side with today's Dems in Congress and admit that their policies failed the American people?

To whom is the Democratic Congress truly sending their message of sudden failure and change: President Bush, China, or Hillary Clinton? In a Dow Jones article by John Godfrey released this afternoon the Dems state that China is "manipulating their currency". Did they learn of this 15 year old revelation only this morning? We’re not buying it. Are they admitting that the Clinton, Rubin, and Reich policies were a failure or do they just feel it's time for the rug to be pulled from under the feet of the Chinese people? Maybe there’s more to this story.

Should the Democratic Congress force the Chinese people to put on a crown of thorns just days ahead of the Olympic stage? Some believe success is a matter of 'timing meeting luck', but of late the Chinese have not been feeling successful or lucky. Perhaps there’s an ulterior motive we have not mentioned yet.. Is it possible that the Dems are finally admitting the two Clinton democratic administrations failed in regard to Yuan/Dollar monetary policy because they don't want another Clinton Presidency, specifically current Senator Hillary Clinton? Is traditional democratic doctrine pulling the rug out from under an already oppressed Chinese people by joining the slow-moving train of silent boycott? Would the majority Congress demand the same currency standards and apply the same measuring stick if China was on the African continent? Does traditional democratic philosophy call for hard working Chinese individuals to suffer pain in order to see Obama gain? You decide (we already have!).

Thanks for understanding the politics behind this 2008 Election Psychology of the Call.

The Psychology of This Week's Data

We took time to analyze this week's economic data in some detail and sprinkle in a little commentary. Now that we’ve reached the end of the trading week, we’ve trimmed this article down to Friday.

Friday March 28th
8:30ET: Personal Income, Personal Spending, and Core PCE Inflation.
The data points are not market moving since they focus on income.

Some economists argue that as income rises, people consume and therefore spend more. Over the last few years U.S. investors have witnessed unimaginable depreciation in real estate, the most widely held asset class. Therefore income, even if it were to rise unexpectedly, may not be spent as quickly as in previous years. Remember Unemployment Data has been rising lately and the U.S. consumer may save more during these rainy days. Retail Sales in April will be a much better datum for investors.

10:00ET: Michigan Consumer Sentiment (University of Michigan).
This data point is at its lowest level since 1992 and, just like the Consumer Sentiment, bears close monitoring. It’s a particularly important indicator since it judges sentiment, which is a better indicator than personal income in our opinion. Look for stabilization in Consumer Sentiment due in large part to the aggressive Fed rate cuts since January. The cuts will definitely stimulate the consumer eventually, but it will take time. My Professor once stated that "tweaking the Fed Funds rate is like steering a huge ship just after midnight, the ship eventually turns without you feeling the initial few inches of pull”. Although we have not reached our destination yet, the Captain has tweaked the rudder, so expect a change shortly: All Aboard?

We predicted a climactic day in our March 9th piece 'The Psychology in the Upcoming Week', and it came with Bear Stearns on March 17th.

We also told our readers of rumors ‘over manhattans in Manhattan’ of a Fed bail out; that also happened. The "foundational crack" in the credit market is still an issue, although recent Fed intervention cannot be completely discounted either. The issue we now have centers on how loudly or softly Washington addresses regulations on Investment Banks. With all the economic data ahead this week and the continued unwinding of large Institutional positions in Oil and Gold, our readers will have their plates full. We urge you to use smaller portions, limit orders, and chew slowly, as this ship has just begun to right itself in our opinion. The ‘market for stocks’ is diverse and dynamic, so approach it from that stand point rather than the general and misleading term ‘stock market’.

We made mention of Goldman Sachs Chief Equity Strategist Abby J. Cohen recently, so we would be remiss if not to wish her a healthy and happy retirement: Bon Voyage Abby, many ‘window shopping’ days ahead! The Psychology of the Call team thanks you for your continued and sincere support, and please click on 'Comments' directly below and tell us what YOU think.

Wednesday, March 26, 2008's Poetic Struggle (BIDU) is an Internet Information Provider, founded in 2000 and based in Beijing, China. The name ‘Baidu’ was derived from a poem written about 800 years ago during the Song Dynasty. ‘Baidu’ means searching for something over and over and over. In the poem though, the search revolves around a beautiful female who lost or abandoned her love. The poet describes the search for her as frantic, making it the goal of his dreams through life's many difficulties. We sense that Mr. Li, the founder and current President expressed more than what's in an average Corporate name when he chose ‘Baidu’. Mr Li deserves great credit for his guts and genius in staring up and operating his company in China: his conviction and spiritedness is reflected in his voice in the conference calls.

Before the analysis begins, we want to give our respects to BIDU's late CFO Mr. Shawn Wang, who tragically passed away only three months ago.

BIDU provides Chinese language internet search services. BIDU's Initial Public Offering (IPO) debut was on the Nasdaq 8-04-2005. The lead underwriters were Goldman Sachs and Credit Suisse (CS First Boston today) and Piper Jaffray was listed as co-underwriter. The initial price range was $21.00-23.00 with 3.7M shares offered, but the deal was over subscribed, "hot" as they say, and ended up pricing 4.04M shares at $27.00. BIDU closed up 354% at $122.54 in its first day of trading! One of our team members placed over 30 IPO's while at Morgan Stanley from 1997-2001, so we called upon him and his expertise to scrutinize the BIDU IPO and the ramifications going forward.

BIDU's shares have a 52 week range of $92.80-$429.19. As of its March 24TH close at $240.00, BIDU's shares are up 159% from their 52 week low and down 44% from their high of $429.19, on November 6, 2007. We labored through many man hours of IPO data, conference call analysis, accounting metrics, competitive advantages & disadvantages, technical analysis, public articles/stories, as well as geo-political issues, both for and against BIDU. We avoided an exhaustive write up of all of the above data points, but we offer enough information to enable you to trade BIDU with greater conviction. After analyzing the fundamental data using our proprietary trading microscopes, we weighed the many intangible components accountants often miss. Here's our Psychological trading Call on BIDU.

The most common statistic quoted by most of the BIDU bulls relates to demographics: 1.3B Chinese, a market that is only 10% penetrated, and BIDU has a 60% commanding market share over its rivals GOOG, SINA, and SOHU. The number of Chinese internet users is tied with the U.S. at 155M, but the bulls argue that when the rest of the 1.3B consumers come online, Baidu looks like it has the ‘green pasture’ that Wall Street dreams of finding. Are bulls correct in going long because of these demographics?

Thomas Malthus would argue against the bulls. His 1798 "Essay on the Principle of Population" is still studied and cited by economists and sociologists. Malthus argued: "The pressure of large populations tends to depress wage rates to subsistence levels and keeps them there, with the excess population being eliminated by war, pestilence, or starvation". ( Could this 210 year old theory apply to modern day China? We hope not, but our readers should be aware of the inherent problems that very large populations could face.

In a piece written on Monday March 24TH, a Motley Fool contributor stated "I am a believer in Chinese growth stocks" and pointed to today's price of only 37X next year’s earnings. We have to question whether the harsh regulatory environment, mounting inflationary pressures, Shanghai Index down over 40%, and recent geo-political tensions with Tibet warrant a 37X forward P/E. How about 30X P/E, which translates into $195/share, or 25X P/E = $162/share. We also question whether the 2008 Beijing Summer Olympics caused advertising revenues to rise to ‘bubble’ levels, and if that's true, what happens if the growth estimates that bulls are using turn out to be too optimistic for 2009?

Yes. Disaster.

The shares would fall to reflect a completely different denominator/profit; so going long based on a forward P/E in an environment filled with geo-political uncertainty is irresponsible in our opinion. Only rarely should you buy a stock based solely on fundamental analysis. To the credit of the Motley Fool writer, he does point to geo-political tensions in his piece, but his prior write ups missed that component and we’d rather not have to piece together someone's thoughts from several articles to understand how they truly feel.

As always our goal is to give you a look at the entire picture from ‘top down’ to ‘bottom up’. ‘Top down’ analysis refers to researching the macro geo-political and economic environment a corporation finds itself in, and "bottom up" analysis targets specific companies from their core first, not factoring in the macro risks. We strongly believe a ‘top down’ analysis must be understood before committing to buying any Eastern asset, especially in China. Perhaps Jimmy Rogers' argument for the commodities bull market in China makes sense, but every market tops out eventually.

Let's turn to the 46th minute of the Q4 2007 conference call (CC), streamed on February 13th, 2008. ( Analyst Robert Peck asked what turned out to be the best and hardest question: "What happens if there's a global consumer recession". Mr. Li answered, "I'm not an economist". He later defends BIDU as insulated and with market share leadership. Ironically, Robert Peck was employed at Bear Stearns at the time. We give Robert credit for asking that forward-looking question, and ask our readers to follow Robert's career; we definitely will as forward thinking analysts are rare. Listen to this exchange and you'll detect the relevance of the Psychology of the Call. At the 3 minute 17 second mark Mr. Li attributes BIDU's recent successes to growth in advertising from large "financial services".

The recent 40% pull back in the Shanghai Index cannot help this metric in the current quarter as many large financial Institutions are looking at eroding balance sheets due to stock depreciation, which will likely crimp advertising campaigns. When an Index falls 5% or 10%, or even 15%, that’s considered a "healthy correction." When an Index falls more than 20%, in the Shanghai case 40%, that’s classified as a "bear market."

A bear market ahead of the biggest commercial/advertising event in China's history? Unfortunately that's a fact!

Lastly, at the 15 minute 10 second mark, BIDU guides their revenues down for Q1 2008, citing severe snow storms and the Chinese New Year. Remember the 4th Commandment: never accept excuses from management. What will happen on the next quarterly CC when management must address the bear market as well as recent Tibetan unrest? Will BIDU say the advertisers may tighten their belts because the Chinese government may ban live footage from Tiananmen Square? Have you any idea of the effect this would have on ad revenues? So please don't be fooled by Motley's mention of 37X next year’s earnings. In other opinion the Summer Olympic months ahead may well present incredible operating challenges.

Here’s where we see the biggest hurdles for BIDU: 2009 may seem light years away for shareholders if the Chinese government stumbles and falls. Unfortunately, the government still has a lot to say in regard to human rights and freedoms and here's where Mr. Li's genius lies in choosing the name Baidu. "'s Poetic Struggle" in China is well documented and cannot be addressed by accounting. Forecasting China is more of an art in our opinion, like a poem perhaps, but definitely not an exact mathematical science like accounting.

In September of 2007, BIDU launched a proprietary online Olympic news site. The shares climbed from $200 to their 52 week high of $429.19 within 2 months. No doubt this was correlated to optimistic anticipation of the Olympics. Most of the Olympic hype and premium has since eroded, but is the erosion complete? Ironically, BIDU's 52 week high of $429.19 was printed the exact month they launched Baidu Finance Online, a site focused on stock prices, market news, and accounting data. But maybe that was just coincidental; maybe our next example is the true reason BIDU has fallen 44%.

Five months ago, the Chinese government was accused of cutting off the ability of U.S. search engines to operate, allegedly redirecting traffic to Baidu. Should any world government be involved the operations of a public corporation? Although this is fundamentally positive for BIDU in the short run, it reveals the lack of freedom in Chinese corporations. Perhaps BIDU's market share would not be at 60% if government allowed true competition. In addition, could the fiery growth rate of BIDU be cooled down in the future by the same government that fans the flames today? That is the type of "top down" analysis we want you to embrace along with the fundamental accounting data. Never trade on growth estimates without weighing the psychology of the geo-political environment. Emerging markets are called "emerging" for good reasons. They differ from ‘developed’ markets in that developed markets exist under more ‘efficient’ democracies, and therefore greater human freedoms and rights.

China was irked by an award that the U.S. bestowed upon the latest Dalai Lama, a Buddhist spiritual leader, in a succession that coincidentally dates back to the 1300's, the same time as the Song Dynasty and the inspiration for the poetic name Baidu. The poetic struggle in finding freedom comes full circle here, and the Baidu name now takes on more meaning than a simple Corporate name. It is a symbolic name. Baidu represents the search for that ‘beautiful’ freedom (over&over&over&over); we sympathize to a great extent with the brave Chinese people and the obstacles they still face. ( No democracy should limit 1st Amendment Rights, but many BIDU bulls continue to offer forward estimates in the face of a dangerously controlling government. Politics in money and banking is a pressing issue even in the U.S (please read our prior piece “One Wounded Bear and Two Gov't Officials Wake Up the Bulls"). But the "politics" in China are of a more dangerous and potentially virulent nature. We refuse to take sides to what is an ancient conflict with Tibet, but we sympathize with the Tibetan Buddhists as well.

BIDU is facing a Shanghai bear market, rising inflation, rising interest rates, a government controlled economy, and an Olympic Games in danger of not being televised. The reason many bulls bought BIDU shares over the last two years had to do with their optimistic view of a successful Beijing 2008 Olympic Games; that optimism is eroding fast. On Tuesday France's Nikolas Sarkozy threatened to boycott China's biggest Olympic moment. Only today the European Union urged China to handle the uprising in Tibet with restraint and to avoid volence, while the Belgian government refused to rule out a boycott.

In considering all of the above it's our opinion BIDU shares have a higher likelihood of trading down to the $150.00 level before breaking through $300.00.

We urge our readers to avoid BIDU until we get a sense of how bad the current operating environment actually is. That will be addressed on the next CC, which you know we will cover in great detail for you.

Lastly, Mr. Li's struggle is in the perfect poetic tradition. Wikipedia states that "The poetic tradition is a line of descent of poets who have achieved a sublime state and can surrender themselves to their work in order to create a poem which both builds on existing tradition and stands on its own". We hope BIDU will one day be able to finally achieve "standing on its own", without any help… only the poetic freedom it deserves one hundreds times over ~

Tuesday, March 25, 2008

One Wounded Bear & Two Gov't Officials Wake Up the Bulls

WOW! The recent developments surrounding Bear Stearns (BSC) stock will likely be a case study for Investment Finance majors for decades to come. We want our readers to understand the integral part that politics and psychology have played since the $2.00/share offer on March 16th. If JPM had offered $10.00/share right away, BSC shareholders would have demanded more, perhaps $20.00, but with such a miniscule starting bid, JPM set themselves up for a win-win situation. BSC shareholders on the other hand were set up for a lose-lose situation. Ironically the Bulls have been awakened by the hurt, battered down Bear.
We suspect that JPM was coaxed into the ‘take out’ (actually more of a ‘take under’) by government officials, specifically Hank Paulson and Ben Bernanke. The financial sector was under great stress and government action had to be taken to avoid a greater panic. Do we think it is a good or bad thing? Well, that all depends upon which side of the trade you were on.
We’ll not pass judgment on the ethics of the transaction. The market is humbling and you have to take what it gives you, study it and learn from it. Our goal here is to educate, to expose the truth, and eventually enable our readers to profit from logical psychological analysis and not simply luck or accounting data. Forward-looking insight is what we promise to teach you.
The political and psychological mechanics of the BSC/JPM deal must be remembered and appreciated for future reference. After studying the near collapse of Continental Bank in 1981, we understood how influential Paul Volcker was as Fed Chairman in getting emergency financial deals done behind closed doors, literally at four in the morning! Politics and psychology have been around for a long time and are clearly evident with the JPM/BSC deal. Respect them and make a note of them for future trading: we did. BSC shares are still down an amazing 85% from one month ago, even though the shares are up over 100% for those who bought on Friday. What looks like a huge winner today for a few wise traders is still a huge loser for BSC employees or anyone who bought and held from much higher levels. Take note.. even one wounded Bear can wake up the Bulls (with help from the government officials that is.. ).
Thanks for understanding the Psychology of this political Call.

Thursday, March 20, 2008

Investment Psychology (Won01)

The stock, bond, options, commodities, and futures markets will be around next Friday, next month, and next year. We advise our readers to never be 100% invested in any one market or individual investment at any one time, ever. We've experienced maximum pain, loss, and stress before and learned from it. The Psychology of the Call team goal is for our readers to never experience what most of the "herd" experiences when markets go against them.

Investment Psychology (Won01) takes the emotion out of trading. We offer you a more scientific & mechanical approach that focuses on the Eleven Commandments. We want our readers to obey them in bull, bear , even stagnant markets. Please, please, please obey The Eleven Commandments and as you do, your faith in investing will sky rocket, especially in times of volatility and great angst such as the one we just witnessed with Bear Stearns. Commandment 10 warns of these events/shocks/inversions; they happened before and will happen again.

Quick question: Has the manager of your mutual fund called and updated you lately? We're sure he/she won't be calling our team for advice, although we welcome all. Think twice before signing over your investment account to one expert advisor, broker, or fund manager, especially when you hear buzz words or phrases like:

"The whole market is down". That's nothing more than an excuse for subpar performance. Afterall, has he/she ever heard of making money on the short side, or the Bond market?

"Buy and Hold". This traditional investment philosophy no longer works, with trading costs so low compared with in the past. Remember Commandment 1: "Never fall in love in any one investment or stock.

"Long-Term". The only things guaranteed to be long term are death and taxes

"Mutual Fund" When the fund loses money, you still pay for the bad advice, ridiculous!

There are many more buzz words used to attract your money/account, so our readers should never become conditioned and juked by outdated lingo and gibberish. If you can think of any other buzz word(s) that you find obsolete in the "traditional investment arena", please comment below and we'll add them to our list. Investment Psychology (Won01) is now simpler than you thought. It involves strict adherence to the Eleven Commandments, nothing else, nothing more. The Psychology of the Call team wants to thank you for letting us be ourselves, again.

The Eleven Commandments Of Trading

1. Never trade more than 10% of your total capital/account value in any one position.
2. Cash is King.
3. Cut losses to 15% maximum whenever possible. If your psyche is shaken, step away and don't trade for 1 week.
4. Take and enjoy profits of 30% or more.
5. Never fall in love with a stock and never force trades or over trade; remember commandment #2.
6. Never accept excuses from management, period.
7. Use technical and fundamental data & psychology/sentiment from the conference call to select trades.
8. There are two sides to the market, long & short; take advantage of that leverage.
9. Understand the significance of the macro geo-political economic environment.
10. Unforeseen events/shocks will happen, inverting the market upside down (remember commandments #1 & #2)
11. All of the above are void without reading the Psychology of the Call.

The Philly Fed Report Kick Starts Stocks!

The stock market is celebrating after this morning’s report! And we are happy to see the bulls come out, OLE!! Our readers should take note of the extended three day weekend ahead. U.S. markets will be closed for Good Friday.

Although improved over last month’s reading, the manufacturing activity in the Philadelphia region is continuing to experience weakness. That slight improvement is only a silver lining. What raises a red flag are the price pressures the regional Philadelphia manufacturing sector is experiencing. We feel these price pressures coupled with unemployment rates inching up could make the decision of the Fed Chairmen (see our article on "Will the Real Slim Shady Fed Chairman Please Stand Up) harder than ever come March 18th. This morning’s strength in the market is attributable to the pull back in commodity prices, in addition to hope for another large rate cut. Since markets hate uncertainty more than anything else, we continue to sell into strength, as there will be a flurry of economic data to hit the wires next week. We will be writing up an in depth analysis of the Psychology of the Upcoming Week's Data this Saturday night, so be informed.

Today, we recommend taking advantage of the volatility in the S&P from the 1,300-1,330 level. We believe that range will reward traders, perhaps even into next week. However we continue to stress that the Bear Stearns fallout will not be disseminated for weeks, and with a three day weekend ahead, we don't see much, if any positive spin from the media or Washington. On the contrary, we believe there will be increased pressure on the financial sector with talk of regulations. Regulations are something truly despised by a free market system. Wall Street surely doesn't want any part of it, but the Bear Stearns debacle won't go away quietly. Please heed this warning when buying financials over the next several days and weeks: regulations can cripple valuation multiples.

Finally, there's a saying among financial professionals "Fridays open with a bang and close with a whimper". Considering that today is Thursday and that the markets are closed tomorrow, we won't be using the word whimper, for sure. We invite you back Saturday night for the Psychology of the Upcoming Week's Data, and we promise you our trading analysis on the Chinese search engine BIDU very soon.

From the Psychology of the Call team, here's to an enjoyable weekend!

Thursday Morning Psychology

Good morning, good afternoon, and good evening to all around the globe! Today's trading will continue to be volatile. The whipsaw movements in the financial sector are spreading into the commodities sector. Look at a chart of Gold and Oil over the last week and you'll see that Institutional money has been selling and switching into other asset classes. This phenomenon is expected at quarter’s end as traders take some profits and ponder what to do with the capital. That said, we don't see any reason to add to a ‘long-term’ account such as a retirement or college savings account until the S&P stabilizes in the 1,330 range. Although we are presently more optimistic since the retest of 1,270 on Monday, we don't want to see any of our readers ride back down, not having displayed discipline and patience (two must have traits in making money in the stock market) . Initial claims for unemployment continue to rise. This morning’s figure of 378,000 claims was a troubling 22,000 higher than the estimate for the week ending March 15th. We still await the Philadelphia Fed manufacturing survey at 10:00AM ET, which measures manufacturing activity and forecasts inflationary pressures. A number above 50 shows expansion in the manufacturing sector; below 50 shows contraction. This number is definitely market moving. We will update you once more in the afternoon; thank you for understanding the Psychology of this Call.

Wednesday, March 19, 2008

Wednesday S&P Update

The S&P is attempting an incredible stabilization at 1,330 today, the mark we pointed out last week! We see more downside risk in the short run, so although our target has been reached, it has NOT yet stabilized to the point where we would recommend that our readers build ANY long positions. On the contrary, we see the 3 day weekend ahead as fueling uncertainty, considering the geo-political events in Europe and Asia, especially China and Japan. We're not pleased with the recent Bear Stearns collapse and we caution readers of potential REGULATIONS being discussed & thrown around in the days and weeks ahead, ESPECIALLY by the Democratic party. We will update you on these fascinating macro developments in the coming days. Until then, please be sure to adhere to the 11 Commandments ~ Thanks to all our valued supporters in 49 countries around the globe. Tell your friends that the Psychology of the Call has been an interesting and accurate read. Please feel free to share your opinion on this or any other post by clicking on “Comments” directly below.

Update on JRJC

Congratulations to our readers with live positions in JRJC! Our short thesis for JRJC remains in place. We have done a very thorough analysis of the micro elements surrounding JRJC as well as the macro economic environment in which JRJC is attempting to operate; neither bode well. We pointed out the difficulties in executing a subscription based business model and the lack of any barriers for competitors to enter. There are even companies that could offer for free the services that JRJC provides. Such a development would cripple JRJC shares. The macro scene hasn't been kind either. ISHARES FTSE/XINHUA China 25 Index (FXI) is about to print 8 month lows, so most of JRJC's subscribers are suffering losses in their investment portfolios. Did you know that the Chinese cannot execute short positions? So a falling market means only one thing; losses. The FTSE/XINHUA is similar to the widely quoted U.S. Dow Jones Average of 30 stocks. We know "V" bottoms seldom occur in emerging markets, so we urge our readers to hold their short positions until a complete wash out occurs, or one of the Eleven Commandments is triggered (like the 4th one). We remind our readers of CFO Wang's comments: "we have very aggressive growth goals". Wall Street doesn't take kindly to that kind of rhetoric if you don't systematically deliver home run quarters. We see this quarter being dismal on a number of metrics, but especially bottom line/earnings. SG&A costs rising faster than sales on a percentage basis will be an issue on the next live conference call no doubt. All these matters mentioned, micro and macro will be reflected in JRJC's share price in the coming days and weeks. We tell our supporters "it's better to under estimate & over achieve than over estimate and under achieve." Unfortunately CFO Wang has fallen into that dangerous trap, and now JRJC longs are ~trapped under ice~. Congratulations to our readers again, we will revisit JRJC next week March 26TH. The Psychology of the Call team thanks you for your Wednesday attention.

Tuesday, March 18, 2008

Wednesday's look at JRJC

On Wednesday, 19 March we will take our fourth look at China Finance Online (JRJC). We initially suggested that our readers sell short in the $16.00 to $18.50 range. Today JRJC closed at $14.06, having dipped as low as $13.25 earlier in the day. We hope to see you back here tomorrow for an update. Please feel free to post any comments below.

Tuesday Market Insight-who will"Plz Stnd Up" at 2:15PM ET

Last week we covered the enigma behind the flat core Consumer Price Inflation (CPI), the number that left CNBC's economist Steve Liesman scratching his head. We pointed out the likely revision ahead in March inflation and this morning’s Producer Price Inflation (PPI) adds credence to this scenario. With the Fed on board at 2:15PM ET, we hope Bernanke finally stands up!

The Labor Department reported that wholesale prices, NOT counting food and energy mind you, shot up 0.5%, the biggest one month rise in 15 months. This is very troubling data in face of a weakening U.S. Dollar and economists like Robert DiClementi from CitiGroup calling for a full point interest rate cut from the real Fed Chairman (see our piece "Will the Real Slim Shady Fed Chairman Plz Stnd Up" directly below).

The paradox in this morning’s PPI data lies in food and energy again. Please take a seat before you ingest this nugget; although the PPI rose at the biggest clip in 15 months, food and energy prices were reported to fall. Moreover, the Labor Dept. actually blamed the rise in PPI (with food and energy excluded), on the rise in food and energy spreading to other manufactured goods. Essentially the Dept states one data set in one paragraph and then contradicts it in another. Are we taking the rise in the price of food and energy into account or are we not? Confused? Don't be, just fast forward this video forward to the 2 minute 15 mark;

Ironically it’s at the same time, 2:15 PM ET that we'll discover who is the real Fed Chairman.

We suggest that you continue to sell the rallies and use volatility (VIX) to enter and exit trades. Bear market rallies provide opportunities to book long profits and enter extended positions on the short side. Happy Trading All.

Thanks for your Tuesday attention to the Psychology of this Call.

Monday, March 17, 2008

Will the Real Slim Shady Fed Chairman Please Stand Up, Plz Stnd Up, Plz Stnd Up!

May I Have Your Attention Please, I Repeat, May I Have Your Attention Please:

After analyzing the recent Financial and Economic shocks, we remain dogged by one question: Who is the real Fed Chairman? Who do you think is making the monetary decisions, Bernanke or Paulson? Maybe their prior work experience will reveal the riddle. Our hope, at least, is to give you a glimpse into our psychology and maybe have you take away a couple of shekels worth of knowledge on the mechanics of Politics in Money and Banking. We ask that our supporters set aside all political leanings and conspiracy theories before reading further. However we will salt the facts with some of our considered opinions. Okay?

Take a look at three recent events:

1. The 125 basis point (1.25%) slashing of the fed fund rates (short term bank rates) in January;
2. Last week's $200B Federal Reserve 28 day bond swap plan, and;
3. Friday's announcement of Bear Stearns' liquidity problems.

We can’t help but interpret these as the Fed Chairman reacting to bad business decisions made by Corporate Executives and their board members. When things go well, take full credit; when things sour, don't make excuses! Is it really the Fed's responsibility to save publicly traded Corporations? Whatever happened to shareholder accountability and personal responsibility? Some economists are predicting that the fed funds rate will be lowered by as much as 100 basis points (one full percent) this coming Tuesday. Is that okay with you?{43F129A6-3D14-4C51-9B3A-E3A7FECFFE08}&siteid=msn

To whom or what do you think this quote from CitiGroup's Robert DiClementi applies: "Aggressive action is needed to stabilize the financial setting". To you, the individual investor/consumer, or perhaps the best interests of CitiGroup? And herein lies the paradox of being a CitiGroup shareholder and an American Capitalist.

Do you want to see the U.S. Dollar continue its slide, in turn driving up the cost of gasoline and imported goods, all for the benefit of a couple of irresponsible Corporate decisions? We recommend to Mr. DiClementi a short story authored by Ursula LeGuinn; "The Ones Who Walk Away From Omelas". The gist of the tale is that Utopia will never exist without "somebody" suffering. So why can't it be CitiGroup instead of the individual for once?

We hope you follow our 11 Commandments, specifically the first, ensuring that you will never have more than 10% your portfolio in any one bad stock (like Bear Stearns last Friday). We think individual investors have good reason to be upset at such biased talking heads like Mr. DiClementi. We apologize to Mr. DiClementi for seemingly picking on him, but we did warn you that you'd get sprinkled with some facts and opinions, right?

We believe the short term gain of this decision will not outweigh the long term pain for the consumer in America and abroad. The current Fed policy will destroy the buying power of the U.S. Dollar. So if you happen to be living in Canada, the UK, China, Japan, or South America, indeed any country that exports goods to America, that is not good news for you, our global trading partners. Granted, lowering the fed funds rate is historically very positive for Banks and investors cheer and buy Financial stocks in anticipation of a rate cut. Money becomes cheaper on the short end of the curve and - in theory - demand for loans increases and Bank margins widen/expand. But is there not another side to this coin?

We argue that a free market banking system is based on the psyche/sentiment of two parties: the "banker/lender" and the "consumer/borrower"; agreed? So in today's environment of rising energy prices and falling U.S. Dollar, who do you feel lowering rates will help most? We don't see this easing policy helping either the Investment Banks who are already knee deep in subprime, or you, the consumer, who may witness the greatest inflation of your life at the gas pump and in the food store. We call for the real Fed Chairman to Plz Stnd Up on the side of the individual investor/consumer for once: show publicly traded companies they are truly free to start up and close shop based on their internal planning and marketing strategies. We believe true American Capitalism should never be rewarded with Government bail out as that could lead to "regulation", a type of monitored Socialistic "freedom." No thanks.

My Investment Finance Professor was adamant in never investing a dime in any regulated sectors. Airlines are one example of a regulated sector he avoided; could Banks be next in line? Our readers should monitor these political events closely. Always remember that politics is often linked to money and banking (unfortunately), and we witnessed it with the Bear Stearns debacle that broke last Friday. Their final chapter is far from over. We think it would be appropriate if it ended miserably because that’s how they managed their business.

Investment Banks (IBs) like Merrill Lynch, Bear Stearns, UBS, Raymond James, Morgan Stanley, and Goldman Sachs tap several springs for profit. Some are more concentrated in one spring than another. For example, Goldman Sachs does more Merger and Acquisition (M&A) business than Bear Stearns and unfortunately Bear Stearns did a lot more bond business than Raymond James. So should our Government reward Bear Stearns for taking on too much business risk and bail them out? Once again, where's the Corporate and personal accountability of the executives and boards? With that in mind, our readers must understand that the foundation of their "wire houses/banks" relies on healthy balance sheets. With the current credit freeze they will all have difficulty in the near term regardless of what how much the Fed drops rates.

Psychology and sentiment is what these corporations must worry about more than simple short term rates. In an earlier piece entitled "Equity Market Insight for Wednesday", a former executive of Monster Worldwide and client Lance commented, "they can lower rates to Greenspan levels of 1.25%, or even ZERO, but that doesn't mean people will want loans, or that Banks will be willing to offer the loans on favorable terms".

We then pointed out "the foundational crack" in the Real Estate mortgage market is something that will take time to correct. "Hang over" (inventory) is still a factor we must work through, regardless of what the cost of money/interest rates will be.

Are free markets not about winners and losers? Ironically, IBs wouldn't be around if there weren't two sides to a trade. After all they’re called brokers/middlemen for a reason. Just as in nature, forest fires are normal and necessary events, regardless of the short term shock and temporary destruction they bring. New life soon sprouts up and the forest thrives again. We thought free markets had to do with survival of the fittest, no? Many people get bent out of shape when separation of Church and State is called into question; maybe those people should be more concerned with separation of Government and Corporations?

We feel the Fed's decision Tuesday will reveal the real Fed Chairman. The two players are Economist and Professor Ben Bernanke, versus the ex Goldman Sachs (GS) CEO Hank Paulson. Here are a few details on the players.

Dr. Ben Bernanke, 14th Chairman of the Federal Reserve. Born December 13th, 1953 in Augusta, Georgia. Bernanke was appointed by President George "Walker" Bush on October 24, 2005. He succeeded Alan Greenspan who served 18 years. Bernanke graduated summa cum laude from Harvard College in 1975 with a B.A. in Economics. He went on to earn a PhD in Economics from MIT in 1979. From 1996-2002 Bernanke was a tenured professor in the Dept. of Economics at Princeton University. Are you still with us? It is a well known fact he has written extensively about the Great Depression. Bernanke has not been known to comment on Fiscal Policy (taxation policy), rather he feels his only responsibility is monetary policy, and we agree. He once stated publicly that fiscal policy was none of his business.

During the emergency meeting today between President Bush, Paulson, and Bernanke, do you think Bernanke will be giving or taking more advice? In our opinion Tuesday's interest rate decision should be his and his alone, without any cronyism or arm twisting from Paulson. Here is the good looking bunch of Fed governors for our readers to view, remembering that the charter calls for 7, and today we are relying on just the 4:

Isn't "7" a luckier number than "4"? We'll leave that to the gamblers in Vegas, Monaco, and Macau to figure out ~

Mr. Hank Paulson, 74th United States Treasury Secretary and International Monetary Fund member. Paulson was born on March 28, 1946 in Palm Beach, FL and grew up in Barrington Hills, IL, 30 minutes northwest of Chicago. In 1970, he received a MBA degree from Harvard. Paulson left GS, one of the largest and most talented Investment Banking Firms on Earth in 2006.

He was officially sworn in as Treasury Secretary on July 19, 2006 by President Bush.

Over the last two years of financial credit turmoil and now crisis, GS out performed its peers by making incredibly gutsy trades on the short side of subprime. Pundits on CNBC are always left scratching their heads with every quarterly report, even in the face of the competitors to GS suffering through huge trading losses and set backs. Please read the first paragraph of this piece:

We remain steadfast in our beliefs that GS is the premier IB firm on the planet and whoever made those trading decisions deserves full credit, period. But please remember we mentioned how politics are often times involved in money and banking. ALL political leanings aside now, please: have you seen a chart of Halliburton(HAL) since 2002/3?

Vice President Dick Cheney's former employer has returned 100% per year since 2002. Do you see how politics and cronyism may play a role in money and banking? If we offended Cheney’s friends or business colleagues, we apologize; it could all be simple coincidence. We will not stoop so low to say Paulson was giving advice to his former GS on the subprime crisis, but after seeing Eliot Spitzer's demise on ethics last week, who can tell.

In one sense we must blame Paulson for being a waffler/hypocrite. When Paulson was the CEO of Goldman, his mission was to hate and seek to destroy the competition. I know this from my personal experiences at Morgan Stanley; we were taught to hate our competitors, specifically Merrill Lynch (ML). Now it seems Paulson has done a "180", going from the greatest "Capitalist Dream Job" to a Socialist kind of mentality:

But please be patient as maybe this 180 degree turn isn't as extreme as we first had you believe. Maybe there is an explanation for his behavior.

On March 14th (this past Friday), Paulson gave a speech that was broadcast on CNBC. He said, "implementation of regulations and new standards must keep up with innovations". In a statement later that day, Bernanke agreed. In our view the word "innovations" is a sad excuse for the subprime trading derivatives created by mortgage banker greed, and now those derivatives are worth less than the paper they were printed on. Paulson went on to suggest that there are "no excuses for fraud, therefore no Government bail outs". Here's where we feel Paulson is speaking out of both sides of his mouth. On one hand, it's OK for Bear Stearns to get bailed out, but not Country Wide Financial (CFC), for instance? If you didn't know, the Government has launched an investigation into fraud at CFC.

We agree with Paulson on this point: we don't believe CFC should be bailed out if they did in fact commit securities fraud, but we also feel Bear Stearns bears responsibility for cooperating in bond transactions with companies like CFC, no? You know the guy driving the getaway car is usually found as guilty as partner who walked in to scoop the bank loot. So when Paulson says it's okay to bail out Bear Stearns, he’s basically rewarding them for driving the car in a sense, no? Don't worry, we don't fully get it either and we don't see this being resolved for several months. Regardless, many could argue Bear Stearns was an accomplice of sorts to the subprime crisis initiated by overly aggressive CEOs like Leo Mazilli of CFC. So is Paulson the Secretary of the Treasury or the Chief Justice of the Supreme Court? Who is really running that Fed?

Paulson's Investment Banking back ground may have influenced monetary policies of late. Shouldn't everyone involved in this credit crisis be questioned before any Government bail outs are handed out? Shouldn't the authority of whether to bail out or not be placed in less biased hands than those of an ex GS CEO? Maybe if John Snow was still signing U.S. currency the decision of bailing out Bear Stearns would be different, maybe not, but his signature sure is different:

Do any of you have currency signed by Hank Paulson in your wallet? (Just making sure you're still with us.. almost done.)

Tuesday's Fed decision will show whether Paulson is more than the Secretary of the Treasury. If the Fed lowers by 50 or more basis points (1/2% or >), then Paulson's power will be evident. If Bernanke's Professorial experience is able to convince the ex Wall Streeter of the bloody pain more rate cuts will cause consumers, then we see rates staying unchanged to maybe down 25 basis points (1/4%). Got it?

In closing, our readers should now visualize both Bernanke and Paulson sitting down. Then at exactly 2:15PM ET Tuesday when the announcement reverberates through CNBC and around the globe, imagine one of them standing up and revealing the mystery of who the real Fed Chairman is, and maybe we'll be able to finally thank Ben Bernanke for standing up for the individual investor/consumer and our free market system envied by most countries.

And speaking of sovereign nations, a very Happy Monday to our readers in all 42 countries worldwide! We are so happy having you back. We hope you enjoyed the Psychology of this Call and we leave you with a “Cheers” to true Capitalism.

Monday Morning Market Update

We urge our readers to sell into any strength or rallies this entire week. The financial sector's stability has been shaken and the fall out will NOT be known for several weeks. Market mechanics are different today than in the crash of 1987, 2001, and the Great Depression, which we hear some talking heads mentioning. Shame on them, and shame on Alan Greenspan for his comments this morning; we wish that man would just retire and not contribute to the conspiracy theorist psychology. The United States will get through this fine. Our readers should keep in mind the strong Euro and other strong foreign currencies, which may be the saving grace over the next several weeks and quarters. Never has the U.S. market crashed in the face of such a strong global foundation. That having been said, the Bond market must stabilize before we ask our readers to commit a single dollar into any global equity market, but especially the US. A great deal of bond trading on Wall Street would have frozen up if it weren't for Government intervention strategies/policies. We see the Government doing everything possible to avert capital melt down. In realizing that the Government is the last line of defense, we urge our readers to allow the markets to reach some equilibrium point before entering any trades, but especially on the long end. Never force trades. Some don’t agree with Government intervention, but we must accept their efforts during such climactic events. U.S. market liquidity can’t be allowed to dry up. We suspect that we’ll not see a bottom in the stock market for several quarters, but we’ll continue to offer our insights on a timely basis, as events unfold. The reverberations from the financial sector are not yet fully understood, and the underpinning of the sector is extremely important to all other sectors. Without a strong conviction in the ability of U.S. Banks to offer loans and extend credit, our readers must be patient until this psychology shifts. Traders in Chicago and NY are in shock. The market doesn't make sense to most under 45 years of age since they didn't trade their way out of the 1987 crash. I traded my way out and am witness to that crash. I actually made several mistakes that I can help you avoid. Even though the mechanics then were much different from today, our readers should remain in cash. As you see the S&P and Dow try to hold up this morning, we reiterate that you should not enter any long positions. Many hedge funds will be covering their short positions to offset their margin calls in Bear Stearns (BSC), so understand the mechanics of the volatility index (VIX) and the opportunities this creates for your trading strategies (for those who do quick intra day flips). There will be many dislocations over the next several days that make absolutely no sense to anyone, but when you’re floating on a small life raft in the middle of the Pacific Ocean, conditions are dangerous and transient.Always follow our 11 Commandments of Trading.. and thanks for reading this time sensitive Psychology of the Call.
We must remind our readers to remain PARKED IN CASH until the market gets washed out. Please realize that it may take several quarters for this to happen. Stay in cash, obey the Eleven Commandments of Trading, and tell your friends that Psychology of the Call has been ahead of the tape these past two weeks.

Friday, March 14, 2008

The Psychology of the Call team wishes our readers a Happy and Healthy Weekend~

Here again are the Eleven Commandments of Trading. Today we refer you to Number 10: “Unforeseen events/shocks will happen, inverting the market upside down (remember commandments #1 & #2)” Very appropriate for today, wouldn’t you say? Hopefully if you were long Bear Stearns you were obeying the first two Commandments. The Psychology of the Call team believes strongly that the ramifications of the liquidity problems at Bear Stearns (BSC) will be played out in the Global Market for weeks, possibly months to come. There are simply no positive aspects to the continued erosion of financial stocks. Investment Banks across the globe will be strained by their relationships and investments with BSC and other US Financials. On Thursday we suggested you not buy the intraday rally, choosing instead to view it as an opportunity to sell into strength. At the end of the trading day the DJI closed in slightly positive territory. Now you’re probably aware that the Asian markets tend to follow the US markets, but on Friday night in Japan the Nikkei closed at a 2 ½ year low. Then Friday the BSC news was released causing the US markets to drop significantly. Do you think – maybe – that someone in Japan knew in advance about the release of BSC news? Who knows, but this situation serves to emphasize the 11 Commandments, especially numbers 1, 2 and 10. Look for further weakness in the financial sector ahead and always obey:

1 Never trade more than 10% of your total capital/account value in any one position. 2 Cash is King. 3 Cut losses to 15% maximum whenever possible. If your psyche is shaken, step away and don't trade for 1 week. 4 Take and enjoy profits of 30% or more. 5 Never fall in love with a stock and never force trades or over trade; remember commandment #2. 6 Never accept excuses from management, period. 7 Use technical and fundamental data & psychology/sentiment from the conference call to select trades. 8 There are two sides to the market, long & short; take advantage of that leverage. 9 Understand the significance of the macro geo-political economic environment. 10 Unforeseen events/shocks will happen, inverting the market upside down (remember commandments #1 & #2) 11 All of the above are void without reading the Psychology of the Call.


Psychology of the Call sees more GLOBAL PANIC ahead, especially in Japan and Europe come Sunday night when the Nikkei starts from a new 52 week low printed ahead of the Bear Stearns news

Bear Stearns Bailout Prompts Record Share Selloff

"Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction," Chief Executive Officer Alan Schwartz said in a press release. "Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations." The Psychology of the Call team just sees CEO Schwartz as a little Johnny, just another dog with more money from Benjamin Bernanke; Game On!

Will Bear Stearns fall in to the foundational crack? Read our post from 28 Feb.

(click then scroll down)

CPI and Core CPI Both Unchanged For February

The CPI and Core CPI both came in unchanged for February, after rising in January 0.4% (CPI) & 0.3% (CoreCPI). Congratulations to the guys over at Briefing, who had the consensus pegged lower than most economists. That said, we do not feel that the consumer is in any better shape today than in January. We look for confirmation of our beliefs in today's Michigan Consumer Sentiment slated for 10AM ET. Our analysis shows Crude Oil climbing well over 20% in the spot market since January; we strongly believe the Core CPI will be GREATLY REVISED UPWARD come March, causing most long entrants today to sell. We urge our readers to consider that scenario of a MAJOR revision next month in the March CPI data. At Psychology of the Call we prefer a scientific approach, never considering Government conspiracy theories. However this morning's CPI data had Chief CNBC Economist Steve Liesman mentioning the word "CONSPIRACY" while scratching his noggin (at 8:35Am ET). Our readers should understand we DO NOT want to see a recession, but we believe we have been in one since at least the 4th Quarter of 2007. Maybe the Government just missed accumulating data from their sources on the price of energy? SENTIMENT/PSYCHOLOGY looks to have been strengthened today, albeit with what we regard as a very mysterious set of data. Please stay tuned for March's CPI as this conundrum unfolds ...

Thursday, March 13, 2008

Buying the Intraday GE Green Rally?

We suspect that Jeffrey Immelt's/GE's morning Conference led to an intra day false rally and we’re not buying it. Please don’t be fooled by the "green" future Jeff addressed in terms of your short term trading strategy today. We strongly advise selling into strength and rallies, as there will be "Munch" better entry points for longs over the next several "weaks." Investment Banks (IBs) will be reporting earnings and outlooks soon, perhaps the most significant being Goldman Sachs before the market on March 18th. We recommend being 50% in cash until that CC passes. Also keep one Pirate Eye open to Asia, where the markets have been falling overboard, as predicted in our featured German painter Edvard "Munch" piece tilted "Munch More Fear ScReaming in the Equity Risk Premium." ( Thanks for reading and understanding the Psychology of this Call.

Wednesday, March 12, 2008

"Gilligan and the Skipper Too" Spotted On Morgan Stanley's Island

Morgan Stanley's Real Estate subprime debacle is spreading into the "Preferred Class of Stock". Here we have the FIRST Investment Bank (IB) admitting cash/liquidity problems in making good on dividend payments on their Preferreds. First, POTC predicts dividend payments being slashed/cut and perhaps suspended in all contaminated Preferred funds/ETFs. And that action will generate a reaction of massive capital erosion in the underlying Preferred share price of the fund/ETF, as investors who bought for the "safe" dividend decide to liquidate/sell, in effect Abandoning Ship for shore!

"Just sit right back and we'll tell a tale a tale of a faithful ship". You know the rest. With your boat docked and your buttered popcorn in hand, enjoy this series until the Psychology of this Call unfolds. CNBC will have a lot to squawk about come tomorrow, rest assured. We just hope either Gilligan or the Skipper agree to at least an interview, but don't hold your breath ..

Our Third Short Sitting With JRJC

We continue to reiterate the underlying weakness in the Shanghai Index as a major reason to be bearish on China Finance Online (JRJC). Their subscription business model relies on a stable Chinese stock market, at least, and we only see the Shanghai falling further over the next weeks as it searches for some equilibrium level. We see JRJC testing $12.00 by their next conference call. We see JRJC's SG&A costs rising further as a result of their aggressive expansion in face of tremendous inflationary pressures in China, coupled with a bad stock market. Our readers would be wise to hold their short positions. We will provide an update to this trade one week from today, on Wednesday March 19th. From the desk of the Psychology of the Call team, we thank you for your attention.

Tuesday, March 11, 2008

Know Your Analysts

As you read through our analyses of conference calls you'll notice that we list the name of the analyst/House asking the question. Try to make note of who asks what. You'll soon learn the names of the analysts to respect and the names of those who seem, well.. completely clueless. Read our analysis of the Jones Soda call for examples.

Cats Seen Bouncing From Broadway to Wall Street

The enduring play "Cats" has run its course on Broadway, but imposter cats have been spotted bouncing on Wall Street today in record number. After the Fed did what we pointed out was the rumor "over Manhattans in NY" in the last paragraph of our piece, "The Psychology of the Weeks Upcoming Data", stocks have had an overwhelmingly upward bias. Congratulations on reading us, and more congratulations if you traded on that rumor. Now, step back and think.

On one hand, we’re happy to see relief from the agonizing pain suffered by equity investors over the past several weeks. We would have preferred a free market wash out with no Federal Reserve intervention. What ever happened to accepting responsibility for your actions? What ever happened to Newton’s 3rd law: "Every action has an equal and opposite reaction."

That law may soon be tested. Today’s market reaction was not sentiment driven by optimistic Americans spending money, creating jobs, and loaning money in record numbers. It is nothing more than a synthetic rally driven by the Bernanke Fed. The Retail Sales data and Michigan Consumer sentiment will be a more telling metric than simply giving the Investment Banks $200B for 28 days.

Many Investment Banks have acted shamelessly in their underwriting practices and trading of subprime paper/mortgages in the last few years. We believe the free market system should correct itself without Federal intervention, and only then can it really earn the title of "FREE." For the Americans pointing fingers at the Chinese Banking system, shame on them, and shame on us for being overly critical of the Chinese system in our piece "The 2008 Animal Tug of War Explained." Anyone ever wonder whose system the Chinese are following? Yes, yes, and yes. Here's to a successful 2008 Olympics. Hip Hip Hoorah, say it thrice!!!

Although the breadth of the market is extremely positive, we wouldn't buy the S&P until it trades and stabilizes above 1,330 for several days. We urge our readers to tread with extreme caution today and not be fooled by the many Bouncing Dead Cats in lower Manhattan; they may head back to Broadway sooner than Bulls believe. Enjoy the show!

We thank you for reading this time sensitive Psychology of the Call, here's to free markets!

We will update our JRJC position Wednesday

Psychology of the Call for Dick's Sporting Goods (Q4, 2007)

Dick's Sporting Goods (DKS) just reported their Q4 results. The stock closed at $25.69 Monday, only $1.55 off its 52 week low. DKS gave guidance for the Q1 below analyst estimates and the shares were down $1.00 ahead of the live Call. We (POTC) were anxious to hear this conference call because DKS went through an upper management change on 2 February and was downgraded by John Shanley of Susquehanna on 13 Feb, based on "weakening economic concerns". Here is the Psychology of this Call:

Mr. Magulick from Investor Relations Dept. started the call at 0:40s with some rehearsed notes. At 2min Mr. Stack read the Q4 results; his delivery was average as he read past Q4 data for DKS.

At 3m:25s the forward-looking data began to be addressed. Stack offered guidance of $1.49-$1.54 for 2008. He said comparable (comp) store sales will be flat for the year (3m:40s). POTC never likes to hear the word flat. At 3m:45s he mentioned another buzz word POTC hates to hear: "cautiously optimistic."

At 4m:05s he pointed out the "uncertain macro-economic environment” and at 4m:25s the "challenging environment". Then the bomb was dropped at 4m:50s. He estimated Q1 same store comp sales to be down 1%-4%. POTC never likes to hear sales going down, ever.

At 5m:40s Schmidt said a few words related to opening and closing stores, details of square footage offered, all good information, and at 7m:20s the Atlanta distribution center was mentioned. POTC heard nothing important.

Mr. Kullman began at 7m:35s and read details of the Q4 results. His delivery was slow and boring and no relevant forward-looking information was offered until 10m:30s. DKS expect merchandise margin improvement, BUT at 11m:10s POTC learned the "magnitude of margin gains will not carry over to 2008”.

11m:55s Costs will increase; 12m:10s Declining gross profit margin rate. They claimed to be "focused on long term". POTC feels the use of "long term" is only an excuse for bad planning and execution.

Analyst Questions and Management Answers began at 13m:40s
Q: Pete with Citi asked how the Underarmour (UA)/Footlocker competition factor was addressed.
A: Footlocker is smaller than Dick's, and we have exclusive UA products, we don't feel it will have an impact. That answer didn't score points with POTC.

15m:10s Q. about Nike.
A: No plans with Nike ACG.

16m:05s John Shanley of Susquehanna, related to Golf Galaxy same store comp sales.
A: The "weather" was cited as the reason. Our readers MUST fast forward to this Q/A and hear what we feel is only an excuse for poor strategy and executive planning. They reiterated that comp same stores sales down 1%-4% and at 17m:50s cited a "difficult economic environment"

18m:50s Matthew at Goldman, regarding the Golf Galaxy impact on earnings.
A: On target. Whispers were heard in the back ground and management sounded exhausted, almost tired and confused at 19m:40s. A question at 20m:30s related to Inventory. A: We don't see inventory being an issue

21m:50s Brian at UBS: Explain guidance.
A: We don't see an improving economic environment. At 23m:05s DKS stated that there’s no guidance for Golf Galaxy because of competitive issues. POTC feels that if Golf Galaxy was doing well, the management tone would have been more upbeat. We heard no indication of a positive related to Golf Galaxy.

25m:40s Mike regarding square footage efficiency.
A: 26m:25s. Very discriminating with development cycle, no change in business as related to square footage seen. At 26m:55s, the fact that nothing has changed was reiterated by management.

28m:20s Sean from Needham, on the conversion of Chick's Stores to Dick's stores.
A: Sometime in 2009, as presence in the Southern California market grows. They expect end of calendar 2009 to have only 15 stores, so comps won't have great effect.

30m:10s Dan at Raymond, related to sales per square foot; why such an aggressive purchasing plan?
A: 30m:45s: They were quite enthusiastic, but "weather" was used as an excuse AGAIN!! This was an emotional Q/A exchange. Dick's blamed weather and seasonality on performance.

32m:20s: Why so optimistic for year compared to Q1
A: Mumble, mumble, mumble. POTC felt management was almost trying to deny something, stumbling through at times.

33m:30s Change in management explanation.

34m:30s Vivian at Oppenheimer asked about Super Bowl benefits
A: One penny reduction in earnings. At 35m:15s NY Giants victory was used as an excuse because Dick's doesn't have many stores in NY. Not a good answer as far as POTC is concerned.

36m:40s Mike with Merrill, related to inventory Golf Galaxy
A: Margin pressures addressed at 38m:30s, some good and others bad.

39m:10s Hardy, related to Super Bowl cost issue
A: I can't give you that. The penny loss was in Q1. Hardy continued to dig for more, and management seemed to skirt the Super Bowl effect in the current Q1. At 41m the Columbia brand was addressed, also Russell and private label price points.

42m. Robert at JP Morgan, related to Footwear performance.
A: We won't speak to specific brands, but on balance we were pleased.

Q: Under Armor shoe launch.
A: 43m:10s. It should drive entire category of shoe sales. POTC felt this answer was less than genuine.

43m:30s David at Robert Baird, related to Exercise equipment.
A: We did quite well. Q: Chick's addressed again at 44m:30s. A: Marginally accretive, very pleased with Chick's performance, snow helped drive higher year end sales.

45m:20s Jay at Morgan, on gross margin follow up
A: 45m:40s, we lost an extra week, difficulty leveraging occupancy costs, lack of 53rd week versus last year.

47m:30s Peter at Piper Q, asking for more Golf Galaxy explanation.
A: We are NOT prepared to provide guidance for Golf Galaxy for competitive reasons. As the price of gas keeps going up, the Atlanta hub will be a benefit for distribution. POTC feels DKS's is focused more on cutting costs than growing sales/revenues.

49m Q. (Rick) Break down in markets and plans for California.
A: Roughly same as last year, don't see anything new opening up in California, focus on Texas and Arizona markets. For competitive reasons we don't address single market stores.

50m:20s Q. (Sam): Follow up on private brands and label margins. Adidas was addressed.

51m:45s Q: On distribution improvement.
A: Inventory turns were addressed.

53m:50s Christian asked for an explanation of margins going forward.
A: Pressure on margins will be there based on occupancy costs and other cost.

The Conference Call ended at 54m:40s.

POTC concludes our feelings like this: Dick's management didn't offer any competitive advantages or positive scenarios going forward. Dicks's management obviously needs great help from the economy, and we don't like stocks that rely on anything or anyone but their own dynamic growth genius. Comparable store sales were estimated to fall 1%-4% in Q1 of 2008, but we see that closer to the 4% after this Call.

Management offered far too many excuses for us to be comfortable with any shares of DKS under our armor. Here's to avoiding a stock focused on cutting costs than increasing sales. Here's to more pain at Dick's. Avoid.

Thanks for coming back to the Psychology of the Call, where hearing is believing.

Margin Calling Forces the Federal Reserve Bank to Rain Liquidity, Game On?

This morning's Federal Reserve action of freeing up $200B for the Banking system exposes the "foundational crack" of the credit crisis to the public even more. We view this as a very positive development for the desperate Investment Banks who kept going back to their high stakes card game without any sense of shame. Shame on them. In an earlier piece (Margin Call.. ing), we mentioned a story about a father scolding his son, Little Johnny for going back and trying to win his money at the same card table. We compared the Bankers to Little Johnny. Now the tables have turned and their father has been revelead. ( Instead of scolding the Banks, Benjamin Bernanke is raining money on them in order to save them from insolvency. Although Bernanke is doing the right thing to save their ability to function, is he doing the right thing as far as the forward-looking investor is concerned? Many will argue Bernake is being too nice of a father. They'll say he should have been a stricter disciplinarian and scolded the Banks like, Little Johnny's father. Fundamentally, we view this as a short term quick-fix-positive in that the Banks have more money to play their game, again! So which direction will our readers take after this development? All of these Banks will be voting on direction with free money with what looks like a 28 day period. Will the force of sentiment and psychology prevail over Bernanke's free money? Will stock market forces shrug this off and trade to some true equilibrium price? We'll monitor these developments for our readers and report more feelings by Friday. For now, it looks like game on, thanks to Benjamin Bernanke. We sure wish he had an "s" in his name so that we could write it as "$" ~ Thanks for understanding the Psychology of this Call, have a happy Tuesday.

Monday, March 10, 2008

Psychology of the Call for Jones Soda (Q4 2007)

Jones Soda (JSDA) just reported earnings after closing at $4.34, their lowest close since August 2005. JSDA reported sales of $5.9M vs $10M Quarter over Quarter (Q/Q), and a loss per share of $.39 compared to a gain of $.08(Q/Q). Soon after JSDA reported these numbers the stock slid down to a bid of $3.40. While acknowledging the arrival of a new and supposedly more experienced CEO in January, we offer you our Psychology of this Call.

CFO Natha began the call at 40 seconds by reading the Safe Harbor statement. Interim CEO Jones at took over at 10 minutes, his delivery monotone and very dull. He mentioned at the 4 minute 10 second (4:10) mark that JSDA was in "transition which could take 18 months". We hate excuses and the word "transition" raises a definite red flag.

At 6:30 he mentioned the Seattle Seahawks NFL team, a non-issue as far as POTC is concerned. "Problems" were mentioned at 8:10. "Selling was incomplete, write offs resulting, sales down". "Inventory write downs" were mentioned.

At 9:50 Natha tried to change the negative tone, or so we hoped, but failed with a very flat delivery of results. Natha mentioned "severance costs" at 12:20 and “slotting fees" at 13:30. It seems these fees are a great burden to JSDA. At this point we were hoping Natha would mention slotting fees in conjunction with International Game Technology (IGT), but it turned out to be wishful thinking.

At 16:20, "decreased licensing revenues" were mentioned, followed by "increased legal fees" at 17:10. It felt like our ears were starting to bleed in the 18th minute with every further word Natha uttered. More and more negatives! A "decrease in cash position" at 19:20 and then at 21:20 the year 2008 was described as a "year of transition and expect losses”. We cannot believe how horrid and hokey the Jones Sodas' Executives were in their presentation. There were no positives to be taken away; not a one. And at 25:30 a "three year transition" was mentioned. Oh my, oh my, JSDA needs a miracle.

Analyst Questions/Management Answers
35:40: Nicole Miller from Piper sounded as confused as JSDA's management. She wanted to tweak a new model for JSDA? Maybe she needs to drop coverage?

37:30: Mark from Stifel Nicolaus asked about "slotting fees" and after management stumbled through the painful truth, Mark answered "great". We were shocked by how this CC was developing. Both analysts seemed happy with the answers, but our ears bled more.

41:50: Alton Stump with Longbow asked whether retail space was at risk. “You will see us sort out the mix" was management’s answer at 42:30. We didn’t feel any conviction at all in that delivery.

45:10: Jaclyn from Lazard asked for any bench marks/mile stones for "success" and management said selling 7M cases in 2008 would be a goal. Management actually laughed at 46:25; they LAUGHED. A comedy developed and investors must rewind to this point and witness the incompetence of JSDA management. We don't ever tolerate management laughing at bad results.

At 51:58 "we are anticipating a loss in 2008" was reiterated by managment.
52:48 analyst Bill asked whether there ever was a real search for a CEO and management said "the four of us assessed we were working well together". The comedy continued. The only analyst we liked so far was Bill, as he seems to get it. Bill asked a relevant question and received a terrible answer.

The last analyst wanted clarity given to the numbers.. unbelievable. At 58:48 the same analyst asked whether management will buy stock. When they answered with a very tepid "yes", the analyst suggested "it would be helpful" in an upset tone. Okay, he scored some points there!

The Conference Call ended at 59:55. We can summarize our feelings as follows: One of JSDA's brands is "Whoopass". After hearing nothing but excuses on this soda Call, we advise our readers to hy-phe-nate that Jones brand to "Whoo--PASS", and not consider a single share.

No fizzle, no fun at Jones Soda. We give JSDA a score of 58% and a letter grade of F.

Thanks for your continued support, the Psychology of the Call team.
The S&P 500 closed at 1,273.3, just a few points above our predicted mark of 1,270. ( Markets tend to overshoot, so be happy that you're adhering to Commandment #2 "Cash is King"

The Market and JRJC

In the interest of preserving your capital, we encourage you to re-read our March 4 posting 'Munch Fear ScReaming in the Equity Risk Premium' ( For the same reason take time to reflect on 'The Psychology in the Upcoming Week's Data' immediately below. As promised, we will update JRJC on Wednesday, 12 March. Thanks for your loyalty to the Psychology of the Call and in the meantime, stick to the Eleven Commandments of Trading.