Focusing In on '09 while Dealing with the Scars of '08

Welcome back to Psychology of the Call as we provide our first 2009 insights! Allow us to begin with sincere greetings to all subscribers! May the New Year shower greater health, wisdom and wealth upon you, your friends and loved ones. With all due respect to the outgoing Vice President, it’s apparent that Dick Cheney & his team did not add the Psychology of the Call blogspot to their favorites list in 2008. Here's a quote from V.P. Cheney's live interview on Thursday, Jan. 8th: "No one saw Financial Crisis Coming." http://news.yahoo.com/s/ap/20090108/ap_on_go_pr_wh/cheney_interview Our readers were tipped off to the problems in the U.S. banking sector several weeks before Bear Stearns concussed the markets on that bloody St. Patrick's Day of March 17, 2008. You can verify the facts by clicking on the link below. Our post of 28 February, 2008 cited an insider at Goldman Sachs (GS) reporting on trouble brewing on Wall Street, upcoming lay-offs, and the legitimacy of what was left of the subprime market. The financial problems were black and white to us, our sources, and anyone reading in February of 2008. POTC even recommended shorting some investment banks, most notably buying puts on (GS) very early in the downward spiral. http://psychologyofthecall.blogspot.com/2008/02/foundational-crack-revealed-mass.html Here's how POTC called Morgan Stanley, five days ahead of Bear Stearns collapse (Morgan Stanley shares were trading just short of $40 before coming down to single digits a few months later): http://psychologyofthecall.blogspot.com/2008/03/gilligan-and-skipper-too-spotted-on.html Regarding the "foundational crack" in the banking sector, POTC warned three weeks ahead of Bear Stearns demise, "it'll take a lot more than carpenters to fix it." Ironically, although we called for an infrastructure plan several times in '08, we don’t see it as a panacea now like some in the media would have you believe. POTC is NOT calling a bottom in equity prices or a top in bonds, FAR FROM IT. The massive infrastructure plan announced by President-elect Obama's administration in recent days will take several years to pass through to consumer wallets. Stabilizing the fundamental and psychological deterioration will take many years, not quarters like the monolithic bullish talking heads believe. Even as the infrastructure money begins to flow into the hands of citizens, do you not feel more people will mimic recent bank behavior and hoard cash? We do. That scar from '08 will take more than an infrastructure plan and carpenters to fix. The extinction of all five U.S. investment banks means their ability to inflate asset prices up to 40X is no more, NOT a good thing as far as we're concerned. Leveraging power of 30X or 40X facilitated U.S. prosperity and incredible market liquidity for the past century, so forcing maximum leverage down to a federal mandate of 10X means cutting credit to consumers and businesses on a massive scale. The tide of public opinion has turned against Wall Street at a time when liquidity is needed. This paradox must be broken in order for the markets to begin breathing on their own again. A cyclical/temporary infrastructure plan will never come near the positive effects Wall Street had on financing for well over 100 years: forward thinkers take note. The death of investment banks is NOT a good thing for the financial markets from a liquidity/financing perspective going forward. For the most part (excluding acquisitions or ultrashort funds), anyone who goes long and holds equities will be disappointed come December 31, 2009, as POTC sees great turmoil ahead in commercial real estate. (This topic will be addressed in the coming weeks; you may consider buying SRS, our favorite buy as of January, '09; buy target $55-$60, sell stop at $40-$45 with profit target of $100.) The fact mortgage rates and energy prices have eased doesn't mean the wound of '08 will heal without leaving a lasting scar, or re-open and begin bleeding again ... Could some other left field event jar our markets in 2009; of course it could. After most felt the terror of 9/11/2001 marked a bottom, then came the accounting scandals from Enron in June of 2002. Do you recall that one-two combination? Most talking heads calling "bottom, bottom, bottom" in early 2002 were caught off guard and ended up losing fortunes. Bottoms are never formed as a result of the things we already know, but usually print after events the public never saw coming. POTC has stressed before that when a bottom sets in, it means most individuals have thrown in the towel and at least a year of boredom (sideways markets) occurs. We feel 2008-2009 could be similar to the disastrous years of 2001-2002, but in reverse order in terms of events. Despicable terror destroyed the two World Trade Centers in 2001, shaking the confidence of every consumer and investor to extreme lows, yet the equity market didn’t make a technical low until after fundamental accounting scandals were revealed at Enron, Arthur Andersen, WorldCom, and others in 2002 and beyond. So 2002 was a lot worse than 2001. Even IF you were to argue '08 fundamental lows have been reached in certain individual stocks and sectors, you cannot go all in after looking back at 2001-2002. IF some horrific terror event(s) unfolded inside U.S. borders in '09, then equity prices would shrug off all fundamental factors. IF the Obama administration were confronted with some terror event, just as happened to Bush the first year into his administration on September 11, 2001, the S&P index would slide through the old lows of 720 in a flash, and perhaps as low as 400 in an ultimate climactic capitulation. Understand it took 1 year and one month for the S&P to ultimately bottom below 800 after 9/11/2001. Here's a chart that shows 10/10/2002 marked the bottom: http://bigcharts.marketwatch.com/interchart/interchart.asp?symb=SP500&sid=3377 IF you take the previous lows in October 2008 and add one year and one month that takes us to November of 2009. POTC believes these are good reasons to follow the 11 Commandments, but especially #2. Strongly consider being overweight cash until a meaningful breakout of S&P above 1,000 occurs, but we do NOT see it happening in 2009. Making money in the market involves being very nimble, quick, and open minded. It also calls for a multi-pronged strategy. Maintaining a 15% short position in your portfolio with ETFs like SRS makes good sense in 2009. What looks cheap today can be expensive tomorrow, yet many investors and traders fall in love with their holding(s) as the investment(s) trend much lower or much higher. We have been guilty of that sort of stinkin' thinkin' of holding onto losers and winners before, shame on us and shame on anyone who doesn't set sell stop limits or take profits! (Hats off to Fast Money's Jeff Macke, who often admits to being stopped out of a falling stock. Please use that strategy with every long position you have in 2009. Don't fall in love with any of your holdings… stocks & options are only paper instruments, with NO emotions/feelings.) Until an individual admits, accepts, and employs the short sale component into his/her investing repertoire, that individual will be let down more often than one who has evolved and understands the significance of that fundamental arrow. Best of the best in 2009! Thanks for your motivational emails since the last time we stepped foot on the Island Where Forward Thinkers Evolve (esp. Tommy S.) May your New Year voyage be safe from the churn of the stormy seas; now for some music video relief, compliments of Youtube: http://www.youtube.com/watch?v=lJZ5YZ4qmD0