Trouble Filled Waters for Traditional Buy & Hold in '09; CAUTION URGED

Sunday night greetings from the Psychology of the Call team (POTC),

If you've ever been on the receiving end of a "heads I win, tails you lose" coin toss, you understand the type of equity market we envision throughout '09 for buy & hold investors. The unfortunate demise of Wall Street's historic investment banks may soon be followed by the traditional retail broker-dealer model's obsolescence. Our grandfathers' C, GM, and GE are collapsing by the minute and a brutal struggle for survival is raging in the capital markets. Deleveraging of assets at fire-sale prices is bad for equity holders, yet it's worse when no buyers for these divestitures are to be found. Unfortunately our government insists it is part of the solution by doing the same exact thing that got us in this mess, hurriedly attempting to pass a bill that would spend zillions of borrowed dollars. A full 75% wouldn't kick in until after 2010; solution you say, we say simple political nonsense.

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Only skilled forward-thinking traders will survive the whipsaws ahead, as volatility works to gut account values as the bear growls and flexes his deadly nails. As horrific as all this sounds, there will be a way for forward-thinkers to profit in '09....

POTC pleads with every reader to make a resolution "to better understand volatility and profit from it once or twice a week." Embrace violent swings and take advantage of them by setting tight S&P pivot points to trade stocks off. Only trade highly liquid stocks/options, with small initial positions and tight stop limits (defense is a must). POTC predicts fewer solutions than fixes from the government as the days, weeks, and months of '09 evolve. Here's a brief forward think...

The anniversary of that bloody St. Patrick's day of '08, when Bear Stearns opened down at $2.00 is only five weeks away. Such anniversaries always bring back painful memories, especially of the buy & hold misery.

POTC predicts the S&P will retest the November '08 741 level between March 6th and April 15th. So our medium-term equity market forecast is dismal; be happy IF the market rallies in the days ahead, as we are very confident in its downward spiral by the tax time deadline. -

The process of restarting the deepest financial model in modern human history will take longer than most economists and politicians forecast. We understand that politicians and economists often have vested interests attached to their projections/models, therefore we interpret them with a copious measure of skepticism (grano salis). Now for some quick stats as to what the brain trust who shorted subprime predicts:

Goldman Sachs' economists foresee Q1 '09 Gross Domestic Product (GDP) to come in at -3%, an improvement from -3.8% actual Q4 '08 number. They have Q2 pegged at -1% and then paint a more rosy picture in Q3 & Q4, both at +1%, got that? The most respected name on the Street has the economy expanding/improving every quarter until Q4 '09, which is the same as Q3 '09?

POTC found this perplexing and foreshadowing more economic problems ahead. How could Goldman rationalize the July-August-September quarter to be the same in terms of GDP as the October-November-December quarter, where Thanksgiving travel, Black Monday sales, and all the holy-days of spending sprees and inventory ramps lead us into the Happy New Year. Or is Goldman's rationale of a slowing Q4 spot on, giving forward-thinkers ammunition to use to their trading advantage. We think that is the correct interpretation as you dig deeper into Goldman's 2009 & 2010 unemployment predictions...

The U.S. ended 2008 with a 5.8% unemployment rate. There are many who do not believe the reported rate is a good real measure since some unemployed individuals never officially register for unemployment checks or exhaust their benefits without finding work, thus getting lost in some mystery ratio. Perhaps this ratio will be talked about more as our government becomes larger, spends more dollars, and focuses more time on extending unemployment benefits, rather than creating real jobs through cutting corporate tax rates, thereby allowing the wheels of capitalism to grease themselves. After all, nobody is ever hired by an unemployed individual, only by small businesses and publicly traded corporations that have confidence and access to capital. All those for tax cuts instead of a bloated government bureaucracy say "I"

Goldman estimates the unemployment rate to be 8.4% by the end of '09, and will worsen to 9.3% by end of 2010. As forward-thinkers we notice another dark cloud in Goldman's predictions. IF they are correct that Q4 GDP will not beat Q3, and the unemployment rate in 2010 will be greater than 2009, that's a grim and compelling argument against holding any equity positions long. Here's what you're facing IF you jump in to the dangerous & bottomless looking Bear pool; the dirty waters of unemployment: http://www.briefing.com/Investor/Public/Calendars/EconomicReleases/employ.htm

With all due respect to Goldman's economists, POTC believes that unemployment will be 50% greater at end of '09 than '08, so 8.7% at a minimum. The latest reading for January came in at 7.6%, and that was up from December's 7.2%. History shows that more temporary people are hired in December for Christmas and other holy-days, yet some economists argue this year was an anomaly since so many retailers were struggling with credit and inventories. Is it possible retailers did not hire as much and thus did not shed as much? IF that were to be true, Goldman's and POTC's forecasts could be very off. We can only hope for the best, yet forward-thinkers must arm themselves with these trading nuggets. IF the unemployment rate were to surprise in either direction on March 6th, the reaction in equities will NOT be a one day event, the reaction will be good for a sustained 10%+ swing in either direction for at least two weeks.

POTC believes that market direction for '09 will occur on March 6th and April 3rd, so heed the warning and set-up small trades with tight sell stops accordingly. We do not see a sudden 180 in unemployment from March to April, only exacerbation of the trend/cycle, and we are very pessimistic. Perhaps our pessimism will motivate some of you contrarians to take the other side? That's why we never claim to be expert economists or to be right every time, far from it. POTC only offers our most educated Psychological Financial Fusion, and we ask you to fill in the blanks.

We know the spiral of unemployment will eventually stop and bounce, as everything in nature eventually hits some kind of bottom. It could be well into 2011 where the unemployment rate strikes some exhaustive point, yet the effects of the sideways equilibrium move and retest could be more painful for equity holders than today's anticipatory optimism. We believe Goldman Sachs is guilty of being overly optimistic on GDP and employment, and the consequences of the brightest being wrong could be ugly for accounts at traditional broker-dealers who still believe in unicorns.

When and where the unemployment spiral stops is open to debate, yet POTC sees no real/meaningful economic impact for most equity holders even after it bottoms. Let's assume it occurs in 2010 and Goldman is spot on at 9.3%. Forward-thinkers have to understand the final bottom will be smoothed due to effects from larger government and therefore more mediocre type jobs.

POTC believes there is NO substitute for lower tax rates and thus greater capital in the hands of entrepreneurs. Research & development (R&D) is something a bigger government chokes off, and until the citizens of this nation understand the paradox of "I'm from the government and I'm here to help you", equities will be trapped under a thick sheet of ice.

Without pointing fingers at either party too quickly, both are to blame lately. Here's a clip from President Reagan, who President Obama has admitted to respecting more than ex President Bill Clinton in public. President Reagan understood the government's role, and his legacy will only explode during this extreme political/economic paradox: Please forward to the 5 minute mark and listen closely until what is spoken at exactly the 6 minute 9 second mark:

http://www.youtube.com/watch?v=IleiqUDYpFQ&feature=related

Although this video is aged, it's message is timeless, and we urge President Obama's administration to heed Reagan's warning, or else take a huge risk of being a one-term administration. The American people will never embrace a larger more controlling government; after all our greatest Fathers/pioneers stated these three words, "we the people", NOT "we the government".

Due to the recent bailouts and hurried spending bills, the United States has strayed from the path of true Capitalism. Raising taxes on successful small business owners and individuals making around $200K or more is ludicrous, ignorant, and dangerous.

Punishing entrepreneurs is not what this nation needs during this developing crisis. This nation needs a leader to emerge from the Obama team who will convince him to shrink the government and lower small business & corporate taxes ASAP. It is after all corporations and small businesses who are responsible for creating high paying jobs and this extends our leadership in medicine, computer software, and other manufacturing technologies, patents, and intellectual property. We the people, NOT we the government must be reinforced.

Imagine there was a park near your home that had two seesaws, one 15 feet in length and the other 5 feet. If you enjoyed the exhilarating ride on the 15 foot seesaw for many years it would be very unfortunate if city managers eliminated the 15 footer and added ten 5 foot seesaws instead. Boo-hoo many would say, but the ones who rode the only 15 footer would be sad, and ironically, only the ones who never witnessed or rode the 15 footer would be excited to ride the 5 footers all day long. So although more people will eventually ride the 5 footers since there are ten of them, only the ones who rode 15 footer will truly understand the "bad change" this has caused. Bear with us...

When the unemployment rate finally bottoms, it will have a similar effect. A great many of the venture capitalist/dare devils who experienced the 15 foot seesaw will no longer come to the park, and the ones riding the 5 footers will flourish. If this administration continues down the path of not rewarding success but rewarding failure, it will create a park with millions of little seesaws in order to make the masses happy. The risk part of the equation will be lessened, therefore the ride/return is expected to be lower. Buy & hold equities in '09 anyone, not us!

Expect some naive economists/people/investors to cheer when the unemployment rate begins to improve under this administration, but forward-thinkers will be prepared and will know better. The smoothing effect of more government jobs will not fool us. With passage of anti-entrepreneur policies, the only betterment that can result is in more mediocre government jobs; far from the American dream we've come to enjoy for well over 100 years, albeit cyclical. The United States and world has always prospered with more Wall Street financing and less government interventions/manipulations, period.

In addition, the authors of this latest $800B bill admit it won't have much impact until after 2011, and that almost takes us to the next presidential primary! POTC would prefer to see this administration not pass this bill and instead cut taxes across the board for all tomorrow. Corporate tax rates for banks and other struggling sectors should be frozen at zero until real growth in GDP and employment comes back. We are not excited by any growth due to the smoothing effect from a larger government workforce. President Obama should show us what real change is, and that kind of change hasn't occurred since the late President Ronald Reagan. POTC reminds forward-thinkers, "Government is not the solution to the problem, government is the problem".

POTC retracts our praise of ex Secretary of State Hank Paulson, and criticizes ex Presidential candidate Senator McCain and ex President George W. Bush for passing the first $700B bailout, shame on them. IF President Obama was for real change, he would stop the spending madness and allow the ship of Capitalism to right itself. Just as in any survival experiment, the weak go extinct and the strong thrive; capital markets are no different Mr. Geithner.

Goldman Sachs publicly said they are close to giving back the $10B of TARP. Perhaps the new name and acronym should be simply "TAR", it makes a lot more sense now that a little time has passed and we know some institutions did not even need it!

The government has now taken center stage and that's tragic for the stock market. Although we warned that regulations were on the way after Bear Stearns collapsed, we must admit we didn't envision anything this nasty.

Unless the message out of Washington takes a 180 in the next few days, the only change buy & scold equity holders will have in '09 will be loose coins jingling in their pockets (oh yeah, make sure your pockets have no holes). POTC is very bearish on holding stocks throughout '09 as the witch hunt against Wall Street is out of control. When a U.S. President goes on public tv and warns Wall Street that the time for making profits is not now, the capitalistic compass is broken; not shattered, but definitely broke.

The only rewards to come from equities in '09 will be from strict adherence to trading the most liquid stocks based on maximum pain swings in S&P, trading smaller, and setting up tight sell stop limits. We will attempt to guide you through these filthy & treacherously dangerous bear waters, because if you're not careful, your portfolio value will get mauled. Speaking of malls, watch out for Feb 23rd Monday after close: retail REIT giant GGP will report horrific news that will send shock waves throughout the REIT sector, esp retail. GGP's report may well have you singing the praises of going long SRS again and or shorting/buying put options on Sears Holding (SHLD). POTC has noticed many troubling developments at SHLD.

The Psychology of the Call team thanks every forward-thinking subscriber for taking the time to read us and for contributing through emails. The Island Where Forward Thinkers Evolve mission is to keep you away from the mortal claws of the bear, and only through Psychological Financial Fusion will we have the courage to dip our right toes into these murky bear waters. We look to celebrate in 2010 regardless of what this administration cooks up; good, brilliant, mirage or sabotage. Here's some music video relief from some venture capitalists, native New Yorkers: http://www.youtube.com/watch?v=-sbqIyeed4g