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The 2nd quarter of 2009 begins in two days so I thought

I would look back to compare my expectations for the year with what has in fact
transpired so far. Earlier comments are quoted in italics (written Jan 2, 2009) with current
remarks in normal font.

2009 will be quite different. The panic has ended, though it could reignite, as positions
were largely liquidated by leveraged funds and institutions before year end. Furthermore
the natural optimism of a new year, the extraordinary optimism attached to the incoming
Obama administration, and finally some effects of the massive monetary stimulus
initiated by Fed and Treasury programs put in place beginning in August should coalesce
to create a more positive psychological environment for investors. This will be a year
where sentiment will be more important than ever.

The coalescing of optimism did not occur as I had forecast. There were feelings of
optimism coming into the new year and the new administration but much of those effects
were felt in December 08 as the market bounced from the November lows and became
the consensus view by January. Plus that optimism dissipated quickly as missteps in the
appointment process mostly in the form of repeated tax problems by administration
nominees gave a strong impression of ineptness and squandered the expectations for
change in the politics of self interest. Late in the quarter a series of economic statistics
came out better than expected ( not actually good , just not as bad as anticipated) and
helped fuel a rally from very oversold levels. These may be the first signs that some of
the Treasury and Fed efforts begun in late august have been in place long enough to start
having some minor effect. Monetary stimulus has long been considered to require 6 to 12
months before results are evident. The media driven notion that steps taken in September
and October would begin to show up in November and December were wildly
overoptimistic and irresponsible. But now we are far enough away in time that some
result from those actions could be possible. In any case the last 3 weeks have seen a 23%
rally in the SP 500 and a mild improvement in sentiment.

At Infinium we have always believed personal psychology is the most important


component in success. This year group psychology will be just as important. Three
trillion plus dollars was pulled back in to money funds and probably equal amounts to
bank accounts and other non market exposed mattresses. Will confidence or greed for
yield be enough to start dragging that money back into the market? Or will continuing
negative economic news and ballooning unemployment maintain a level of fear that
continues to depress money velocity? That is the pivot point for the market and the
economy. The positive in this for us is continued volatility and opportunity for intelligent
risk taking and edge collection.

Changing fearful sentiment enough to bring back risk taking is still the pivot point for the
economy. The velocity of money collapsed in 2008 and until money flows stop moving
into cash equivalents and starts seeking return the economy will not recover. At the lows
in late February and early March one could pick up any publication and read about the
death of capitalism or the end of buy and hold. Pessimism was rampant and the almost
daily spectacle of name calling finger pointing and spitefulness of the retromingent gas
bags in the national legislative bodies confirmed that nothing constructive could come
from Congress. All of this should be positive for market makers who benefit from fear,
confusion, and volatility.

Theme Review and Update

Big Themes

Reflation trades still good. The central banks will continue to fight deflation longer than
necessary and now fiscal stimulus will be in place as well. Trading opportunities will
exist in short versus long rates, spreads between treasury and investment grade and high
yield bonds, forex crosses; also individual stocks and equities that benefit from or are
harmed by specific pieces of stimulus legislation. I still believe this theme is solidly
intact. The government will still be focused on restarting the economy and achieving
employment growth using every monetary and fiscal tool they have. Trades
constructed to exploit reflationary efforts should have the wind at their backs.

Country Indices outright or spread based on differentials in growth estimates or policy


proposals and national financial solvency. Individual country markets should be less
correlated than last year offering spread opportunities.

Commodity trades will be more differentiated than last years correlated boom in the first
half and even more correlated crash in the second half. Examples are: precious metals
as the only not currency specific trade, grains on weather and carryover. base metals and
oil on rising demand from infrastructure projects fueled by government stimulus. So far
in 2009 correlations have remained high but I still expect more divergent behaviors
to occur. Ags will reflect growing conditions, energies will respond to global growth
expectations and industrial commodities will move with China and emerging
economies where infrastructure growth is highest.

Politics will play a much bigger part of the action because of a new administration and
one sided Congress rather than just bluster surrounding the election contest.
Infrastructure companies, utilities, autos, healthcare and pharma are all likely to be
heavily affected by legislation. Type and quality of fiscal stimulus proposals will push
the debt markets around. Geopolitical policy will move currency, debt and country
indices. Unfortunately politics will be more important than I feared. The somewhat
centrist posture Obama demonstrated in December proved illusory and a far more
socialist agenda has emerged in his legislative proposals. Any sense of bi-partisan
co-operation has evaporated. Republicans with reborn sense of fiscal conservatism
will fight every move to increase spending. The Republican opposition will of course
be viewed as entirely political since the party has no credibility after their
regrettable fiscal behavior earlier in the decade. Prepare for a lot of whipsaws as
any politician or administration official with a microphone in his face will have the
power to move the markets when he talks out his ass as they so often do.

Specific Theme s( as of beginning 2009 )

Infrastructure stocks that operate worldwide based on stated stimulus plans in the US,
China, Mexico, Brazil, and India, Europe likely. I still like this theme but focus on
global companies rather than domestic as the infrastructure portion of the Obama
Pelosi budget had a much smaller portion of the spending in infrastructure than
anticipated. Scratch Europe from the list.

Precious metal are the currency alternative in an era of competitive debasement of paper
currency. Platinum is outperforming. Gold still the only alternative to world wide
currency devaluation as countries rush to avoid having a strong currency.

Strong balance sheets versus cash poor companies. Still a good strategy. Add an
emphasis on global presence especially in Asia and emerging markets.

Fed will hold short rates low to press for shrinkage of quality risk spreads. This is still
policy but spreads are not coming in very fast right now.

China relative strength China is showing signs of life and is likely to lead any
recovery.

Long corporate and high yield bond funds outright ( these have had a big move during
last week) and spreads of etfs of different underlying quality and maturity length. Early
January saw corporate versus Treasury spreads narrow some but that has stalled
some. One has been able to trade discounted closed end funds holding corporate
bonds and earn a good yield while waiting for risk spreads to narrow provided one
enters the trade when closed end discounts are high.

Add a long commodity currency short Japanese Yen specific theme.

Conclusion

I do not expect nearly as much high correlation or so many enduring trends as 2008
because I believe positions are smaller and there will be more crosscurrents among
trading instruments. I do expect significant opportunities for the alert. Surprises are
likely to come from geopolitical conflict (Russia – Ukraine), legislative proposals after
the first quarter( in the 1st qtr appalling proposals), state and municipal finance(
California), and crop failure, failure of large European banks tied to credit default
swaps and or the default of eastern Europeans on Swiss and Eurocurrency loans.

I do not have much to add to the earlier conclusion. Please feel free to express
disagreement with my opinions.

Bruce Lawrence

Global Strategist

Infinium Capital Management