Kass: Bulls Could Drown on the River Card

It's as if the bulls were dealt rockets (a pair of aces) in a Texas Hold 'Em poker match against the bears, who were dealt a weak 10 and deuce hand (one of the worst hands extant).

But strange things can happen (and usually do) in stocks and poker.

"In 1976, the World Series of Poker was only in its seventh year but was growing in popularity. Doyle Brunson was in the prime of his poker playing career and was gunning for his first Main Event title. Down to heads-up play against a final-table fixture of the day in Jesse Alto, the Doyle Brunson Hand would make its first mark on the poker world.

"Preflop, Alto raised with his unsuited A-J, an excellent heads-up hand. Doyle called with his 10-2 of spades. The flop was A-J-10, with two hearts and one spade. With the top two pair on a flop with lots of draws, Alto made a pot-sized bet. Almost certainly on an aggressive play intended to induce a fold from Alto, Brunson moved all-in with the chip lead! Alto naturally called and was a dominating favorite to double up.

"A 2 on the turn improved Doyle's hand but still gave him two smaller pair. On the river, Doyle spiked another 10 for a runner-runner full house and the title. The first-place prize money was $220,000 that year."

--Beat the Fish

Amazingly, the same occurrence happened in 1977's World Series of Poker championship.

"In 1977, Doyle dominated the field again to make a run at back-to-back World Series of Poker championships. Down to heads-up play with the chip lead against Bones Berland, Doyle was dealt the 10-2 again. Unlike the previous year's final hand, he was up against another trash hand in Berland's 8-5. Neither hand was suited, and neither player showed any strength preflop.

"The flop came 10-8-5 rainbow, giving Doyle top pair and Berland bottom two pair. Both players slowplayed their hand, and the turn gave Doyle the miracle 2 for a better two pair. This time, Doyle bet out, Berland raised him all-in and, of course, Doyle called.

"Amazingly, the 10 on the river gave Doyle another full house on the river to win his second consecutive WSOP Main Event with this antithesis of a power hand. His prize for the win was $340,000.

"Texas Dolly went on to poker immortality and the 10-2 was forever known as the Doyle Brunson Hand."

-- Beat the Fish

I have a feeling that in the 2008-2010 period ahead (like during the 1976 and 1977 World Series of Poker tournament, which also was coincided with a period of weak stock prices in the aftermath of the 1973-74 "Nifty Fifty" market wipeout), the bears will prevail in the U.S stock market.

"It never hurts for potential opponents to think you're more than a little stupid and can hardly count all the money in your hip pocket, much less hold on to it."

-- Amarillo Slim

Despite the view of an increasing amount of investors that the worst is behind the U.S. credit and economic markets, I expect the underdog bears' 10-2 deal (the Doyle Brunson Hand) will beat the favored bulls' pocket rockets (pair of aces) as a number of factors are seen as near- and intermediate-term headwinds.

Near term, a combination of generally reduced credit availability, a levered and spent-up consumer (vulnerable to the parabolic rise in energy prices), the dilution from an unprecedented amount of financial sector stock offerings, a still deteriorating housing market, and demand pull and cost push inflationary pressures (leading to disappointing corporate profit margins and profits) suggest that the 2008-09 forecasts are far too elevated and that P/E multiples are higher than is generally envisioned. Should these factors do sufficient damage by producing a stagnant economy during the second half of 2008, new stock market lows will be likely.

Intermediate term, a number of prosperity killers (and headwinds that used to be tailwinds to investors) are seen as legitimate threats to the stock market and will likely weigh on equities. These include high and rising inflation, a low dollar, higher tax rates, heavier regulation and trade protectionism, which could serve to produce an uneven and lumpy period of economic growth that will be difficult for corporate managers and investment managers to navigate.

"A man with no money is no match against a man on a mission."

-- Doyle Brunson

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.