I have seen these various arguments against telephoto work with a smaller camera and a smaller format before, and they do not make sense to me. [Edit: one might relate to the particular way that live view works in the Olympus Pen models, changed in the E-M5.]
On size: omce the system has a distinct overall size advantage, the fact that the advantage os smaller in some situations (like when you need a tripod) does not nullify the advantage, let alone turn ot into a disadvantage. Also, when the system's size advantage comes in part from a smaller format (or to be pedantic, from smaller photosites and so higher resolution in lines per mm) then the telephoto focal lengths needed get smaller. In fact this is the place where smaller formats get there most noticable size advantage. I greatly enjoy carrying a light zoom that reaches 300mm, and does things with 4/3" format that would have needed 600mm or more with 35mm film (”or more" because the images are more detailed and allow more cropping than with film).
The issue of "imbalance" between long lenses and small bodies (mentioned elsewhere, not here) is irelevant to me at least: a long lens is supported from below either by a hand or a tripod, and either way, having less camera weight pulling down at the back behind the support point is no disadvantage.
I agree that composing telephoto shots on the rear screen is unpleasant, so I can understand your reaction with E-P1, and if I recall correctly, the Pen models do not apply IS to the image in the viewfinder whereas Canon SLR's with IS lenses do. The solution to that is probably using an EVF with stabilization of the live view image, which I believe Olympus offers for the first time in the E-M5, and Panasonic has always offered with its lens-based IS system.