Capitol Hill Blue Forums Political Issues Finance, the economy & Economics Dead Cat Bounce

Micro snapshot of a micro economy

Sales have increased in my shop over the past few months, Q1 is definitely up over Q4 last year on a month to month basis. People aren't investing in big ticket items, but they are buying, and while I'm still afraid to breathe too freely, I am at least avoiding anxiety attacks<G>

My own tiny investment is also looking better. I, too, hope that I am wrong in my pessimism, and will end up looking "the fool", especially after my latest prognostication of the DJ going to 5000.

As I see it, any recovery will not come from a poll about consumer confidence, but from the bottoming of the market. The recent Fortune analysis of the top 500, shows a drop of 84% in earnings last year. I believe that the "real" value of a stock will be established on the basis of a comparison to the 2007 earnings or previous peak , not by exceeding a revised earnings estimate or by comparison to the all time low.

The market is still being influenced by the activity in trading, more than by the confidence in investing. My guess is that chartists have not yet adjusted to the huge drops in bank and auto stocks, fo example. Consider the effect of a $.30 change in a stock that was selling for $30.00 18 months ago, and the effect on that same $.30 when the stock is now selling at $3.00. It's the penny stock effect.

I have a good friend who was tempted, and then bought Fannie Mae stock when it went to $.50 a share. He has made 50% since.

I have a very few accidentally owned shares in Morgan Stanley (from a merger), and just received their annual 250 page statement. With my admittedly weak analytic skills, I could not find good reason to be confident about the balance sheet.

Yes, I realize that this is not a quantitative analysis, but then neither does the consumer confidence scale represent an actual measure of underlying stability.

I believe that the real value of the market rests in the value of bonds. The question that gets swept under the rug in analyzing the true value of the market, is that of bond value, and even more, is the question of who owns those bonds.

As of today, the bottom of the market in financial products is not apparent to anyone of stature. Unless, and until there is a measurable base, I'll continue to tread water.

I'll leave with this question:
What happens to the stock market, if major banks are nationalized?

Sharing this Forbes interview with Nouriel Roubini:
Roubini
He is my current guru.

I noted two things that seemed new to me.
First, that the he seriously questions some of the IMF loans to countries with unstable economies. This appears to be more than the usual warning.
Second, that he worries that one of the likely side effects of federally guaranteeing the leveraged sale of questionable assets... a main Geithner plan basic... will likely end up with trading of bad assets in order to transfer the risk directly to the government. Given the recent history of tacit collusion, My guess is that this is not only a possibility, but a foregone conclusion.

Unless and until banking is temporarily taken out of the hands of the existing management, I don't think that we'll even see another dead cat bounce.

From WSJ

A current update Opinion Page Article excerpt:

-

I was perusing the news over at Bloomberg, com:

http://www.bloomberg.com/?b=0&Intro=intro3

and I came across this headline in their breaking news column:

Retail Sales in U.S. Unexpectedly Drop as Unemployment Cuts Into Purchases

Unexpectedly? And they are paid money to write this sort of stuff?

One can only shake one's head in disbelief.

-

Current info, on Dead Cat Bounce....
Bill Bonner Article August 10 2009

It's pretty obvious that the bounce in the market is more than most people expected. A 50% increase over the lows, has helped many of the people who were "trapped" with investments they couldn't get out of without paying taxes.

Here are a few things to remember before "irrational exuberance" sets in again, brought to you by Gloomy Gus.

- the price/earnings ratio is very high (compared to stable market periods) at 18.6
- most reporting companies admit that current profits are based on severe cost cutting, to include restrictions on forward looking plans
- market volume is very low, reflecting that most trading is coming from brokers.. retail investors still on the sidelines
- housing, jobs, have not reach "lows". cheerleaders treating a slowing of losses are premature.
- the actual cost to the economy has not been tallied. spending continues unabated, with no indication of controls, any time soon.
- toxic assets have not been addressed, and proposed unwindings have failed miserably.
- second level housing repo's don't kick in until October, and commercial real estate foreclosures don't being until 2011.
- FDIC and PBGC reserves will both run out before the year is out, with no plans yet in place to handle this.
- there are no national studies that currently address the status of State and Local Community (city and town) budgets, and the loss of federal and local taxes is only beginning to be addressed (besides the high profile California, Michigan and Nevada problems).

Finally, and perhaps most importantly, whatever rebound the market has had, is coming from the Financial Sector. When one third of the economic positive activity is centered in the non-productive "money" part of the economy, it's a sign of serious GDP failure.

Gloomy Gus is now in the minority, as the vaunted Guru's like Nouriel Roubini and Paul Krugman have now equivocated, and are tiptoeing around the "cautiously optimistic" theme.

I'd like to believe that the silver lining is shining through, and I won't mind being proved wrong, but FWIW, I intend to be very cautious with my own dwindling money supply. This despite the reminder that $100,000 invested in Citigroup on May 9, 2009, would be worth about $375,000 today.

One last point... When the economy does rebound, we're not out of the woods, because that will be the beginning of inflation.

This is just an opinion, which I would be happy to revise based on any reasonable data.

BTW... my bank made history on August 14, by being the biggest Bank Failure of the year... (sigh)

My Bank is the Royal Bank of Canada(RBCUSA) So I am taking some small comfort that maybe just because it isn't Primarily an American bank it may remain stable.

Correct me if I'm wrong but isn't the financial sector the one the government has spent literally gazillians to keep afloat?

I'm gloomy right along with ya, Gus. There is still money to be made in the stock market but as you have pointed out it has risen for all the wrong reasons. As the title of this thread implies, the cat has just taken a bounce, it's still dead.

Bump

It's why I don't get into the market.

So, whaddya think, Ardy?

The only reason I can see that makes sense to me, is that none of the bank activities that got us into this, have had any new regulation at all. The same problems (though toned down a bit) that existed last year, exist today. In lieu of investing in businesses, the banks are still heavily into hedges, and derivatives, especially in the commodities markets, and till taking place in dark rooms.

The other question that I have, is addressed in this recent post, regardign readjusting portfolios, and more importantly the question of how Japan, China, and most of the European Countries will be looking at refinancing of the short term Federal Debt
Here.

It looks like March and April may be perfect storms... refinancing of the federal debt, the second wave of house foreclosures, and the start of the commercial real estate problems. Also, local government budget shortages will be adding pressure to the markets.

Looks to me as if Geithner is following his word about doing whatever it takes to keep inflation under control. We'll begin to see some clue to this by watching the short term Fed Rate.

I just write based on what makes sense to me. I have buddies that I gave bad advise to... about getting out of their funds last March. They ignored me, and have recouped about half of their loss. I'm less adamant about what's going to happen in the markets... BUT... I don't see any guru who is doing a great job in long term planning, either.

I'll give ya the dead cat bounced pretty high, but I feel pretty sure that it will fall back... I'd love to see a recovery, but before I buy in to it, I'd like to see some pretty strong reasons to offset the concerns already voiced.

Above all, I'm not backing off on accusing Geithner and Bernancke et al, of burying America in a bottomless pit of debt.

Do you believe the recovery is real? I'd like to see some rational arguments to believe Obama who indicates we're on our way back.