Dead Cat Bounce?... Post from a friend

[pasadenaDC]

I sent a quick text message to a buddy of mine yesterday whose a trader at the CBOT (Chicago Board of Trade), with roughly ten years of open outcry and electronic trading experience. I asked him whether we're going through a 'dead cat bounce' or if we're staging a prolonged rally and have seen a market floor. Just thought I'd post some of my buddy Mike's email response, it was quite interesting:

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In terms of the stock market, there will be a pretty sizable rally after the stimulus plan is passed. As a trader who listens to fundamental economists, I do think that many parts of the package make no sense at all. The way things are written in the package makes our treasury the world's ATM. What Obama is essentially doing is borrowing money now, and letting inflation take hold to make the pay back cheaper. This is a big 'if'. Another big 'if' would then be unemployment. What's been happening in recent history is that corporations preemptively lay people off and re-hire the same talent for cheaper. These are companies that aren't doing so badly. This forces people to even take pay cuts as we've seen. Slimey? Yes. Good business? I'm going to have to regrettably say yes to that, too. This is actually how we got out of the last recession. Real earnings went down due to inflation and lower real wages, making company earnings look better. Now, the question then becomes: Have we hit a bottom? The answer is 'no'. Here are my signs of recovery: 1) Most experts are calling for unemployment to hit the double digits. Currently, we're right around 7.5%. Once we hit about 10% (even 9.5%) and then the number recovers convincingly to 8.5%, the economic ball will start rolling. 2) Watch the S&P500 more than the Dow. The Dow is TOO heavily weighted to the financial sector, and this sector may be the last to recover. The 12 month low in the S&P is 741. 750 is a pretty good place to add on a LITTLE BIT, because this may signal a floor. BUT, many in the industry (myself included) see this as a possible middle of the range value for the next 24 months or so. We may see the S&P hit the 600's, and range. We know that there is recovery when we hit the 1000 level again in 4 or 5 years. That means we've hit reasonable and steady growth over that time. 3) Watch oil and gold prices. Oil will trade at around a $50 to $60 equilibrium for a while during our recovery. This will mean that demand has gone up, but that's the price people will be able to afford. As for gold, it's not so much a gauge of inflation, as it is a gauge for uncertainty in the market. You'll see gold prices spike in rallies as well as in downturns. Anyone using gold as an inflation hedge is ill-advised. The strategy I'm using with my personal investments is that I'm going bottom feeding in the real estate market for a place to live. I'm not going to look at it as an investment, that's where a lot of people are going to get into trouble again, and I would advise against buying a home for the investment potential. I've already cashed out all of my stock accounts in late 2006 and early 2007, mostly since the market made no sense, and I told people that I saw this movie before. i put it into a high interest rate FDIC-insured savings account. My 401k was invested in only bonds and income stocks. The cash that I have will be used in super-aggressive growth funds when the above stars are aligned. After about 3 or 4 years of (hopefully 50% year over year growth) I'll then be allocating most of it out to diversify my holdings until I see signs of trouble again at the top. Just remember, when you see VH1 do specials on how the "fabulously" rich live, it's usually a sign that the end is near. The funny thing is, over half of the billionaires featured on that show are now in a lot of trouble. Oh yeah, we traders also take the approach that when a non-business publication puts a "hot" investment or money making idea on the cover, that's when we short it since that signals the end of the party. So yeah, Dead Cat Bounce due to stimulus plan. Oh yeah, and I'm kinda using my brother as a personal bellwether. Once he finds full-time employment in his field, that's when I'm going to buy back my shorts and implement my aggressive growth plan. I'll let all of you know when he does to warn you guys of impending recovery.

[TromboneAl]

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In terms of the stock market, there will be a pretty sizable rally after the stimulus plan is passed.

Just like the one today?

[73ss454]

Hey Al, he didn't say how long after.

[Nords]

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Originally Posted by TromboneAl Just like the one today?

Like all great stock-market predictions, he'll be right eventually...

[pasadenaDC]

Thanks for the thought provoking replies everyone. Old guys rule

[OAG]

So what he said was get out of the stock market 15 Months or more ago, buy CD's (FDIC Insured) and now wait for the bottom. I think that is what almost everyone sees "in the rear view mirror" and many wish they could have or should have done exactly that.

[FinanceDude]

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Originally Posted by pasadenaDC Thanks for the thought provoking replies everyone. Old guys rule

Traders are good inside guys to know, much like option guys, they are often the ones who "see the trend" before some empty suit on CNBC does.........

[CuppaJoe]

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Originally Posted by pasadenaDC ... Mike's email response, it was quite interesting:

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...Oh yeah, and I'm kinda using my brother as a personal bellwether. Once he finds full-time employment in his field, that's when I'm going to buy back my shorts and implement my aggressive growth plan. I'll let all of you know when he does to warn you guys of impending recovery.

Mike's brother is in what field?

[pasadenaDC]

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Originally Posted by CuppaJoe Mike's brother is in what field?

CuppaJoe, I'm not exactly sure. I know he was a 'professional' student for 5+ years and I believe he finally graduated with a CS (computer science) degree from a State university. But this was 3 years ago, so perhaps he was laid off and is now looking again for work. I assume in Chicago or thereabouts.

[pasadenaDC]

Okay, another reply I got from my buddy Mike re: gold as an investment (and other random thoughts from the trading floor). No one seems very interested, but I'll post anyways just in case

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To address the gold issue a little better, we have to differentiate Dollar Strength and inflation. We are seeing historic dollar strength relative to the Euro and the Pound Sterling. The Yen is also very strong compared to other currencies. These two situations should be EXCELLENT of the US, but alas, that is not the case. When we talk about inflation, we're talking about how much one dollar gets us. For instance, I remember a time when a dollar would get me a Snickers AND a can of Coke. That was a long time ago, and so the lesson here is that a dollar gets you less and less. Here's where gold comes into the picture. Let's take a very extreme example here: Russia declares war against the US for meddling in its affairs. They threaten to launch nukes at us, and the threat is very real. We all make a run for it. Some to Canada, myself and others are on our way to Cancun. If Russia hits the US with everything it has in its arsenal, there's no point in carrying dollars since the country no longer exists. On the other hand, if we're carrying gold bars, it still has value regardless of which country you decide to run to. Now, if you look at the historic gold charts, you'll see that gold prices spike in times of unrest and uncertainty. Take for instance the 70's. There was an oil embargo, US citizens taken hostage, and a world climate that was beginning to become more and more hostile to the US and the developed world at the time. Now, you'll see that during the 80's and 90's, gold went back down to the 250-300 level. We still had sizable inflation, but gold came back down to earth. The joke around here is that gold started its upward trend when Bush came into office. Let's face it, nobody was certain about anything while Bush was in office. We were all wait to see what he would bungle next, and so there was a lot of political uncertainty. The world hated the US, and now, we have a lot to worry about. Now, I hate for anything like this to happen to anyone, but gold is also used as financial insurance in the case that someone succeeds in taking out our newly elected president. Let's face it, racism isn't dead yet in our country, and the comparisons to Lincoln and Kennedy are a bit eerie if you ask me. On top of that, we are beginning to see that Obama is employing the "Quayle" tactic in picking Biden as VP. The man isn't very smart. Finally, inflation, economic growth, and price appreciation on assets TEND to all hold hands and move together. The real offset for inflation is asset appreciation. This tends to happen in times of peace and prosperity for everyone. These are the same times that gold trades much lower than it does now. Traders have been using gold as a hedge against losses in their portfolio, lately. The reason you hear so much about gold is it's a legalized version of the "pump and dump." Like I wrote in my last post, once the public starts jumping into the pool, the pros get out and take the water with them.

[W2R]

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In terms of the stock market, there will be a pretty sizable rally after the stimulus plan is passed.

Since the stimulus plan is supposed to be passed tonight or tomorrow morning, I suppose this means that finally we can all breathe a huge sigh of relief, sit back with a cold beverage , and watch as the sizable rally unfolds the market catapults upwards. But of course.

Hey, why not. I'd rather dream about that than about nearly anything else.

[pasadenaDC]

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Originally Posted by Want2retire Since the stimulus plan is supposed to be passed tonight or tomorrow morning, I suppose this means that finally we can all breathe a huge sigh of relief, sit back with a cold beverage , and watch as the sizable rally unfolds the market catapults upwards. But of course. Hey, why not. I'd rather dream about that than about nearly anything else.

I've found that enjoying a cold beverage should be a mandatory practice with no correlation to market movement. So drink up W2R, lest we have to wait for or until a market upswing!!

[W2R]

Well OK!! Though I must admit that in real life I don't actually drink (alcohol), and since I don't even keep diet sodas in the house, I'll just toast the potential market upswing with a big glass of cold, refreshing icewater.

[TromboneAl]

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there will be a pretty sizable rally after the stimulus plan is passed.

Maybe we can use this guy as a contrary indicator.

[laurence]

His explanation for his predictions would make for some entertaining reading.

[Grep]

"We are seeing historic dollar strength relative to the Euro and the Pound Sterling."

Seems he hasn't been around all that long after all, or does he just have a short and selective memory?

And just what bounce are we talking about?

I'd put him in the category of "well meaning and enthusiastic but, as is typical, far too self-confident," with some tin-foil thrown in for good measure.

[Gone4Good]

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Originally Posted by FinanceDude Traders are good inside guys to know, much like option guys, they are often the ones who "see the trend" before some empty suit on CNBC does.........

I know many, many traders and most of them blow. It's actually a pretty interesting thing to watch. A guy spends a year taking bets with other peoples money. 50% get blown up the first year and either move on to something else. Of those that survive year 1, 50% are up the following year. But losses in year 2 don't mean you get axed because you were up year 1. Most of the 1st year survivors make it to year 3. By year 3, a handful have flipped heads three years in a row and think they're the second coming and get paid like it. Some of the other folks have put together 1 or 2 good years and then try to flip to another shop for a guarantee and a couple of more years playing with other peoples money. A handful are truly awful and move on. But once you survive the early years you're in the club. I've seen guys lose hundreds of millions of dollars in several different years and they're still working as traders . . . earning 7 figures.

I also know a couple of guys who seem to be able to spin gold year in and year out. They're not the norm.

[TromboneAl]

I often think of the scammer who sent out thousands of letters, each predicting different results for a pro football game. Next week, he sends out new predictions only to those for whom the first week's prediction were correct.

By the end of the season, a few victims have received a correct prediction each week. To them the guy is a genius, and they send him big bucks when he offers to predict the superbowl.

[W2R]

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Originally Posted by TromboneAl I often think of the scammer who sent out thousands of letters, each predicting different results for a pro football game. Next week, he sends out new predictions only to those for whom the first week's prediction were correct. By the end of the season, a few victims have received a correct prediction each week. To them the guy is a genius, and they send him big bucks when he offers to predict the superbowl.

Why didn't I think of doing that? That sounds like a perfect scam. For all I know, it might even be legal.

[bow-tie]

Quote:

Originally Posted by Want2retire Why didn't I think of doing that? That sounds like a perfect scam. For all I know, it might even be legal.

W2R - I was thinking the same thing!