pasadenaDC
Dryer sheet aficionado
- Joined
- Sep 22, 2008
- Messages
- 40
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:
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.