Wednesday, February 25, 2009

The Infamous Dead-Cat Bounce

Earlier today, we appear to have seen what many pundits have referred to as the dead-cat bounce. Having never seen a dead cat bounce and suspecting that no one but the most perverse of individuals would actually test whether a dead cat would actually bounce, I am not sure how anyone could coin a reversal like todays as a dead-cat bounce.

Seven trading days ago, on February 12th, the Nasdaq and S&P closed their sessions at 1541.71 and 835.19 respectively. Through this morning, the indexes (and investors) had suffered through six straight days of declines, taking the Nasdaq and S&P 9% lower. Looking at today’s sharp recovery on measurably higher volume, one may come to a variety of conclusions on the cause.

a.) The cause may have been Ben Bernanke’s Monetary Policy Report to the Senate Banking Committee. The Fed Chief, early Tuesday morning, suggested that if policy efforts “can steady the markets, restore some measure of financial stability,” then we may see an end to the recession and a start of the recovery towards the latter half of this year. Certainly a good reason to send the oversold markets sharply higher…
b.) It may have been short sellers taking profits after 20-40% declines in some sectors, particularly financials. As the initial wave of short sellers take profits, the remaining shorts become concerned and also begin to cover, creating a squeeze of the shorts and a stampede to the exits can eventually materialize…
c.) Finally, today’s rally may simply have been optimistic bulls anticipating positive results from the “stress tests” expected to be applied by the Treasury on 19 U.S. banks starting Wednesday

Although many dismissed Bernanke as being far too optimistic and dismissive of the real cataclysmic and dire state of the economy, these are the same individuals who choose to deny that the aggressive efforts of our current administration will have any effect in slowing the current economic bloodletting. The real cause of most recessions is the pervasiveness of fear. In today’s downturn, we have the fear of losing our homes, fear of losing our jobs … and fear of losing our life savings. This has led consumers to stop all spending and investing in fear of the perfect storm hitting their lives and marginalizing their families.

But Bernanke’s suggestion is that IF policy efforts can slow the value implosion in the U.S. housing market, if it can convince businesses to see a glimmer of hope … long enough to stop terminating every employee within earshot, then possibly the most powerful force in U.S. economics, the great consumer, may begin to hope again. Hope that they may be part of the majority of Americans that remain employed, hope that although their homes may still slip further in value, that losing their homes may no longer be a risk, and hope that the equity markets can once again be part of a diversified investment strategy, despite what certain Mad and Fast shows about Money on cable TV seem to be conveying these days.

This great HOPE is what policy efforts are working for, although many on the far right see this as an overreach by the far left. Governments are there to catch the weak when they slip, provide them some respite and then allow them to continue on their own. When the weak represents the entirety of the populace, then governments must be willing to increase the size of that safety net to unheard of proportions, ignoring the calls from the masses to let “things run their course.”

I’m not sure if today’s rally represented a belief that this great HOPE may be sparked in the coming months, but to ignore and dismiss the rally simply as a dead-cat bounce, a short squeeze or an over-anxious market response to comments from the Fed Chief is na├»ve and short-sighted.

Stock markets often speak volumes, for those willing to pay attention to the many signals it provides. Those who allow these powerful signals to become buried under their own rhetoric, often watch in disbelief as markets move against their “seemingly unshakeable logic…” Today’s signals included:
a.) Volume that far exceeded Monday’s light volume slide to index levels not seen since 1997
b.) Closes above Friday’s close for both the Nasdaq and the S&P
c.) Potential establishment (if an uptick tomorrow holds) of a double-bottom, often an extremely strong signal for optimists

It’s only been one day, so no need to start polishing off the bandwagon yet – the skeptics will remain on the sidelines, but for those of us waiting a long time for any hint of a positive, we’ll take this day any way we can…

Monday, February 23, 2009

Sidestepping the Great Depression

We live in interesting times...for five months now, the aftershocks of the collapse of Lehman Brothers and the bailout of AIG (NYSE:AIG) have taken the U.S. and worldwide markets sharply lower, while absolutely obliterating the banking industry. The initial reverberations of the Lehman and AIG news was a catatonic credit market and a fear-stricken consumer - both which resulted in businesses sharply scaling back operations to address lack of liquidity and the sudden absence of the voracious appetite of the U.S. consumer. The ensuing impact is an economic collapse that we are reeling from on almost a daily basis.

The Obama Administration is focused in doing everything possible to avert what many have called the coming of the second Great Depression. The strategies all come with fancy names which try and convey hope and calm. We have the Financial Stability Plan (formerly the Troubled Assets Relief Program or TARP), the American Recovery and Reinvestment Plan (better known as the 2009 Economic Stimulus Package) and the Homeowner Affordability and Stability Plan (known around CNBC circles as the "Bailout of my Neighbor" act). Over the next several days, I will attempt to analyze these different plans, all with a singular strategy of substituting government spending for consumer absence, and how they may go in achieving their lofty goals.

Any analysis should start with the biggest of all these plans, which at the current time is the $787 billion Economic Stimulus Package. An analysis of the different components of the 2009 Economic Stimulus Package - many which clearly appeared to have received a failing grade from a suspect populace - is useful and insightful. I'm sure many of us have watched the proceedings from the sidelines and have been left with only soundbites as to the different components of the package. But an analysis of any spending package, let alone one as herculean as this $800 billion monstrosity, which critiques the various parts (but ignores the whole) can easily find faultlines, as there is rarely a spending package that moves through a government office that is not a result of many hard-fought compromises.

The presence of significant tax cuts in a bill engineered by Democrats is an enormous show of bipartisanship and an olive branch to the right, but Republicans and conservatives alike chose to ignore this aspect of the bill and instead resorted to bickering and blatant attempts to win back votes lost through eight years of failed policies. As a fiscal conservative, I also had enormous issues with many aspects of the bill, but recognizing the abyss which the US economy is quickly sinking into, I felt it more responsible to step back and analyze the overall impact of any spending package of this magnitude at this time.

There are many debatable consequences of this bill, but one that is undeniable in any economic corner is that $800 billion dollars WILL MAKE ITS WAY into the US economy over the next two years. This will boost a sagging GDP by 3% in each of the next two years, send checks back to a public that has felt disenfranchised and ignored throughout this crisis, and provide real spending incentives across many socio-economic sectors. For this, the Obama administration should be applauded for "railroading" this bill through Congress as quickly as they have.

The reality is that there is no stimulus package alone that can turn around a $14 trillion economy - but if we can enact one that is large enough to buffer the enormous vacuum of spending that has occurred due to the immeasurable fear and distrust that exists in the US today, then we may have a chance. The Obama stimulus package benefits many segments of this country that are currently cowering in their corner and we need these segments to begin to believe again in the future of this nation.

Add to this effort the $2 trillion dollar leveraged boost provided by Geithner and team (hopefully with some sort of plan) and we can again hold out hope that the US will be able to raise its proud head once again.

Had we instead paused and debated the various inputs to the bill and attempted to arrive at a package embraced by all, an impossibility in a country as divided as ours currently is, we will have undoubtedly slipped dangerously further into an economic downturn that could make the last six months seem like the iceberg that barely nicked the Titanic.