ultranomics

False hope and bouncing cats?………..TK elaborates……..

Are you sick to death yet of the credit crunch/subprime crisis/global meltdown/worldwide recession ? Have we missed any of the Armageddon terminology being used these days? Probably – so please, email us with your suggestions and we will publish a full list in the next Ultraletter.

The thing is, the current situation unfolding across the world is the worst of its kind for a generation. This one is the big one – a recessionary storm of tsunami-scale proportions. Yet tell us, dear dedicated readers, does it feel that way to you? Deep within are you feeling the fear and the panic? Do you lie awake at night and feel sick through the day?

For those currently threatened with repossession or job loss, the answer to this question will undoubtedly be yes. Yet for the vast majority of us, we suspect that it still feels like just another scary news story, albeit one that has been going on for longer than most now. We know something bad has happened and we can see that prices of houses in our street have fallen a bit. But nausea and panic? …..Not really.

Take for example the stock market. After spending the first half of 2008 well above the 12000 mark, the Dow Jones Index fell to a low point of 7552 on Nov 20th. Yet since then there has been somewhat of a retracing and the Dow Jones ended the last week at just over 8400. Overall this was a positive week for the stock market, despite President Bush (fresh from dicing with the deadly dinner shoes) agreeing a multi-billion bailout for the obviously terminally-ill american car industry, and in spite of the desperate rate cutting by the Fed to a record low of 0.25% with the promise to print as much money as needed to bailout the nation, prosaically called ‘Quantitative Easing’.

So whats going on here? Is this the ‘dead-cat bounce’ everyone talks about in stock market crashes? Or has the whole crash thing been overblown meaning this is a great buying opportunity which the savvy buyers are taking full advantage of?

There is no doubt that if my pet cat was thrown from the top of the Empire State Building and then observed to spring back up off the pavement (sidewalk) – there would be a truly heartfelt impulse to believe that the pet had survived the fall. Yet one’s intellect would still be the best judge and we would realise, if we were sane people, that more than likely the moggy is indeed dead.

Unfortunately, the share traders and financial pundits out there are still listening to their hearts right now. They are hoping against the odds that tiddles the cat is still alive and has merely sprained a cat-ankle which is already on its way to getting better after a few shakes of the leg.

We on the other hand, remain with yellow pages in hand, looking for the number of the nearest pet cemetery.

You too should be very wary of this bounce. This is danger territory friends – a classic post bubble bounce. Much of it is down to technical traders trying for some short term gains. There are also short sellers in there, covering their trades. But also, average people still have hope left in them. They still remember the good times. Something in them thinks that the good days have just taken a breather and no doubt will be back again some moment soon. There are those who are counting on Obama doing a magic trick in early 2009 and lifting the economy with his bailout initiatives. The recent decline has not been internalised. People still view it all as some phenomenon that is in major part affecting those other than themselves. They look pitifully at their poorer neighbours who are obviously feeling the pinch. So the fall becomes a ‘buying opportunity’. The financial pundits are complicit – they tell us that stocks always go up in the long run. While this is no doubt true, it still doesn’t mean this is the time to pile in nor does it inform us as to how long the long term might be. The element of ‘risk’ is perhaps still being misunderstood at this juncture.

These ’sucker rallies’ happen in bear markets, we all know that. We are still too hopeful and curiously watching the show, chatting about it, considering whether or not to make a ‘play’ or sit it out some more. We see the daily doom, the companies in strife, the unemployment levels rising and the repossession levels growing. But still the worldwide indices are holding their nerve. We would humbly suggest that weighing things up in total, it is not worth taking upwards bets at this point, even though there may be some sorely tempting rallies in the next 6 months.

If you really believe in buying and holding, and do not mind the long term being more than a decade then we are sure that buying into high quality best-of-breed companies will work out well over that time frame. However if you are aiming for an investment span of 5 to 10 years, then be exceedingly careful with your selections.

Personally we are going to wait until there is blood on the streets. When ’stockmarket’ is a dirty word and you can not tolerate reading the financial headlines. When everyone has finally given up on discussing the credit crunch and the global recession. When internalisation has occurred and the regular guy has fully grasped that this situation is hanging like the sword of Damacles over him and his family. When there is true panic. That’s when we might start looking for our long-term stockmarket buys.