Bounceback or dead cat bounce?
We’re sure you know what we’re referring to.
It’s got nothing to do with animal cruelty.
A dead cat bounce is a way to describe a market when stock prices bounce after a big fall.
They call it a dead cat bounce because sometimes it’s only a brief bounce before the stock price falls again — much in the same way as a cat would (we assume) ‘bounce’ off the pavement if dropped from a great height…but then fail to get up again.
So, after the Australian share market’s 65 point fall on Tuesday and 54 point gain yesterday, are stocks bouncing back from the low with further gains to come, or is it merely a short-term jump before stocks resume their downward trend?
The overnight numbers from Wall Street provide some clue. The Dow Jones Industrial Average fell 1.2%.
There’s no doubt there are a bunch of problems with the world economy.
We won’t cover them all again here because you’re probably sick of hearing about it. To be honest, we’re sick of writing about it. We’ve felt that way for the past three years.
We were sick of so-called experts pointing out all the problems but never coming up with ways to profit from what was happening; ‘don’t tell us what’s wrong, tell us how to make money.’
It won’t surprise you to know we heard that message loud and clear from readers like you.
What’s Better Than Stocks?
One thing we want to make clear is that we’re not a stock market cheerleader. We don’t always believe that stocks are the best place to put your money.
That’s why we only recommend that you put a maximum of half your investable assets into stocks. Stocks can be risky. You need to choose carefully when to buy them and when to buy other assets, such as gold…or even to stay in cash.
But right now, despite the volatility, we say that buying stocks makes the most sense for investors. There just isn’t any other type of investment that you can easily buy and sell which can give you the same type of returns.
Although it’s fair to say that not everyone shares our view. There are others who think that the recent bout of volatility involving emerging markets is big warning sign.
One of those with that view is Satyajit Das. Das is a well-known finance professional and author. He was the star performer at the first Port Phillip Publishing conference in 2012. He’s back to present at our next conference in March — World War D: Money, War & Survival in the Digital Age.
In a recent interview with the ABC, Das said:
‘In the short run, what will happen is the actual flow of liquidity out of emerging markets will expose the fact that these markets are heavily dependent on, number one, foreign capital, and much of what was called the “boom” in emerging markets may be just the effect of short-term capital flows and particularly the effect of lower interest rates.’
Das says this flow of capital out of emerging markets could lead to problems with local banking systems and even defaults, both by private institutions and even governments.
If such a situation plays out, holding stocks would be a risky investment choice.
So, does that mean you should sell now?
Don’t be Fooled, the Fed is Still Printing
If things play out as Das expects then the answer would be yes.
But we’re not prepared to give that advice.
While many analysts and commentators focus on the prospects of another stock market crash, similar to that seen in 2008, our view is that the market dynamics are very different to what they were then.
That’s not to say things are better. You only have to look at the amount of money printing that has happened since 2008 to understand that things aren’t better.
But what has changed is that today there’s no question about the willingness of central banks and governments to intervene in the market.
It’s not a question of if they’ll do so, it’s a question of when and how much. That’s why you see the market volatility today.
And that’s why you see the market ‘misbehave’ after the US Federal Reserve decided to cut back on its bond-buying program.
But, as we’ve noted previously in Money Morning, even if the Fed tapers its bond-buying program to zero by October this year, it will still have printed nearly half-a-trillion dollars in money in order to buy US government bonds.
That’s more than the amount the US government spent on the infamous TARP bailout package back in 2008 and 2009.
We won’t pretend to know exactly how things will play out in the markets over the next few days. Events have a funny habit of doing the unexpected.
But just as we told you to keep investing while most others ran for cover when Japanese interest rates climbed last year, when China’s economy appeared to slow, and when all the talk was of the US Fed stopping the printing presses…we’ll tell you to keep investing now.
Hold on to those good dividend paying stocks. Keep your money in those speculative small-cap stocks. And buy into beaten down markets when the opportunity presents.
We say buy emerging markets, and we also say to buy the other major victim of the current panic — mining stocks.
Fortunes Are Made in Recessions
Although it may seem crazy, it looks to us like the Aussie mining sector is bouncing back. The past two years has been terrible for resource stocks, but if we’re right about the market heading towards a turning point, this is where brave investors can make a lot of money.
A statistic we like to point out is that around half of the Fortune 500 companies came into existence during recessions or depressions. So when folks try to tell us it’s too risky to invest, we tell them that the depths of a bear market are where investors can make a fortune.
For that reason you should keep an eye out for a special research report which will be available online this weekend. In it resource analyst Jason Stevenson makes the case for a major bounce back in a handful of key mining sectors in 2014…including three beaten down Aussie miners that could lead the way.
The fact is, investing is always risky, and right now it’s as risky as heck.
But as any experienced investor will tell you, when the market is this risky, more often than not, that’s exactly the time when you should buy.
Cheers,
Kris+
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