Dead Cat bounce?

[blackcap]

A strange article, best explained by reading it in terms of a swing-trader's views, as opposed to an investor's.

Sure, the US is experiencing a short-covering rally brisk enough to make your eyes water, and well done to the author for riding that wave. But does he really expect it to last forever? S&P500 at 3,000 perhaps? Or 4,000? And, when the rally surely peters out, what then?

Yes, the press & media have been full of doom & gloom, but then, we are experiencing a global pandemic compounded by an economic shut-down. What does he want, feel-good articles on gardening and upcoming movies?

Fundamentals still apply. The 'Earnings' part of PE ratios will still eventually drive the markets lower when reality kicks in. Maybe sooner rather than later, given the fact that the S&P is now back at the pre-covid levels of October, and the Nasdaq at early Feb levels!

Or does the author think that 'this time it's different'? Heard that one before...

This time it is different though. Look at the interest rates. They are what discount rates are derived from and valuations are derived from discount rates. PE's can be in the 30's and still be relevant in a low interest rate environment. Other than that, I too do not know.

[HKG2301]

Netflix valued at 83 times earnings on a TTM basis, as of April 29. Even taken as a multiple of 2023’s estimated cash flow, the multiple is 45!

The stock bounced 55% since mid-March, one of the best performers since the covid crash, and it's still up there at $442. Almost double it's price in September.

I'm not denying it's been a fun ride, but really? You don't think this bounce back is a tad overdone?

[Aaron]

Not sure I follow you, Aaron - can you expand?

If we agree that a stock market plummet into recession is deflationary (followed by inflationary emergency $-printing measures), why are you expecting the value of assets to rise? Or do you mean other assets, such as gold. Or possibly you're taking a much longer term view?

To quote from the article
"Printing and Devaluing Money Is the Easiest Way out of a Debt Crisis
There are four ways out of a debt crisis
1/ Austerity (spending less)
2/ Debt defaults and restructurings
3/ Transfers of money and credit from those who have more than they need to those who have less than they need (e.g., raise taxes)
4/Printing money and devaluing it"

Number 4 is the easiest and most politically acceptable to people who don't want to 1/ cut back 2/ go broke 3/ pay more tax. It is also what is actually happening on a much bigger scale each time there is a crisis. No one in power is proposing any of the other options and they can't because the people who vote don't like options 1/-3/ and they mostly don't understand option 4/

he says currencies devalue against debt which is another way of saying the price of everything goes up and as we have seen so far real estate and shares have been increasing faster than anything else. If money printing continues shouldn't asset prices continue to rise?

The economy plummets into recession, central banks print money and hand it out then this goes into asset prices. 2008/09 financial institutions got the money asset prices have been going well ever since. This time more is going to main street so consumer prices might rise as well, more so if globalisation decreases and cheap labour in Asia is replaced with well paid workers back in the developed world. I have no idea what will happen, I am expecting this to be a dead cat bounce but it might also be a lost opportunity for me.

Ray Dalio doesn't propose any solutions or investments. He did say "cash is trash" and was hammered for that after the crash earlier this year. He also recommends diversifying.

[blackcap]

Netflix valued at 83 times earnings on a TTM basis, as of April 29. Even taken as a multiple of 2023’s estimated cash flow, the multiple is 45!

The stock bounced 55% since mid-March, one of the best performers since the covid crash, and it's still up there at $442. Almost double it's price in September.

I'm not denying it's been a fun ride, but really? You don't think this bounce back is a tad overdone?

You use Netflix as an example. A bit extreme. But say a market PE of 30 in this new environment should be sustainable. If interest rates stay low and authorities keep printing money.

[Aaron]

You use Netflix as an example. A bit extreme. But say a market PE of 30 in this new environment should be sustainable. If interest rates stay low and authorities keep printing money.

Blackcaps post is saying something similar. Easy money, low interest rates high asset values.

[blackcap]

Blackcaps post is saying something similar. Easy money, low interest rates high asset values.

Very much qualified with the last statement though. If that does not hold, I do not believe in PE's of 30. Back to the 10's for me then.

[HKG2301]

... currencies devalue against debt which is another way of saying the price of everything goes up and as we have seen so far real estate and shares have been increasing faster than anything else. If money printing continues shouldn't asset prices continue to rise?

The economy plummets into recession, central banks print money and hand it out then this goes into asset prices. 2008/09 financial institutions got the money asset prices have been going well ever since. This time more is going to main street so consumer prices might rise as well, more so if globalisation decreases and cheap labour in Asia is replaced with well paid workers back in the developed world. I have no idea what will happen, I am expecting this to be a dead cat bounce but it might also be a lost opportunity for me.

Ray Dalio doesn't propose any solutions or investments. He did say "cash is trash" and was hammered for that after the crash earlier this year. He also recommends diversifying.

Understood. Meaning, I think, that you're talking longer term.

Short term, the crash is deflationary: businesses fail, assets are sold off in a fire sale (witness gold), jobs are lost, cash is king.

Then, money-printing kicks in to aid a recovery and inflation drives asset prices North again. Cash becomes trash, if you don't return to hard assets: property, gold, whatever.

Timing is everything!

[Aaron]

I am wondering whether there will be a crash in asset prices at all or whether money printing will keep everything elevated. I don't know but am guessing there will be another leg down (along with more money printing) when the economic impact of the lockdown has time to flow through.

Timing is good if you get it right but hard to achieve in practice (for me at least).

[HKG2301]

You use Netflix as an example. A bit extreme. But say a market PE of 30 in this new environment should be sustainable. If interest rates stay low and authorities keep printing money.

TSLA would be extreme.

I agree, the Fed pressure (printing, purchases and rates) is huge. Unprecedented levels. And I've learned the hard way that 'Don't bet against the Fed' has been true for at least a decade now. However, they are trying to balance a calamitous economic disaster. The dam has burst and there's no un-bursting it. Hence, longer term, we can expect the recovery to take years.

Shorter term, these Nasdaq levels remind me of the dot-com years. Remember that: 'a new paradigm', 'PE is meaningless these days' and 'this time it will be different'? In short, un-sustainable.

IMO, we haven't seen the bottom yet. And that bottom will not be V-shaped.

So my concern is, how will all this effect the NZ markets? Both NZX and property? To what extend will the biggest global crash in history infect ('scuse the pun) our small corner of the world?

[blackcap]

TSLA would be extreme.



Shorter term, these Nasdaq levels remind me of the dot-com years. Remember that: 'a new paradigm', 'PE is meaningless these days' and 'this time it will be different'? In short, un-sustainable.

?

I do remember vividly. I was a dealer at the time. Interest rates on deposits were in the order of 7-8% as well. Huge difference with now. Try putting a WACC of 12% in a DCF as opposed to 5%. Makes the wold of difference.

But I too am looking at all this unfolding with bewilderment.