dead cat bounce

Investors have a cute name for a short term rally that follows a steep and prolonged decline. It is called a dead cat bounce. The idea is that even a dead cat will bounce once or twice when you drop it from a high enough place. Unlike a live cat however, it will stay down after that. 

What we are seeing in the housing market now, is a version of the infamous dead cat bounce. Housing rebounded somewhat in December. Some too-eager investors, hoping for a quick turnaround no doubt, are snapping up properties at what they think is a bargain. But is it a bargain? Will the market recover in 2009? Don't bet on it. 

While housing was the proximate cause of the crisis, much like an infection that kills a patient with lung fibrosis, it wasn't the real problem. The real problem is that Americans have been spending for decades like there was no tomorrow. Now their net worth has fallen to zero or below. They are done spending. 

For an economy that depends on spending for 3/4's of its bulk, that is not good news. Layoffs will continue and continue to grow. The crisis has now spread beyond housing into job losses. These losses will then precipitate another round of foreclosures and another drop in housing prices. This vicious circle will continue for a while to come.

As a matter of fact, almost 70,000 layoffs were announced yesterday, but investors chose to ignore these. Why?

One was the Pfizer-Wyeth merger. Mega-mergers like Pfizer-Wyeth always stimulate the market for a variety of reasons. But for those smart enough to look past the headlines, the merger showed none of these healthy signs. All it illustrated was how badly broken this economy is. Pfizer had trouble getting loans, even though it reportedly has $30 billion in cash. Pfizer did not want to use that cash, because in doing so it would have had to bring it into the country and pay taxes on it. By lending Pfizer avoids taxes and gets a tax break on interest to boot. So much for tax cuts!

The second reason is that layoffs often mean higher profits. Investors see layoffs as trimming fat, a move that helps the bottom line. But these layoffs are no such thing. These are layoffs caused by lack of demand. These are desperate layoffs that are meant to keep companies afloat in adverse conditions.

If I could suggest one thing to Obama, it would be to create jobs and to do so directly by starting government projects. I would only caution that it be done wisely. Not to beef up our highway infrastructure, but to dismantle it and to replace it with a more sensible, public transportation-friendly infrastructure.

Let's not invest in "green" (or any other color) energy. Let's instead invest in using less energy. Let's bring back repair jobs that allow people to keep items around longer. Bring back the tailors, the shoemakers, the grocers. It is not Walmart we need (ironically enough WM has been doing very well and that should worry us a lot!), it is local grocery and retail stores. Not suburbia and malls, but local walk-to businesses. No cheap China-goods, but locally produced artisan products with lasting value.

Not vitamin D, bran, or for that matter melamine enhanced mass-produced food products concocted together in far away places, but local organic produce and meat. Not cherries and watermelons in winter, but seasonal fare. The list is endless. Let's create jobs that matter, Mr. Obama. Not cogs in a big churning, wealth shifting, and value destroying, gas-guzzling monster.