For those interested, many banks and investment banks are warning of a second decline in the stock markets - a so-called Dead Cat Bounce:
There is a finance tool called the Capital Asset Pricing Model (CAPM). Its postulate is that stock values are a multiple (CAPM multiplier) of the company's cash flow before interest expenses and income taxes are paid (corporate finance guys call this "free cash flow") - a much more mathematically driven approach to valuing stock prices than the traditional Earnings Per Share multiple (EPS multiplier).
Anyway, the dilemma is that companies' net incomes (essentially their cash flows AFTER paying all debt interest expense and income taxes) are being threatened by a combination of (a) high (highest in 10+ years), and continually escalating, debt interest rates and (b) the Howdy Doody Dummy Administration's threat to increase federal income tax rates on corporate earnings. Each of these two drags on earnings will hammer stock prices - not because of frailties in CAPM or EPS valuation techniques themselves - but because the market will be compelled to reduce the multipliers (both CAPM and EPS) to take account of the higher expected debt costs and income taxes.
This may well result in something that stock market professionals call a Dead Cat Bounce - a second freefall in stock market prices that follows a "false positive" (i.e. premature and thus unwarranted) uptick in the markets. Those professionals assert that the most recent three months' positive stock performance is such a Dead Cat Bounce, and it will be followed by another stock market decline.
Indeed, more and more banks and investment bankers are warning of recession in 2023, triggered by the falling domino effect of, in order, 1. companies' lower reported earnings, 2. then by employee firings that result from those dismal earnings, 3. then by retail sales declines caused by fewer people having spending money, 4. then by retailers' employee firings that result from lower retail sales, 5. then by lower manufacturers' sales caused by lower retailer goods purchases, and 6. then by manufacturers' employee firings that result from lower manufacturers' sales. And then rince and repeat - the cycle repeats itself.
The many high-tech companies' recently announced layoffs, and on-line companies' announcements of reduced ad spending are collectively early harbingers that the dominoes may have started falling. The next signs will include the finally determined Holiday season sales (and how much of those sales were made at deeper than normal discounts), companies' December quarter-end earnings releases, and corporate announcement that they are being forced to refinance their existing (low interest rate) debt instrument with much higher interest rate debt.
Stay tuned. The time during which those events may occur is rapidly approaching.
I personally don't trust cats, so my money is in 4.5% T-bills right now.
