Business & Finance

Dead cat bounce!


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You have very likely heard the term “dead cat bounce” used to describe the markets as of late.

DEAD-CAT-BOUNCE-44712975426In finance, a dead cat bounce is a small, short-lived recovery in the price of a declining security, such as a stock. When a financial market suffers a consistent fall traders attempt to detect when prices are at their lowest and then buy stocks hoping for a bargain. If they buy too soon prices may rise temporarily but then decline again. This is called the dead cat bounce. The idea being that even a dead cat will bounce if you drop it from a great height. This phrase, which originated on Wall Street, is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline.

If a stock trades from $20 to $2 over the course of a few days, then there is a quick move up to $3 and then again it falls below $2. This is a dead cat bounce. The bounce in the stock may be due to short-sellers covering, possibly existing shareholders in the company doubling-down on their positions, and potential bargain-hunters swooping in to buy shares, but there might not be any real fundamental improvements in the underlying company. The current recovery in oil prices could prove to be nothing more than a short-lived dead cat bounce, analysts have warned, pouring cold water on hopes of a sustained recovery in crude.

The phrase seems to have struck a chord and other “bounce” phrases have emerged, notably “Baghdad bounce”. This is the rise in popularity that both George W. Bush and Tony Blair enjoyed following the fall of Baghdad in the Iraqi War. That popularity waned somewhat later when it became clear that pulling allied troops out of Iraq was likely to take longer than the public had first anticipated. Mutual funds that used to buy foreign stocks in sectors from banking in Brazil to cellphone makers in Europe saw gains in April, 2003 as the swift end to conflict in Iraq provided a “Baghdad bounce” in financial markets.

There is a story (not related to bounce), popular among British politicians and attributed to the Australian strategist Lynton Crosby, known as “The Dead Cat.” A CEO is confronted with poor statistics at a board meeting, and to divert attention from this unpleasant news, he suddenly pulls out a dead cat and throws it onto the middle of the table. The people will be outraged, alarmed, disgusted. That is true, but irrelevant. The key point is that everyone will shout, “Jeez, mate, there’s a dead cat on the table!” In other words, they will be talking about the dead cat — the thing you want them to talk about — and they will not be talking about the issue that has been causing you so much grief.

Please share with me your thoughts and comments. Thank you!

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