Sunday, April 12, 2009

Dead Cat Bounce - and other animals

I’ve never actually seen a dead cat bounce, so I don’t know if its trajectory resembles that of the stock market in a brief rebound such as last week’s. But the financial world is very fond of these rather brutal animal metaphors. “Bull markets” are so called because when bulls attack they toss their victims up in the air. Bears, on the other hand, beat down with their paws, hence “bear market”. Leaves you with the image of a cat being tossed about by bulls and bears as they beat it to death. Which is pretty much how you feel if you have your pension invested in the stock market.

“Stags” are aggessive speculators who “flip” or buy and sell undervalued shares before anyone notices. And the slump has added more exotic creatures to the financial bestiary, like “vulture funds” - which pick over the carrion left lying around by the bears. And my special favourite, “bottom feeders”, City slang for investors who discretely buy shares at the bottom of a bear market. Yum.

Bottom feeders are no doubt hoping that “quantitiative easing” will get the market moving. QE, is a vaguely medical metaphor designed to divert attention from what the Bank of England is actually doing, which is printing money to encourage inflation. The Bank would rather you thought of gentle laxatives clearing the blockage. Another diversionary image is “tax haven” designed to make you think of poor harassed capitalists seeking asylum from the big bad taxman. In fact tax havens run tax avoidance schemes where “shadow banks” “speculate” on “derivatives” dreamed up by “rocket scientists”.

Actually, many rocket scientists - physicists and mathematicians - really were attracted to work in the financial world in the 80s and 90s by the big rewards to for devising ever more complex ways of making money. Like the infamous “Black-Scholes option-pricing model”, which was supposed to guarantee profits in any market, but, er, didn’t. It's now called the "black holes" model.

"Hedge funds" - as in hedging bets - created “short sellers” who borrow shares in a company they think is about to collapse and then sell them back at a lower price making a profit on the difference. “Naked short sellers” don’t even borrow the shares in the first place. Then there are wonderfully opaque concepts like “backwardation”, a market in which futures prices are higher in the early delivery months, not to be confused with “contango” where prices are higher in the later delivery months. Wake up at the back there! You’ll be tested on this.

There is “balloon maturity”, and “boning” which is charging a lot more than an asset is worth. “Bootstrapping” and the “barbell strategy” are more or less what they sound like. Which brings us to the most important financial term of all, which applies to all of the above, namely: “b@llocks”.

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