A few months ago we penned an article titled: "Bond Yields Imply The Fair Value Of The S&P Is 750" and this was when the 10 Year was still above 3.00%. It is now around 40 bps tighter, meaning the fair value of stocks is even lower based on the historical 75% regression pattern we indicated back in June. Today, David Rosenberg also chimes in on this ridiculous divergence between the S&P and bonds, and in graphic form shows that should the gap ever close, it would lead the stock market to its fair value, which ironically, is just around the March 2009 lows of 666.
Folks — something has to give … yields on the 2-year T-note (thin line, right hand side on chart below) has a 75% POSITIVE correlation with the S&P 500 and just hit a cycle low. Either it’s a short or the equity market is … take your pick.
As a reminder, historically bonds are right… about 100% of the time.
And with the S&P’s market cap at $10.5 trillion, meaning each S&P point is equivalent to about $9 billion dollars, the impact of the Fed’s intervention on stocks is roughly $4.4 trillion. Alterantively, one can argue that stocks are right, and bonds are wrong. Since the bond market is double the size of its smaller stock cousin, it would means that the Fed’s endless interventions have mispriced just under $9 trillion worth of fixed income assets.
And people want to play in a market that is as ridiculously out of sync with reality as either of these?
Since I started publishing Financial Armageddon in late-2006, I’ve often railed against the incompetence and tomfoolery of highly-paid Wall Street "strategists" (note the double quotes). Many of these so-called experts are clueless data-regurgitators or ivory tower economists with above average communications skills. Indeed, it seems to me that most of the "stars" of the forecasting game are simply being rewarded for having the gift of gab, rather than their ability to look past the trees and size up the layout of the forest.
But as with most generalizations, there are exceptions. Surprisingly — yes, I am cynical — a very small number of those who know what they are talking about, have something intelligent to say, and know how to translate their insights into clear and interesting prose have been recognized as such. I am referring in particular to Albert Edwards, the number-one ranked global strategist for I-don’t-know-how-many-years running, and his sidekick Dylan Grice, who placed second overall in the 2010 Thomson Reuters Extel Survey, both of whom are members of the strategy team at Societe Generale.
In his most recent Global Strategy Weekly, Mr. Edwards touches upon two topics near-and-dear to my heart: the real state of the economy and the utter cluelessness of most equity investors [italics mind]:
The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.
The notion that the equity market predicts anything has always struck me as ludicrous. In the
Just in case there was any confusion which way SocGen’s Albert Edwards may be leaning after the recent however many percent rally in the AUDJPY, sometimes known affectionately as stocks, it is hereby resolved: "My views on the outlook could not be clearer. They may be wrong, but at least they are clear. We still call for sub-2% 10y bond yields and equities below March 2009 lows." In other words, according to AE the market is well over 50% overvalued.
In a surprisingly pithy note, the strategist reverts back to his favorite formulation of the economic New Normal, which he calls the Ice Age, and specifically the current phase which he compares to the period where the Nikkei used to enjoy 40-50% rallies on no news, even as the general market continued its long term collapse over a span of 20 years:
We are at the most dangerous stage in the Ice Age – the ‘post-bubble cycle’. For although it is clear that leading indicators have turned downwards, the choir of sell-side sirens is singing its song of reassurance. The lesson from Japan was that once the cyclical rally is over, any downturn in the leading indicators should find you stuffing beeswax in your ears to block out that lilting melody so as to avoid the jagged rocks of recession.
In addition to remarking on the recession certainty now implied by the ECRI index (which we are confident will post an uptick this Friday just to plant some seeds of doubt in all those who look to forward looking instead of lagging indicators, A.E. notes the change in analyst optimism, which is also signifying a recessionary advent:
Although the closely watched ECRI weekly leading indicator (WLI) is now in the ?recession? zone, other leading indicators such as the OECD and Conference Board are weakening at a far more moderate, reassuring pace. Yet one of our favourites and most over-looked of leading indicators is the change in analyst optimism. Like the ECRI WLI this too is in recession territory and suggests the OECD and Conference Board measures will also be soon! Appealing as the siren song is, we should all know full well that the sell-side will only call the recession long after it has begun and
Just days ago we reported that the Federal Reserve trumpeted the fact that all 33 participating banks passed the latest stress test. Banks also spent a lot of money on consultants in preparation for the stress tests as well.
After failing the Federal Reserve's annual stress tests in March 2014, the WSJ reports that Citigroup hired multiple consulting firms, and spent about $180 million on stress tests during the second half of 2014 in order to address re...
Regional manufacturing surveys are a measure of local economic health and are used as a representative for the larger national manufacturing health. They have been used as a signal for business uncertainty and economic activity as a whole. Manufacturing makes up 12% of the country's GDP.
The other 6 Federal Reserve Districts do not publish manufacturing data. For these, the ...
Following two economic reports this week, the Atlanta Fed GDPNow Model forecast rose 0.1 percentage points to 2.7%.
Latest forecast: 2.7 percent — June 29, 2016
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2016 is 2.7 percent on June 29, up from 2.6 percent on June 24. The forecast for second-quarter real consumer spending growth increased from 4.1 percent to 4.3 percent after this morning’s personal income and outlays release from the U.S. Bureau of Economic Analysis. This was partly offset by a decline in th...
Wednesday may be the most important day of the year for large U.S. banks, with the Federal Reserve set to release its verdicts on whether they have passed or failed annual stress tests. The 33 large U.S. banks taking...
By Jacob Wolinsky. Originally published at ValueWalk.
Shares of TESARO Inc (NASDAQ:TSRO) are super hot today today on Ovarian Cancer results and the rally could continue to be hot until phase 3 results in the fall. The stock is up at the time of this written by over $40, 110%, destroying the shorts (at least for today). The sell side are panicing to play catch up with price targets here is what they are saying.
This morning TESARO Inc (NASDAQ:TSRO reported long-waited Ph3 NOVA data, showing s.s. PFS benefits in both cohorts; plans to file for U.S. & EU approval in 4Q16. Contrary to our cautious stance on non-gBRCAm/HRD+ arm following experts’ discussions, this arm also showed s.s clinically meaningful PFS benefits of ~9mo. AE profile was consistent with Ph1 data (most common Gr3/4 AEs thrombocytopenia, anemia & neutropenia). Full data to b...
The media seems to be focused on the Brexit issue, with most of the coverage suggesting it was a negative event. Regardless of the media’s focus, prices are attempting to do something in Europe, that could be bullish and surprise a few investors.
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The FTSE 100 Index remains in a long-term bullish trend (lower highs and higher highs) over the past 5-years. The bottom of the rising channel (A) was hit in Fe...
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I have mixed feelings about Brexit today. Clearly the European institution need reforming. The addition of so many countries in the last 20 years has created a top heavy administration. The Euro adds more complexities to the equation as the ECB policies cannot fit every country's problem. On the other hand, a unified Europe has advantages as well – some countries have benefited from the integration.
For Britain, it's hard to say what the final price will be. My guess is that Scotland might now vote for independence as they supported staying in Europe overwhelmingly. Northern Ireland might be tempted to leave as well so possibly RIP UK in the long run. I was talking to some French people and they were saying that now there might be no incentive for France to stop immigrants from crossing over to the UK like they do now and simply allow for travel there and let the UK deal with them. The end game is not clear to anyone at the moment....
One week ago, when bitcoin first crossed above $700 on the seemingly insatiable Chinese buying which we forecast last September (when bitcoin was trading at $230) would take place as a result of China's capital controls (to much pushback by the "mainstream" financial media), we tried to predict what may happen next. We said that "it could go much higher. That said, anyone who bought last September when the digital currency was trading at $230 may be advised to take some profits, and at least make...
After a three-year bull run that more than quadrupled its value by its peak last July, IBD’s Medical-Biomed/Biotech Industry Group plunged 50% by early February, hurt by backlashes against high drug prices and mergers that seek to lower corporate taxes.
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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