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
Everybody was looking forward to hear what Janet Yellen had to say last week, as people were waiting for a cue about what the Federal Reserve might do next month and later this year. Will the Fed keep the interest rates stable? Or will we indeed see three additional rate hikes to push the benchmark interest rate towards 1.25%?
The side effects of Negative Interest Rate Policies in Europe and Japan — what we’ve come to call the NIRP absurdity — are becoming numerous and legendary, and they’re fanning out across the globe, far beyond the NIRP countries.
Seven of the eight indexes on our world watch list posted gains over the past week, up from five the week before, and the average of the eight was an impressive 2.60%. India's SENSEX was the outstanding out performer with a 5.34% surge, and three indexes, France's CAC 40, the Hong Kong's Hang Seng and Germany's DAXK closed the week with gains in the mid-three percents. China's Shanghai was the sole loser with its fractional 0.16% decline. Japan's Nikkei had the second worse performance with a modest gain of 0.59%. Incidentally, the Nikkei about 4% below its late January close when the Bank of Japan adopted its negative interest rate policy.
The rally in mining stocks since the first of the year has been very impressive.
The rally has taken Gold Miners ETF GDX up to test the 23% retracement of the collapse over the past 5-years. At the same time it is hitting the 23% level, two other resistance lines are being put to a test, with momentum at the highest levels in the past 5-years.
Graham Media Group, Inc., a Graham Holdings Company (NYSE: GHC) subsidiary, said it struck a deal with Nexstar Broadcasting Group, Inc. and Media General, Inc. to purchase WCWJ, a CW affiliate television station in Jacksonville, Florida and WSLS, an NBC affiliate television station in Roanoke, Virginia for $60 million in cash and the assumption of certain liabilities.
The agreement to acquire Nextar Broadcasting included pension obligations. Graham Media Group, Inc. would continue to operate both stations under their current network affiliations.
Graham Media said the acquisition is subject to approval by the FCC, other regulatory appr...
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Do you remember when you were growing up and all your friends were allowed Atari game consoles but you weren’t?
Well, I do and the things seemed as foreign to me as Venus. Mostly because the little time I managed to spend on the gaming consoles when my friends weren’t hogging them I found it all a bit silly. I never “got” computer games, and to this day still have poor comprehension of things like Angry Birds.
I suspect that many people around the world view Bitcoin in the same way as I view Angry Birds: with mild amusement and a general lack of understanding as to what the hell all the fuss is about.
I was thinking of this since a buddy of mine recently started ...
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.
Although we try to stay focused on finding and managing promising trade ideas, the comments in the comment section sometimes take a political turn (for access, try PSW — click here!). So today, Jean Luc writes,
The GOP debate last night was just unreal – are these people running to be president of the US or to lead a college fraternity! Comparing tool size? The only guy that looks semi-sane is Kasich. The other guys are just like 3 jackals right now.
And something else – if Trump is the candidate, that little Romney speech yesterday is probably already being made into a commercial. And all these little snippets from the debate will also make some nice ads! If you are a conservative, you have to be scared now.
Phil writes back,
I was expecting them to start throwing poop at each other &n...
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 email@example.com 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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