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
The warning signs have been everywhere since the beginning, growing ever clearer with each new valuation round, IPO launch, and earnings cycle emanating from Silicon Valley.
Like a phoenix rising from the ashes of the post Dot-Com ruins people were told not only was it “different this time,” they were also instructed to observe even the phoenix bird itself had morphed into what is now commonly referred to as a “Unicorn.” And any comparisons to the prior meltdown in the land of Dot-Com were met with howls and scowls of, “You just don&rs...
A quick post before the Superbowl begins. Friday's action was very disappointing if you were in the bullish camp; poor jobs data contributing to the malaise. However, investors can view this as another buying opportunity, with the Nasdaq clocking the 10% percentile of historic weak prices dating back to 1971, and the Russell 2000 making fast work of a push back to 958. Again, it's not about investing everything at once, but perhaps using the coming year(?) to build long term positions. I would be happier to see a 40-60% trim from highs - keep an eye on my bottom watch table, but this is the kind of action which helps reset the bulls count.
The S&P registered a clear break of rising trend. Volume was lighter, so it wasn't necessarily a panic sell. And while it could be viewed as a breakown, the glass half full crew would see this as a drop back...
Last week, I discussed the boost the market received as the BOJ made an unexpected move into negative interest rate territory combined with end of the month buying by portfolio managers. I wrote:
“However, the announcement by the Bank of Japan (BOJ) to implement negative interest rates in a desperate last attempt to boost economic growth in Japan was only the catalyst that ignited the bulls. The “fuel” for the buying came from the end of the month portfolio buying by fund managers.”
But more importantly, was the push higher by stocks that I have been discussing with you over the last couple of weeks. ...
Throughout the past 30 days of wild volatility, here’s what I didn’t do.
Panic. Worry. Sell.
In fact, the best I did was add to a couple of positions yesterday. The world was already in an uncertain state for the past 3+ years. It’s just that with the market rising, we pushed the issue to the back of our mind and ignored it.
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A number of systemic, structural forces are intersecting in 2016. One is the rise of non-state, non-central-bank-issued crypto-currencies.
We all know money is created and distributed by governments and central banks. The reason is simple: control the money and you control everything.
The invention of the blockchain and crypto-currencies such as Bitcoin have opened the door to non-state, non-central-bank currencies--money that is global and independent of any state or central bank, or indeed, any bank, as crypto-currencies are structurally peer-to-peer, meaning they don't require a bank to function: people can exchange crypto-currencies to pay for goods and services without a bank acting as a clearinghouse for all these transactions.
Last year, the S&P 500 large caps closed 2015 essentially flat on a total return basis, while the NASDAQ 100 showed a little better performance at +8.3% and the Russell 2000 small caps fell -5.9%. Overall, stocks disappointed even in the face of modest expectations, especially the small caps as market leadership was mostly limited to a handful of large and mega-cap darlings.
Notably, the full year chart for the S&P 500 looks very much like 2011. It got off to a good start, drifted sideways for...
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Baxter Int. (BAX) is splitting off its BioSciences division into a new company called Baxalta. Shares of Baxalta will be given as a tax-free dividend, in the ratio of one to one, to BAX holders on record on June 17, 2015. That means, if you want to receive the Baxalta dividend, you need to buy the stock this week (on or before June 12).
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
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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