Archive - Jun 29, 2010 - Story

One of the less discussed topics by the propaganda machine is that with bond yields approaching record yields, and in the case of the 2Y below them, the S&P has no place trading over 1,000. There was a time when bonds and stocks would correlate, and as bond prices surged, equities would plunge and vice versa. Now that we live in HFT days where stock values are completely disconnected from fundamentals, and even the bond market, courtesy of the Fed's seemingly endless market interference,  it makes sense to extrapolate what the fair value of stocks would be implied purely based on bond yields stripping away for the Fed. Attached we present a very simple regression analysis between simple 10 year spreads and the S&P, and the 2s10s (steepness between the 2 and 10 Year) and the S&P. What both analyses indicate is that stocks are approximately 30% overvalued, at least based on historical regression patterns relying on yields to imply stock prices. Yet even though this analysis is purely statistical, here is a simple extension: with US stocks at about $13 trillion in market cap, if one assumes the suggested 30% haircut the result is $9.1 trillion in fair market value. Considering that the Fed has pumped $2.5 trillion in the form of monetary stimulus, and Obama's various fiscal stimuli now amount to just over $1 trillion, that explains the delta. Bonds are implying where stocks should be almost to the dot, absent the $3.5 trillion pumped into stocks by the administration and the Chairman. Fair value of stocks, when stripped away from the printer and Congress, is 750.

From Bloomberg: "IMF is working to develop a precautionary credit line, MD Dominique Strauss-Kahn said." Last time they did the same with the New Arrangements to Borrow (discussed here), on April 12, a $1 trillion bailout followed. Get ready folks. Europe bailout two is coming.

HFTs baby. HFTs. They just provide liquidity.

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 29/06/10

Here is why the entire Liberty 33 trading desk is set on preventing a break of 1,040 in the S&P - as Goldman's trading desk technician John Noyce warns, the next stop in the head and shoulders formation, should 1040 be taken out, would be 865, not to mention a complete rout for global teleprompter stocks post the mid-term elections.

Goldman off to the races as 3 reports confirm that the captured and bribed congressmen and senators are about to drop the $19 billion bank levy in order to win the support of Scott Brown and others who demand that banks gradually lose every expense item from their P&L over time, and have revenue translate to net income.We anticipate more such 11:59th hour horsetrading, as the entire already worthless bill is reduced to one ply toilet paper for Wall Street's CEOs.

Zero Hedge's view on the systemic threat that HFT poses to markets, a topic beaten to death on the binary pages of this website, is gaining ever more supporters each day. The latest to lament the lack of imagination, creativity, and work ethic, and to caution against the greed, bandwagoning and groupthink of the binary churning crew know as the HFT lobby is Paul Wilmott, in yet another scathing critique of all that is rotten with modern market structure. One would hope after 10 years of increasingly more vocal complaints and a few hundred more flash crashes, even the incompetent illiterates at the SEC will finally pay attention and put an end to this travesty.

The teleprompter also says that economic headwinds are due to concerns about Europe, and that the US must extend unemployment benefits to boost jobs. What can one even say at this point... The lunatics are firmly in control. We will keep listening to hear when Obama tells the general public that the Fed will stage another year long melt up as he did in March of 2009, and report promptly.

Obviously now that FinReg will not pass, it will suffer the same fate as the Federal budget - i.e., be put out of sight and out of mind, never to be seen again. After all Obama already got his bragging points on FinReg. Too bad he doesn't have the votes to pass it. As for the Bernanke stuff, we will keep you posted on that.

The Conference Board is on fire today. First it killed the Shanghai after revising its China propaganda massively as reported previously, and now it indicates it surely has no credibility whatsoever, after its June Consumer Confidence number came out at 52.9, compared to 62.5 expectations, and a 62.7 previous (revised down from 63.3). And in keeping with recent tradition, we won't be surprised if this number is also massively revised down subsequently. CNBC warns to take consumer confidence numbers, when declining, with a grain of salt, and to gobble them up when rising, wholeheartedly.

The S&P is back to resuming its downward channel. Blow outs in quant land, where deleveraging is at 2010 highs, are are not helping. In other news, a very lucky Elon Musk just guaranteed he will never get invited on CNBC ever again, after slamming Jim Cramer for his Buy Bear call, and calling him a contraindicator. Alas, when it comes to the Tesla business model, which assumes investors will not pay just a little more for a Ferrari, we are on the sidelines.

Morgan Stanley's Jim Caron in major damage control mode. Try keeping a straight face as you read this. "Why are UST 10s below 3%? Fear and greed, but mostly fear. Many in the market have surrendered themselves to the deflationistas. It seems to be all over the media these days. Concerns about a deflationary double-dip, rumors of the Fed re-opening QE and purchases of USTs as a liquid positive-carry hedge against risky assets are but only some of the culprits pushing UST 10y yields below 3.00%. We recognize and respect these forces and concede that UST10s can fall further in yield. We will not fight this current move. Instead, we will look for the opportunity to counter it."

The cold war is back... At least in terms of espionage. As expected, yesterday's stunning press release of the spy ring bust which came at a very tense time in US-Russia relations, and is already drawing a response from Russia. According to Reuters, "Such actions are baseless and improper," the [Russia] Foreign Ministry said in a statement. "We do not understand what
prompted the U.S. Justice Department to make a public statement in the
spirit of Cold War espionage. We deeply regret that all of this has happened
against the background of the relations reset declared by the U.S.
administration." Next steps - retaliation: "It's is a slap in the face to Barack Obama,"
said Anatoly Tsyganok, a political analyst at Moscow's Institute of
Political and Military Analysis. Russia will
inevitably follow Cold War etiquette and uncover an equal number of U.S.
spies, he said." All this is happening as Bill Clinton is in Moscow today, chatting with Vladimir Putin. We wonder just how reminiscent of Cold War propaganda those talks will end up being.

Yesterdays’ activity was not much of a surprise to us. It seemed like the Gold of old. Speculators get long, cover shorts going into an event that can have an impact on Gold (G-20). Nothing happens immediately relevant to Metals during the event. Participants look at each other for 30 minutes as the market starts out flat. Then it dawns on the weak longs, that they have the patience of gnats, and the selling starts. This is Gold behavior circa 1997.

• Europe told G8 may use public funds for banks (Reuters)
• 1 in 5 choosing to default on mortgage even though they can pay (Palm Beach Post Money, h/t CB)
• Pimco on government manipulation in MBS prices (via GSEs): "The 30-year 5.50 percent coupons are insanely expensive. Even if this coupon cheapened a full point, I
  would still
  not like them and we are not even close to levels where I would
  consider buying them" (Reuters)
• Alex to become hurricane as swells reach gulf spill, BP refusing to cancel clean up ops (Bloomberg)
• Recession warning (Hussman)
• Google may lose Chinese license after government objections (Bloomberg)
• The three biggest liest about the economy (MarketWatch)