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A Glance At The Start Of Earnings Season, And Yet Another Asset Price Decoupling

Tyler Durden's picture


Tomorrow the Q2 earnings season kicks off, with Alcoa as usual leading the parade. The chart below shows all the S&P stocks that report in the coming week. The key day will be Friday when GE, BofA and Citi all report together.

With earnings still expected to post healthy gains over Q2 of last year, it will become increasingly difficult for companies to report the same type of blow out bottom line outperformance that was seen earlier in the year on continuing cost cutting, which is still accompanied by merely tepid revenue growth. If anyone is so confused as to why corporations continue to hoard cash, the record high margins may be a good place to start. CEO are not stupid and know all about the reversion to the mean phenomenon, and are stockpiling cash precisely for that, and for the imminent increase in corporate taxes, whose recent collapse has been a primary reason for the cash stockpile (a topic we discussed first about 3 months ago).

Tangentially, for readers who trade across asset classes, in addition to the recurring FX-risk decoupling seen between the carry pair of choice, another notable observation is the recent decoupling between stocks and IG bonds, as represented by the on the run IG CDS index (14). As we have demonstrated repeatedly, and as even the WSJ is finally picking up on, fund flows have been going into IG and out of stocks, which is yet another reason why credit spreads are far more likely to be indicative of reality as it is a leading capital asset class, not a lagging one. Yet somehow spreads manage to tighten in the pursuit of stocks, even as IG suggested the S&P is about 50 points rich to a credit implied fair value. A useful pair trade would be to sell stocks (which are typically overvalued when compared to AUDJPY fair value) and buy IG credit (sell CDS) should this trend persist. We will keep you posted.


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Mon, 07/12/2010 - 00:22 | 463900 trav7777
trav7777's picture

Decoupling, bitchez

Mon, 07/12/2010 - 00:42 | 463922 Testicular Cancer
Testicular Cancer's picture

I am sure this can be spun around to make it look positive.

Mon, 07/12/2010 - 01:53 | 463969 molecool
molecool's picture

Just turn the CDX IG chart around.                        

Mon, 07/12/2010 - 06:34 | 464021 Sudden Debt
Sudden Debt's picture

Alway look on the bright side of live! Tootup, tootup up up

Mon, 07/12/2010 - 07:01 | 464030 Implicit simplicit
Implicit simplicit's picture

The approach of large bond offerrings might require a stock sell off by mid week; should be an easy manipulation for the Olie Arch clan.

Mon, 07/12/2010 - 07:39 | 464038 mephisto
mephisto's picture

I like your thinking, but can't help adding that the reason equity falls are often followed by large bond auctions is because the large bond auctions are occuring every day!

Mon, 07/12/2010 - 09:19 | 464144 Implicit simplicit
Implicit simplicit's picture

The random unpredictability of the markets is like an enigma wrapped up in a conundrum. We are all just lucky we wake up every morning to perceive the excitement of life's random actions.

Mon, 07/12/2010 - 08:06 | 464056 IBelieveInMagic
IBelieveInMagic's picture

Unlikely, option expiration coming up this week...

Mon, 07/12/2010 - 09:32 | 464154 Implicit simplicit
Implicit simplicit's picture

Who nose, eye don't, butt no sweat;>)

Mon, 07/12/2010 - 07:48 | 464042 papaswamp
papaswamp's picture

I would think the markets would go up today since there are no economic reports to spoil the algo glee ramp....but of course the markets don't make sense to me anyway.

Mon, 07/12/2010 - 09:51 | 464168 jkruffin
jkruffin's picture

4yr old Toddler, earns Obama housing tax credit  (Clear sign of how ignorant this administration is from top to bottom)


The Obama administration expanded and extended the program as part of the American Recovery and Reinvestment Act in February 2009. This legislation extended the credit through Dec. 1, 2009, and increased the credit amount to $8,000.

Last November, with the expiration looming, Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009. This extended the first-time homebuyer credit through April 2010, and included a credit of $6,500 for current homeowners who purchase a house between Nov. 7, 2009, and April 30. This act also raised the income limits for qualifying for the credit.

A look at new home sales suggests that the credit didn’t have the intended effect of stimulating a resurgence in the housing market. New home sales, which fuel the construction that can drive gross domestic product growth, failed to rise above the level of 477,000 that they posted in the month that the credit was first passed. It is probably the case that sales would have dropped more without the credit, but a large share of the credits were almost certainly claimed by people who were going to buy a house anyway.

But since the other parts of the stimulus didn’t work very well either, there were few people willing to buy a home for any reason.

Signs of Fraud

The credit did, however, waste an enormous amount of your tax dollars.

Last October, I wrote a column in this space discussing the rampant fraud that has been a hallmark of the homebuyer tax- credit program. The problem was the Obama administration decided that the money had to be spent as fast as possible, so it provided the credit to anyone who said they deserved it without requiring that the recipient provide the documentation to support that claim. That led to the credit being awarded to 19,300 people who, upon review, didn’t buy a home. Among those receiving the credit were 580 children younger than 18, including a 4-year-old toddler, below the age of legal homeownership.

Although the Internal Revenue Service has increased enforcement efforts since that time, a recent report reveals that fraud is still a significant problem for the program.

Thu, 08/19/2010 - 10:58 | 530336 herry
herry's picture

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