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A Lesson In Cherry Picking Data From Morgan Stanley

Submitted by Tyler Durden on 09/10/2010 16:32 -0400

Somebody better remind Morgan Stanley's Jim Caron that he is now pitching 10s30s flatteners, cause he sure seems giddy over the 25 bps move in the 10 Year (coupled with an even bigger, i.e. steeper, move in the 30 Year), which of course means his advice continues to lose his clients money. Of course, this being the most optimistic bank on Wall Street, Caron immediately equates rising rates with surging stocks: "The last time UST 10y was around 3.00%, S&P's were around 1127. If the high level of correlation between bond yields and stocks hold, then the breach in the bull UST 10y trend may signal better performance of risky assets." And that, ladies and gentlemen, is how you cherry pick data. Because taking Caron's chart a little further back, shows that the last time the 10 Year was here, as Rosenberg reminded us three weeks ago, the S&P was at 805. So... 1,127 or 805? The upside/downside after today's 1,110 close sure looks very attractive to the upside. Just like Caron, we will leave it with the rhetorical "Just an observation to think about before you head home for the weekend", and we'll add - "pick your kool aid."

From Morgan Stanley's Jim Caron:

A point that we have discussed in our research is how highly correlated many asset classes are to the level of interest rates. Recently we have observed the rising rates are good for risky assets and falling rates are bad. The short-term rationale is quite simple: higher rates reflect a reduction in the tail risks for a negative economic outcome and vice versa. We argue that the interest rate market is leading the equity market, so it follows that rising rates may usher in higher equity prices. As one can observe (see chart below), the short-term correlation between rates and stocks is quite high.

What is significant about today in the rates market. Today, we observe a break in the bull trend line for UST 10y. Please reference the work done by our tech analyst Drew Baptiste for more details (further below in the e-mail). Drew's analysis indicates that a close above 2.72% in UST 10y (10y is at 2.80% currently) may target a move to 2.85% and beyond that 3.00%. The last time UST 10y was around 3.00%, S&P's were around 1127. If the high level of correlation between bond yields and stocks hold, then the breach in the bull UST 10y trend may signal better performance of risky assets.

Just an observation to think about before you head home for the weekend.

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Fri, 09/10/2010 - 16:42 | 574987 traderjoe

Tangential - that's an approximately 6% downside move on the UST. I know some people think rates are going lower, but I tend to think the Great Unwind is an unwind of all paper assets. Does anyone really think the US is going to be able to continue to pay all the money back, plus the unfunded liabilities? I think it possible that this was the reversal in bonds, and that both bonds and stocks will go down from here. People will exit both - move to cash, etc.

Stocks are rigged. Bonds are rigged. If your sole thesis (Leo) is that the Fed will be successful in pushing asset prices higher - is that really an investable thesis?

Fri, 09/10/2010 - 17:09 | 575060 NotApplicable

Does anyone really think the US is going to be able to continue to pay all the money back, plus the unfunded liabilities?

Depends upon the valuation one gives to political promises.

Fri, 09/10/2010 - 16:43 | 574989 Hondo

The street is stupid..plain and simple..

Fri, 09/10/2010 - 17:37 | 575093 DavidC

We're the street. Are you stupid? I don't think I am. Or, for that matter, neither are the likes of Bruce, CD, George Washington and, yes, Leo.

I think (and I admit I don't KNOW) that a large number of 'the street' is disenfranchised, but don't know what to do about it.

DavidC

Fri, 09/10/2010 - 19:15 | 575233 mynhair

You think, therefore you are....

stupid, that is.

Brain dead rules! Get with it!

Sat, 09/11/2010 - 00:49 | 575533 CPL

To be the asshole here, there is no "street".

Otherwise look for the under 30 entry for TZA

Fri, 09/10/2010 - 17:31 | 575081 Getagrip

I like stocks. I buy them with the VXX....

Fri, 09/10/2010 - 18:05 | 575134 GFORCE

Noise.

Fri, 09/10/2010 - 19:12 | 575224 mynhair

I ain't the Street. Feel like I've been run over on it, at times, though.

Reality will suck, eventually, when collective IQs breach zero.

Hopefully, in my lifetime.

Fri, 09/10/2010 - 19:31 | 575252 Rainman

Cherry picking data is too kind a term, TD. Even data scrubbing doesn't work.

The prime rate has been locked at 3.25% for two years and it's still too high. I look for a 10 year UST at 1.5 % and a JGB at .5 , 6-8 months out, as someone contributed previously here on ZH and with which I concur and cross fingers as I do so.

The boyz will dump the equity market before they let the bond market loose on a tear. Suicide by interest rate getaways will not be on the menu for central planning. Something else will have to stink up the party because, like it or not, the UST will be an escape hatch.......especially when shit meets fan.

Fri, 09/10/2010 - 19:43 | 575268 alangreenspan