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Why You Should Believe Bonds And Not Stocks (Again)

Tyler Durden's picture




 

Equity prices - and more specifically valuations - are becoming increasingly disconnected from economic reality. As Bloomberg's Jo Brusuelas notes though the Fed may be driving up asset prices without achieving their end goal of improving economic conditions - based on a number of recent economic surprises. As earnings expectations and a global slowdown continued to point to recessionary outcomes (with industrial and consumer data weak), the probability of a fundamental mispricing in stocks and bonds grows. But when we look over the medium-term at how bonds and stocks react to negative and positive economic surprises over time, it is more than abundantly clear that not only is the bond market more sensitive-to and reflective-of the economic state of the world (and its expectations) but the equity markets remain significantly less sanguine about reality (about 20% less!!).

 

Bonds are within 0.5bps of the change we would expect given fundamentals...

 

but stocks appear around 20% mispriced relative to economic expectations over the past six months...

 

As Brusuelas notes:

The relationship between economic surprises and bond yields is straightforward. As new economic information arrives, investors adjust their expectations about likely economic growth, which is followed immediately by changes in fixed income order flow. As those economic growth expectations shift, equities prices may later adjust.

 

Charts: Bloomberg Briefs

 

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Wed, 10/03/2012 - 15:07 | 2852782 slaughterer
slaughterer's picture

Something HORRIBLe is going to be announced in AH today.  LAst time I say it.  

Wed, 10/03/2012 - 15:19 | 2852843 Dr. Richard Head
Dr. Richard Head's picture

AH?

Wed, 10/03/2012 - 15:20 | 2852845 Vincent Vega
Vincent Vega's picture

You must be talking about the debate toinight.

Wed, 10/03/2012 - 15:20 | 2852847 FL_Conservative
FL_Conservative's picture

Must be a fucking asteriod heading our way, eh?

Wed, 10/03/2012 - 15:28 | 2852873 FL_Conservative
FL_Conservative's picture

........or a hemorrhoid......

Wed, 10/03/2012 - 17:15 | 2853386 optimator
optimator's picture

Or, half  the Iranian Navy, all one of their destroyers, on maneuvers in Long Island Sound.

Wed, 10/03/2012 - 15:21 | 2852849 Mark Carney
Mark Carney's picture

cool, care to elaborate or just throwig shit at the wall?

Wed, 10/03/2012 - 16:19 | 2853082 FL_Conservative
FL_Conservative's picture

Come on Slaughterer!  When is this news coming!  I need to go take a dump and don't think I can hold it much longer!

Wed, 10/03/2012 - 17:13 | 2853368 optimator
optimator's picture

Where?  Not on CNBS, Blooom, or any of the major media.

Wed, 10/03/2012 - 17:25 | 2853471 Thought criminal
Thought criminal's picture

Hmph so where is it? You know some people might lose money and get realllly pissed if u keep throwing sht like that around?

Wed, 10/03/2012 - 23:09 | 2854648 hamstercheese
hamstercheese's picture

...is it still After Hours?

Wed, 10/03/2012 - 15:07 | 2852785 CClarity
CClarity's picture

Uh-oh.  APPL at that dreaded 666 again.  HP (Hell's Peeps) plunging 11% and a flash crash in food - Kraft.  These are not good omens.

Wed, 10/03/2012 - 15:15 | 2852814 Rainman
Rainman's picture

Oil down 4%.....word is out Biden discovered the middle class is being crushed.  

Wed, 10/03/2012 - 17:05 | 2852901 FL_Conservative
FL_Conservative's picture

Actually, he said the middle class was being crushed and processed into a new form of synthetic crude oil.  Code name "Oylent Brown".  That's why oil is rolling over.  New competition from renewable source.  He's one fucking smart dude to think of that!

Wed, 10/03/2012 - 15:10 | 2852793 DoChenRollingBearing
DoChenRollingBearing's picture

Stocks and bonds are both expensive, IMHO.  They're both OK to hold, but, add some gold, silver and Pb to your portfolios!

Wed, 10/03/2012 - 15:21 | 2852851 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Peanut butter?

Wed, 10/03/2012 - 15:27 | 2852863 DoChenRollingBearing
DoChenRollingBearing's picture

Yes!  Of course!  TP too...

 

:)

Wed, 10/03/2012 - 15:31 | 2852884 LongSoupLine
LongSoupLine's picture

yep, just not the Trader Joes one...

Wed, 10/03/2012 - 15:33 | 2852890 JuliaS
JuliaS's picture

Plumbum - Latin for "lead", periodic symbol [Pb] . The term borrowed from ancient Rome gave origin to the English word "plumbing".

Wed, 10/03/2012 - 15:11 | 2852797 slaughterer
slaughterer's picture

Get ready for the HORROR show AH.  OMG.  It sucks.  

Wed, 10/03/2012 - 15:15 | 2852816 fonzannoon
fonzannoon's picture

Is it a horror if you are short? Is it that bigtime drudge obama video again?

Wed, 10/03/2012 - 15:19 | 2852840 slaughterer
slaughterer's picture

 If you are short, the HORROR will be good for you.  

Wed, 10/03/2012 - 15:25 | 2852862 fonzannoon
fonzannoon's picture

I give you a lot of credibility slaughterer. If it is Moody's downgrading Spain I will be disappointed. This will lead them to ask for a bailout which will be bullish.

If it is Apple making a public apology to foxconn workers and offering them a 1000% thats another thing....

Wed, 10/03/2012 - 15:36 | 2852907 Dr. Engali
Dr. Engali's picture

Don't get us all worked up like some lame ass  hyped up Drudge video.

Wed, 10/03/2012 - 15:42 | 2852915 Squid Vicious
Squid Vicious's picture

yeah haven't seen much of that fuktard, or is it fox-tard? CPL and his "America-changing event" today

Wed, 10/03/2012 - 16:02 | 2852992 Squid Vicious
Squid Vicious's picture

ok slaughterer it's now AH... as Ted Knight said in Caddyshack: "we're WAITING..."

Wed, 10/03/2012 - 16:05 | 2853007 fonzannoon
fonzannoon's picture

Maybe he was playing games with the hft guys and we were just pawns in his game. I feel so used.

Thu, 10/04/2012 - 09:49 | 2855542 amadeusb4
amadeusb4's picture

... and there goes your credibility. Is there some sort of "ignore this user" option on ZH?

Wed, 10/03/2012 - 15:19 | 2852838 gjp
gjp's picture

dude, slow down on the coke will ya? you're not going to make it to 30 at this rate

Wed, 10/03/2012 - 15:20 | 2852846 Dr. Engali
Dr. Engali's picture

What's the big news? You didn't really jack of to a porn hub Suzie Diamond video.?

Wed, 10/03/2012 - 15:21 | 2852853 ptoemmes
ptoemmes's picture

Romney's spray on tan was sabotaged and he will be forced to debate in black face?

Wed, 10/03/2012 - 15:35 | 2852899 Squid Vicious
Squid Vicious's picture

they found an old Obama video where he talks like a black dude? wait, that was last night...

Wed, 10/03/2012 - 15:37 | 2852910 HelluvaEngineer
HelluvaEngineer's picture

Osama walks onstage during the debate tonight, with a copy of Obama's real birth cetificate in hand.

Wed, 10/03/2012 - 15:13 | 2852805 Piranhanoia
Piranhanoia's picture

I believe that my bonds will be paid off with inflation factored in so my yield will really be 28% in a distant future utopia.

Wed, 10/03/2012 - 15:16 | 2852809 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Who fucking cares when both stawks and bawds are being manipulated by the President's Working Group on Financial Markets:

http://www.archives.gov/federal-register/codification/executive-order/12631.html

Wed, 10/03/2012 - 15:15 | 2852815 Dr. Engali
Dr. Engali's picture

By the way oil is rolling over  today (they are working hard to get gas down for Obummer) I wonder if it's signaling a role over in stocks. 

Wed, 10/03/2012 - 15:19 | 2852836 FL_Conservative
FL_Conservative's picture

No, its just the fucking speculators again.  /sarc

Wed, 10/03/2012 - 15:19 | 2852841 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The fine line between input costs and return is tighter than the string that connects Bernanke's ass and mouth.  Pensions need stocks to stay up since bonds are giving investors no return, yet oil is taking any surplus away from the retirees.

If Bernanke wants to sacrifice high oil prices to the gods of the underworld he will have to do it by shorting it, otherwise he would increase the value of the DXY and collapse the stock market.  Yet throwing fiat into the fire to keep a lid on oil will only last as long as it takes to burn a pile of dollars for warmth.

I'll give it a week.

Wed, 10/03/2012 - 15:24 | 2852857 Quinvarius
Quinvarius's picture

Personally, I smell a margin raise in oil or SPR smashdown coming.  Could be either with this magnitude of frontrunning.

Wed, 10/03/2012 - 15:27 | 2852870 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

You may be right.  Too bad when they raise margins on oil people can't go out and buy physical...like we can gold.

Wed, 10/03/2012 - 16:21 | 2853089 Mark Carney
Mark Carney's picture

Right you  but Jamie will

Wed, 10/03/2012 - 17:09 | 2853346 optimator
optimator's picture

They can't broadcast why oil is down and gas is up, sure wish someone would ask Carnak, meant Bernak, next meeting he has.

Wed, 10/03/2012 - 15:16 | 2852819 fonzannoon
fonzannoon's picture

CNBC doing a big piece on Apple right now. Specifically how Apple owns the biggest hedge fund. They are crediting some no name underground thing called Zerohedge as their source....

Wed, 10/03/2012 - 15:24 | 2852859 DavidC
DavidC's picture

Hoorah!

DavidC

Wed, 10/03/2012 - 15:26 | 2852866 Dr. Engali
Dr. Engali's picture

Damn it fonz I went and turned on that accursed channel only to miss it.

Wed, 10/03/2012 - 15:29 | 2852876 fonzannoon
fonzannoon's picture

What's with Slaughter and the word HORROR? He keeps using that word. Let's unlock this secret.

Wed, 10/03/2012 - 15:54 | 2852964 Squid Vicious
Squid Vicious's picture

he watched Apocalypse Now a few too many times...

Wed, 10/03/2012 - 15:30 | 2852878 Ineverslice
Ineverslice's picture

Please, just give me my Obamaphone and let me go home.

Short NDX (fu aapl)

Wed, 10/03/2012 - 15:31 | 2852885 Squid Vicious
Squid Vicious's picture

this time it's different, equities are right... loaded up on homies and Robo-tard faves all day...

Wed, 10/03/2012 - 15:45 | 2852935 kornholio
kornholio's picture

Bullish!!!!!!!!!!!!

Wed, 10/03/2012 - 15:50 | 2852954 Quinvarius
Quinvarius's picture

I don't get much out of those charts.  The don't seem all that out of whack with each other or predictive.

Wed, 10/03/2012 - 17:07 | 2853331 optimator
optimator's picture

Looking at charts with the bald headed guy with the beard in charge is a waste of time.  All you'll do is spend an hour or two looking at charts and end up buying more gold.

Wed, 10/03/2012 - 21:26 | 2854282 alex_g
alex_g's picture

Everyone should be buying stocks that grow their earnings at 6% at 18x eps because they pay a 3% dividend.  Just ask Bernanke...

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