Treasury Curve Collapse Signals Multiple Expansion Exuberance Is Over

Tyler Durden's picture

Thanks to buybacks, multiple expansion has been the driver of equity market strength as non-economic actors know one thing - buying stocks at record highs pays better than 'investing' in Capex or growth. However, the Treasury market's yield curve is sending a message loud and clear that multiple-expansion is due to end. As Wells Fargo's Gina Martin Adams notes, "Index P/E is likely to fall," as the spread between 10Y and 2Y yields compresses. Historical data shows the P/E ratio contracted in seven out of eight periods when the curve flattened since 1975.



As Bloomberg adds, Martin Adams expects the S&P to close 2014 -7.5% from here at 1850 (tied with Deutsche's David Bianco for lowest prediction among 20 strategists).


Source: Bloomberg

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NoDebt's picture

I am increasingly unimpressed with historical comparisons, especially technical ones.  We've broken every one of them so far in this 5 year 200% run-up.  In particular, TSYs have been sending warning signals for years.  So has copper.  So has a lot of stuff you used to be able to depend on.  The only thing the market is depending on is the Fed bailing them out if anything starts going off the rails.

(Short version:  there are no markets any more)

i_call_you_my_base's picture

"The only thing the market is depending on is the Fed bailing them out if anything starts going off the rails."

Why would anyone think otherwise?

wallstreetaposteriori's picture

Funny how the long end of the curve has been the better investement over the indexes all year...  I hope all the endless pumping that interest rates would be moving higher at the end of last year merited all those excessive bonuses and pay raises on wall street.  

i_call_you_my_base's picture

I don't think it's surprising at all. When debt is so high, the last line is interest rates and the fed will do anything to drive rates down, even if it means lying and buying through proxies. The US will crash foreign economies and even their own to drive money into US bonds and push rates lower. They will do anything to keep them low. Anything. Betting on interest rate rises is the surest way to lose money.

NoDebt's picture

7% (actual) inflation with 3% treasury rates has always been the unspoken goal.  I can see it from here.

nasdaq99's picture

they're all phoney markets.  the yield curve would be inverted if the fed didn't have it's foot on the front end.


there is NO MEANING to be derived from charts anymore.

JuliaS's picture

Luckily there's enough experts out there to offer us a fresh prognosis each of the 365 days a year. Eventually one of them will be right. That's why MSM news love guest correspondents. They can have an-expert-a-day and never be liable for anything that comes out of their mouths.

kaiserhoff's picture

I feel your pain, NoDebt, and have for a while, but this is not really technical analysis.

If this continues, they will no longer be able to sell long debt.   Deep weeds.

The role over trap fonz has talked about is getting worse.

NoDebt's picture

I don't know.  There seems to be almost limitless demand for TSYs of all maturities.  Long is fine.  In fact, it's baked into the cake for a lot of big "institutional" investors.  They essentially HAVE TO buy it with shorter term stuff not hitting their yield requirements.  It's a vicious circle.  Everyone knows it's a rigged game but many of the big players are chained to their seats at the table.

kaiserhoff's picture

Good points.  Stay flexible.  In my experience a little hooch helps;)

highly debtful's picture

It would seem that this time the Gods will let those stupid humans run wild until the very last warning is ignored, the very last line crossed and the very last circuit breaker deactivated in an effort to keep this show on the road.


starman's picture

does it really matter where the DOW , Nasdaq or S&P closes. It's a meberships only casino for years now.

Fuku Ben's picture

More MSM mouthpiece quotes serving notice to the muppets

Dr. Engali's picture

Two words: Policy tool.

wallstreetaposteriori's picture

who is the bigger tool? bernake or yellen?  

ebworthen's picture


Holiday debt shopping will save retailers, Cold Winter will save Utilities, Ebola will save biotech, online job hunting will save Technology, EBT will save Walmart, yield chasing retirees will save Treasuries, sub-prime lending will save Autos and Homes, and .gov will save the banks.

All green shoots and mustard seeds from here on out.

Winston Churchill's picture

We are going to need a bigger lifeboat.

Uber Vandal's picture

I have a feeling that once the rug finally is pulled out from under everyone, this south park clip will prove to be rather succinct:

AdvancingTime's picture

While very short the clip was worth turning my volume back on to watch, thanks.

Atomizer's picture

NSA, DHS are calling this a unpatriotic action of terrorist not supportive in supporting the Bank of International Settlements and the Global Ponzi development agenda goals. 

NGO'S are furious. Under anonymity, a spokesman said; things are spiraling out of control. We haven't seen chairs go airborne and land into walls since the days of grunge rock concerts. A news conference time is expected to be released shortly. 

FreeMktFisherMN's picture

actually the low rates are precisely what keep these valuations high because the DCFs are calculated with a minimized denominator as the rate they use is virtually nil. It all has to do with the repo/carry trade. Companies are smart to not malinvest in capex unless it is abroad in countries with growing incomes, trends of economic liberalization, and resources.

fuu's picture

Songs About Fucking was an incredible album that is not appreciated enough.

Soul Glow's picture

The shitshow continues.

max2205's picture

Forget about P/E until hell freezes over......

AdvancingTime's picture

The economic landscape is beginning to look like something out of  "Alice And The Looking Glass" A bizarre  and unrecognizable land, a land that is distorted and papered over by ream after ream of paper. This paper has been rolling off the printing presses of central banks all across the world in an attempt to mask reality.

Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off. What was once the "long run" or "distant future" may be getting much closer. More on what happens when the momentum ends in the article below.