As Everything Disconnects And Everything Is Soaring, Morgan Stanley Issues A Warning

Tyler Durden's picture


The latest report from Morgan Stanley's Graham Secker can be summarized simply as follows: i) in January everything has disconnected as traditional linkages between asset classes have broken down, ii) also in January every major asset class (equities, treasurys, gold, oil) was up materially, iii) such a phenomenon has been seen only 5 times in the past 5 years, iv) a double digit decline followed 3 of the past 4 such surges. Then again, as Bob Janjuah lamented earlier, when a bunch of bespectacled economists who have never held a real job in their academic careers since transplanted with banker blessings to various central bank buildings, and who continue to plan the fate of the world in secrecy (a fate that can be summarized as follows: CTRL+P), as the only marginal decision makers, who really cares anymore?

From MS:

Breadth of positive returns across asset classes is rare …

Reading the January version of our global cross-asset strategy team’s excellent ‘Global In The Flow’, it struck us just how unusual performance trends were last month. While we’re all aware that we’ve just witnessed the best start to the year in equities since 1994, what was more interesting to us was the sheer breadth of positive performance across a wide array of assets. Effectively, the only major asset to fall in value in January was the dollar, and the only other laggards we could see were corn, coffee, coal and natural gas.

… and has often preceded equity market corrections

Unfortunately, the report in question hasn’t been in existence long enough for us to see just how rare such a breadth of positive performance is. So we have screened the past five years to identify periods of coinciding monthly price appreciation in the S&P, Treasuries, Oil and Gold. As shown in Exhibit 1, January 2012 was only the fifth month in the past five years when all four of these major asset classes have risen in unison. More interesting, on three of these four prior occasions that month proved to be a significant peak in equities and was followed by a substantial double-digit decline.

The traditional relationship between equities, treasuries and gold has broken down in recent months

While this analysis doesn’t guarantee that the market is about to suffer a reversal, it probably does reflect an abundance of liquidity plus rising investor optimism that this liquidity can lift asset prices across the board. Exhibit 3 and Exhibit 4 chart the longer-term performance of equities relative to USTs and to gold, and both clearly show a breakdown in the relationship in recent months. Of course, it is possible this gap can close through either falls in stocks or declines in the other assets, but we think it is unlikely this disconnect will continue for very long.

We see the breadth of recent strong performance as a warning sign

While we believe Exhibit 1 is a powerful argument to position for a market pullback, investors should note that this rule-of-thumb was less compelling in prior years. For example, although it gave correct sell signals in June 2000 and August 2002, it also gave a number of false sell signals during 2003 and at the end of 2004, as shown in Exhibit 2. We believe the macro environment going forward is more akin to the last five years than the preceding decade, and hence consider this signal is an important warning sign; however, we acknowledge that others may take a different view. [yes, like ChairSatan]

Speculators are bullish on equities, bonds and oil …

In seeking corroborating evidence to support the rule-of-thumb suggested by Exhibit 1, we have analysed CFTC positioning across similar asset classes. Exhibit 5 plots CFTC net speculative longs as a % of open interest for the NASDAQ (historically this metric has been a good predicator of European equity performance), US treasuries and the oil price. Within the chart the grey shading indicates areas when investors were net long all three asset classes based on a rolling 3-month moving average basis. To illustrate its efficacy for stocks Exhibit 6 then shows the S&P and MSCI Europe with the same periods again shaded grey.

… which has provided strong sell signals over the last decade

If anything, we think Exhibit 6 suggests the CFTC analysis is even more powerful than that shown in Exhibit 1, as there do not appear to be any false sell signals (although it was a little early at the tail end of 2010) even when we take the analysis back to 1999. Further, Exhibit 7 details some standard performance analysis around this data – for example, since July 1999 the average 6-month return from MSCI Europe has been 0% and the probability the market rises (hit ratio) is 54%. However, when we measure performance from periods when net longs were present across the three asset classes, we find the average subsequent 6-month return was -6.6% with a hit ratio of just 19%.

Ze charts:

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Mon, 02/20/2012 - 15:18 | 2178209 hedgeless_horseman
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I cry a little each time I read a story saying "speculators" or "investors" are pushing up governemnt bond prices.

Mon, 02/20/2012 - 15:18 | 2178219 oogs66
oogs66's picture

yes...and whenever bernanke points out the yield curve showing that inflation expectations aren't high, but it is only so flat because he is buying them all

Mon, 02/20/2012 - 15:21 | 2178230 fonzannoon
fonzannoon's picture

thats right. So what happens in June when he stops? My guess is either huge correction will have happened so the dumb money flees to treasuries and bails him out or we get QE llaunched behind the scenes.

Mon, 02/20/2012 - 15:32 | 2178267 WonderDawg
WonderDawg's picture

QE is already going on behind the scenes, but they don't publicly acknowledge it, or call it QE.

Mon, 02/20/2012 - 15:53 | 2178317 slewie the pi-rat
slewie the pi-rat's picture

operation "twist" is QE, dawg

by definition

there is more than 1 type of QE, ok?  it (twist) is also

  • acknowledged and
  • above-board
Mon, 02/20/2012 - 16:11 | 2178340 Manthong
Manthong's picture

You have to be an idiot to think that they don't have a trading desk.

I wonder how much of the "market" is buried in the Fed's books.

Tue, 02/21/2012 - 00:20 | 2179879 slewie the pi-rat
slewie the pi-rat's picture


listen, you styooopid fukface:

  • i'm not talking about what i think
  • i'm not talking about what i wonder
  • i'm simply talking about what i know

you are more intelligent than others b/c you "think the FED gas a trading desk"?  good4U, asswipe!

Mon, 02/20/2012 - 15:57 | 2178323 DoChenRollingBearing
DoChenRollingBearing's picture

If it's inflation: prices will go up due to more money and credit in the system.  Some things will go up faster than others.

If it's delation: some prices will go down more so than others.

I contend that gold will do better in both environments (gold would go up FASTER than inflation and would fall more slowly in deflation).  Gold is what people will WANT when things get ugly.

Mon, 02/20/2012 - 20:41 | 2179261 TrulyBelieving
TrulyBelieving's picture

It's deflation already. Most things, like gasoline, houses, and food have actually gone down in price since the sixties, if priced in gold.

Mon, 02/20/2012 - 18:18 | 2178791 slaughterer
slaughterer's picture

Fuck MS, GS wannabes with a first-row seat on .. what?  ... New Year's Eve? Too many bridge and tunnel boys and girls at MS.  They deserve to go bankrupt like Europe.  

Mon, 02/20/2012 - 15:15 | 2178210 Temporalist
Temporalist's picture

Ctrl+P is so last millennium. Now it's Ctrl+C > Ctrl+P

Mon, 02/20/2012 - 15:20 | 2178226 Ahmeexnal
Ahmeexnal's picture

hmmm....even that is last millennium.
What's the trackpad gesture to print?

Mon, 02/20/2012 - 15:38 | 2178285 adr
adr's picture

You whip out your dick and make one long swipe.

In Bernake's case he uses an industrial water pump made by GE in the hopes it gets long enough to even register.

Mon, 02/20/2012 - 17:07 | 2178490 HungrySeagull
HungrySeagull's picture


sticky money, I dont think so.

Mon, 02/20/2012 - 15:45 | 2178296 Martin W
Martin W's picture

Now should be CTRL+ALT+DELETE !!!!!!!!!!!

Mon, 02/20/2012 - 17:42 | 2178651 A Nanny Moose
A Nanny Moose's picture

Format c:

Mon, 02/20/2012 - 15:45 | 2178297 MsCreant
MsCreant's picture

And really, we all know actual printing has nothing to do with it. Key punch those number pads...

Mon, 02/20/2012 - 15:17 | 2178216 fonzannoon
fonzannoon's picture

The 10yr closed out 2011 at 1.8%. It is up around 2% right now. I thought treasuries had sold off (slightly anyway).

Mon, 02/20/2012 - 15:18 | 2178221 GeneMarchbanks
GeneMarchbanks's picture

Disconnect for a month is one thing, disconnect for six months another and interest rate rise or even volatility is... a jubilee.

Mon, 02/20/2012 - 15:18 | 2178222 YesWeKahn
YesWeKahn's picture

If someone knows the S&P 500 price target in Bernank's mind.

Mon, 02/20/2012 - 15:23 | 2178237 TradingJoe
TradingJoe's picture

50/50 we're going up/down tomorrow ;)))) , honestly I couldn't care less, Phyzzz It IZZZZZ!

Mon, 02/20/2012 - 15:36 | 2178278 adr
adr's picture

100% we are going up and down tommorow. There fixed it for you.

Mon, 02/20/2012 - 15:51 | 2178312 TradingJoe
TradingJoe's picture

Gee thx Bud, I gave you an up arrow, I like people with some sort of humor :)))!

Mon, 02/20/2012 - 15:27 | 2178246 q99x2
q99x2's picture

Off Topic: from Yahoo Finance: Spain sending military planes to retrieve treasure

"It ruled out the idea of the treasure being sold to ease Spain's national debt."

Guess we know what the bankster's kids are getting for gifts this year.


Mon, 02/20/2012 - 15:49 | 2178307 Manthong
Manthong's picture

Grave damage to justice, freedom and entrepreneurship is being done by the US court system here.

Once again, the SCOTUS falls down in defense of justice and the Constitution.


Mon, 02/20/2012 - 15:59 | 2178326 DoChenRollingBearing
DoChenRollingBearing's picture

Spain stole it from Peru.  Now they are stealing it again!

Mon, 02/20/2012 - 15:30 | 2178260 Yen Cross
Yen Cross's picture

I'm long federal reserve notes, as they make great ass wipes when you are on safari!

Mon, 02/20/2012 - 15:30 | 2178261 juggalo1
juggalo1's picture

So it has happened 5 times in the last 5 years and 3 out of 4 times was followed by a double digit decline.  What about the 5th time?  I understand the sentence is correct, but it leaves me hanging.

Mon, 02/20/2012 - 17:11 | 2178506 lazarus
lazarus's picture

The 5th time is now is how I understood it. (My first zh post!!)

Mon, 02/20/2012 - 17:12 | 2178512 amadeusb4
amadeusb4's picture

They are presumably counting the current event with yet to be determined outcome as one of those 5 events. We only know the outcome of the 4 previous events unless you have some sort of advanced technology we're not aware of.

Mon, 02/20/2012 - 15:32 | 2178266 TheSilverJournal
TheSilverJournal's picture

The dollar is going to take a beating when the Greek bailout goes through. The weakness in the Euro seems to be over the concern that the Euro will fall apart, not how many Euros are being printed. Once it is made clear that the Troika will backstop anything and everything, the Euro should soar, the dollar should get crushed, and silver should jump.

Mon, 02/20/2012 - 16:25 | 2178369 LawsofPhysics
LawsofPhysics's picture

Sure, now how is that going to work out for the average european or exports coming out of the E.Z.?

Mon, 02/20/2012 - 17:22 | 2178562 TheSilverJournal
TheSilverJournal's picture

In the end, very poorly as the entire western world goes bust and the wealth of the world ends up in Asia. But for now, the Average European will be helped by a strengthening Euro.

Mon, 02/20/2012 - 16:51 | 2178437 TooBearish
TooBearish's picture

Agree the lastest shorts in the EUR will get nuked, but next week Super Mario dumping upwards of 1 Trillion EUR into the system - not likely fuel for mutli handle sustained rally in the ccy....

Mon, 02/20/2012 - 17:19 | 2178549 amadeusb4
amadeusb4's picture

I don't follow how the dollar will get crushed. Why would people rush to a euro that's just lost the first of 5 PIIGS countries? Wouldn't this then portend an exodus from the eurozone of the others and unleash a bunch of yet to be sorted through chaos on the financial world? You would then be left with a currency that is supported by an economy of unknown size and health for the forseeable future. If anything, such a scenario would be good for the dollar.

Mon, 02/20/2012 - 17:32 | 2178596 TheSilverJournal
TheSilverJournal's picture

By setting the precedent of bailouts for eternity, there's less worry over the Euro falling apart. It's that worry over the Euro crumbling that's propping up the dollar right now. Besides, the dollar is fundamentally in much worse shape than the Euro.

Tue, 02/21/2012 - 01:58 | 2180130 amadeusb4
amadeusb4's picture

So if the dollar is such a mess, then who are these swap lines really for and why do they seem to be propping up the euro?


Mon, 02/20/2012 - 15:39 | 2178272 adr
adr's picture

Speculators are bullish on everything because everything is supposed to increase in value forever. The years of 2000 and 2008 were not bubbles being popped, they were just delusional periods where investors made a mistake in thinking stocks were overvalued. If anything they were wrong and stocks were massively undervalued. The Nasdaq should have doubled from 5000 instead of falling.

It isn't wrong to assume that any stock certificate you hold, real estate investment you made, or commodity contract you bought will double in value every single year. In fact they should double very single month. If Select Comfort can increase in value by 10,000% over three years, Apple should increase in value by 1 million percent over that same period!!!!!

This absolute insanity pretty much describes the mindset of any permabull I ever met. I remember when I told my friend to sell his house in 2006 after it tripled in value. He told me, "Fuck no way man the realtors are all saying the property values are all going to $1 million plus in my area. Doubling again in five years."

I asked a rational question, "How much do you make a year man, $80k. Can you afford a million dollar house?" He said, "Of course not." I then said," Well then how is anyone like you ever going to be able to afford to buy your house for $1 million." He then said, "Because they will sell their house and make enough money to buy my house. Then I will have enough money to buy any house I want."

I gave up.

Mon, 02/20/2012 - 17:36 | 2178302 ekm
ekm's picture

Speculators are good people. They assume the risk the real goods producers want to unload.

But when the Fed floods the market with printed debt as Slewie mentioned above, nothing matters.

Mon, 02/20/2012 - 17:05 | 2178433 battlestargalactica
battlestargalactica's picture

Maybe I will never understand... And maybe thats a good thing.

Mon, 02/20/2012 - 15:43 | 2178289 slewie the pi-rat
slewie the pi-rat's picture

from tyler's intro: iii) such a phenomenon has been seen only 5 times in the past 5 years, iv) a double digit decline followed 3 of the past 4 such surges

from the MS piece:  but we think it is unlikely this disconnect will continue for very long.

from slewie:  hey, shitheads @ MS!  how many times in the past 5 years was the FED goosing T-prices w. ZIRP + Twist?

(answer) :  zer0

so, maybe it IS a bit "defferent" this time at least so far;  don't fight the FED!

these fuking shithead bankster/broker/insurance salespersons will stoop to anything to try to make a buck off a rube!

they may be right, but it would be for the wrong "reasons" imo

Mon, 02/20/2012 - 15:49 | 2178306 ekm
ekm's picture

Agree with everything except for "don't fight the Fed" unless one is broker owned by big banks which are government banks under private management because they can't exist on their own.

Anything Fed does leads to hikes in food and energy prices without hike in real wages. Remember Arab spring?

Mon, 02/20/2012 - 16:42 | 2178366 xela2200
xela2200's picture

Translation of the article above:

Morgan Stanley sees a big move ahead. Therefore,  please sell all us your crap in fear, so that we can buy it on the cheap and make an even bigger profit.

Mon, 02/20/2012 - 17:09 | 2178495 cosmictrainwreck
cosmictrainwreck's picture

have u considered changing yer handle to "slewie the pi-rant"? :) always enjoy yer posts......

Mon, 02/20/2012 - 20:59 | 2179296 GernB
GernB's picture

Even in a bull market pullbacks occur. We are overdue. The market never travels in a straight line for long and rarely repeats itself.

Mon, 02/20/2012 - 15:52 | 2178313 Archon7
Archon7's picture

I don't like the "decoupled" argument...  all these indices go up, and go down.  Say, for instance, that gold decoupled years ago...  the other indices would rise and fall and do their thing while gold was off doing its decoupled thing.  Periodically they would randomly move in the same direction as gold, but its the same coincidence as a broken clock being right twice a day. It doesn't mean anything, only that the already-decoupled indices just happened to move in the same direction.

Mon, 02/20/2012 - 15:55 | 2178321 TradingJoe
TradingJoe's picture

In my VERY EXTREME HUMBLE opinion we 'll sell the news tomorrow...or not?!?! Or we'll have an up market followed by a donw market, then by a very extreme up to going down market, eh?!?! Catch my drift?! If we're in Phyzz we couldn't care lezzz!!!

Mon, 02/20/2012 - 16:33 | 2178389 miker
miker's picture

Total bullshit article.  They just want to sucker you in on a buch of bearish puts.  Laughing all the way to the bank.

Mon, 02/20/2012 - 16:37 | 2178404 monopoly
monopoly's picture

Have no idea when it all comes to an end, although I think except for a minor correction or two not much happens until after the election. Then again, the bond market is acting a little different lately. At some point.....

Mon, 02/20/2012 - 16:43 | 2178422 azzhatter
azzhatter's picture

What can possibly go wrong.? Everything's up, dollars down Happy Days are here again......................................

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