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What Do Bonds Say About S&P 500 "Fair Value"

Tyler Durden's picture




 

On a day when the reflexive NEW QE knife-catchers seem to have stepped away from the desk, we thought it useful to get some cognitive clarity on where exactly Treasuries think the post-FOMC-disappointment equity market is likely to end up in the short-term (especially as they retrace all the way down to yesterday's low yields). It seems, as we noted yesterday, that bonds believe ES needs to be well under 1300 before deflationary concerns rear their ugly head and NEW QE can be back on the table.

It seems the more things change, the more they stay the same as hope fades once again - just like in April...

 

Charts: Bloomberg

 

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Thu, 07/12/2012 - 10:45 | 2609852 SheepDog-One
SheepDog-One's picture

GEE 20 whole ES points? Oh my gosh.

Thu, 07/12/2012 - 11:00 | 2609913 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

In this world one investment stands alone from the manipulation and counterparty risk of stocks and bonds and cash.  That investment is precious metal.  That which you can rely on as long as you have it, that which does not change.

It is the real money supply, and tomorrow, Friday the 13th, take back your right to own sound money.

BUY SILVER!!!

Thu, 07/12/2012 - 11:03 | 2609927 BKbroiler
BKbroiler's picture

"Fair Value"?  ... so 80's.  how quaint.

Thu, 07/12/2012 - 11:05 | 2609935 redpill
redpill's picture

But front page of Yahoo! Finance this morning says there's nothing to worry about.  How could they be wrong?

 

 

Thu, 07/12/2012 - 12:05 | 2609966 Thomas
Thomas's picture

I think the high correlation means that the market is no longer forward looking. In Surwiecki's "The Wisdom of Crowds" he shows in detail how such wisdom gets nuked with correlation. Therefore, I don't believe any of these markets are all knowing. The markets have become morons.

Thu, 07/12/2012 - 11:33 | 2610024 Stock Tips Inve...
Stock Tips Investment's picture

The market is absorbing all the bad news there. Is also discounting the bad news to come. The Fed will likely be forced to implement a new QE. I think the big question is whether this new QE will be able to give new impetus to the market ... market forces and mark their own direction.

Thu, 07/12/2012 - 10:46 | 2609861 mrktwtch2
mrktwtch2's picture

lets get  it on..

Thu, 07/12/2012 - 11:15 | 2609956 CrashisOptimistic
CrashisOptimistic's picture

It's hard to do a valuation (P/E) based estimate of proper S&P level when mark-to-market remains suspended and allows financials to misstate more or less everything.

These banks are carrying non performing mortgages at full value, collateralized by houses whose prices are down 50% in reality, but are carried on the books at full value -- because of the magic phrase -- "it benefits no one to mark the value of these assets to pricing for a market that does not exist.  Rather, their value should be marked to a price that best judgment suggests would be their value in "normal times".

That is still in force.  It's been 3+ years.  That is the source of all the bullshit.

The truth is your asset is worth nothing if there are no buyers.  If those zero value assets overwhelm your balance sheet, then you are bankrupt.

 

Thu, 07/12/2012 - 11:15 | 2609968 Rainman
Rainman's picture

BINGO !!!

Thu, 07/12/2012 - 12:07 | 2610118 True.North
True.North's picture

+1

One of the more astute observations on here. And that will continue to happen as long as markets are driven by hopes of more QE, LTRO, Twist, etc. The question is when will we return to a market driven by fundamentals and not ? stimulus

Thu, 07/12/2012 - 10:48 | 2609869 Plymster
Plymster's picture

Eyeballing the chart, it looks more like it should be at 1270-ish (now at 1321), so more like "GEE 50 whole ES points"  or ~4% premium.

Thu, 07/12/2012 - 10:56 | 2609887 SheepDog-One
SheepDog-One's picture

Wait, but didnt we learn just yesterday ES really has no business anywhere above about 600? So then what does 'fair value' even mean? We should rather use terms like 'QE Hopium value', if all it takes is a 20 or even 50 point drop to 'justify' more 'easing' nonsense, for the single purpose of then getting the ES back up to where it is now again.

Thu, 07/12/2012 - 10:58 | 2609907 Plymster
Plymster's picture

True.  If we're just comparing /ES to Treasuries, there's only a 50 point drop needed.  However, if you compare it to commodities, you're prolly looking at a much larger plummet.  If you compare it to commodities sans printing hope (which is what the Fed basically discovered in http://www.zerohedge.com/news/chart-year-fed-has-doubled-sp-admits-fed), then the /ES should be at ~600, but that would mean a few less ivory backscratchers for Jamie, Lloyd, et. al.

Thu, 07/12/2012 - 11:05 | 2609938 rubearish10
rubearish10's picture

That would only be if the FED is destroyed.

Thu, 07/12/2012 - 10:50 | 2609875 Diesel Seven
Diesel Seven's picture

Who would have thought just ten years-ago, that a graph label as silly-sounding as "QE Hopeyness" would be an accurate description of a relevant and meaningful metric.

Thu, 07/12/2012 - 10:51 | 2609880 onikoroshi
onikoroshi's picture

I don't understand the baseline for this chart.  How does a yield value correlate to a specific value on the SP500?  That is, the perception of this would be different if the yield line is bumped higher where the most recent yield price matches the current SP500 value.

Thu, 07/12/2012 - 10:53 | 2609885 midgetrannyporn
midgetrannyporn's picture

what do manipulated bond yields say about the manipulated stock market? is that the question? bree hee hee

Thu, 07/12/2012 - 11:11 | 2609895 SheepDog-One
SheepDog-One's picture

LOL exactly. What does one completely manipulated thing say about the other totaly manipulated Fed hand-held thing? And why even speculate about where stocks will drop to, as its obvious theyre completely terrified of any market drop and are even now pumping stocks back up again.

Thu, 07/12/2012 - 11:11 | 2609955 NotApplicable
NotApplicable's picture

Anything they want it to say.

Thu, 07/12/2012 - 11:19 | 2609982 SheepDog-One
SheepDog-One's picture

And then what?

Thu, 07/12/2012 - 11:20 | 2609986 midgetrannyporn
midgetrannyporn's picture

...you take the blue pill, wake up in your bed, and believe whatever you want to believe. [/morpheus]

Thu, 07/12/2012 - 10:54 | 2609886 vmromk
vmromk's picture

The S&P needs to go much lower before the Bernank can unleash his massive QEIII.

Think more in the neighborhood of 1100's.

Thu, 07/12/2012 - 11:36 | 2610031 SheepDog-One
SheepDog-One's picture

'Massive QEIII' lol dream on.

Thu, 07/12/2012 - 10:54 | 2609888 Zola
Zola's picture

I'm more interested as to where the S&P would be without QE when Bernanke is finally restrained/jailed/replaced etc .

Thu, 07/12/2012 - 10:54 | 2609891 Temporalist
Temporalist's picture

What do record low mortgage rates say about home prices?  One would think that it means people aren't buying right and they need lower rates to con(vince) people?  But you'd be wrong because it shows "signs of improvement in the housing market."

 

U.S. Mortgage Rates Decline, With 30-Year at a Record-Low 3.56%

http://www.bloomberg.com/news/2012-07-12/u-s-mortgage-rates-decline-with...

 

Thu, 07/12/2012 - 11:11 | 2609958 Temporalist
Temporalist's picture

Oh and now it get's even better.  Great headline!

 

 

Housing Rebound Signaled as Banks Resume Foreclosures

http://www.bloomberg.com/news/2012-07-12/housing-rebound-signaled-as-ban...

Thu, 07/12/2012 - 10:54 | 2609894 evolutionx
evolutionx's picture

of topic, but important:

 

VeriFone Hacked

VeriFone - a global leader in secure electronic payment technologies - has been hacked. They knew it since end of March. Since then stockprice plummeted. The electronic paying devices of VeriFone can be easiely manipulated from outside. On Thursday a "white hat hacker" went public with his secrets in Germany. Debit card terminals are not sure, even the PIN can be read and collected.

 

Look at the shareprice, it fell since May

 

More: http://www.webcompact.net/index.php/news/37827-verifone-hacked

Thu, 07/12/2012 - 11:03 | 2609928 evolutionx
evolutionx's picture

this will develop into a huge insider trading scandal

 

to Tyler: can u pic up the story? u will be the first in the US Market. In germany there are allready some reports about the case

Thu, 07/12/2012 - 11:21 | 2609987 Beam Me Up Scotty
Beam Me Up Scotty's picture

Oh yes, the whole plastic money thing is a joke.  It was about 2 months ago on a Sunday afternoon for about 20 minutes, NO ONE was able to process credit cards.  NO ONE!!  How do I know?  I have 2 businesses on 2 separate processors.  Visa itself had a problem.  I couldn't process any cards at either business.  I asked another business owner later that day about 45 minutes away if he had the same problem and he said yes.  My sister was at the mall that day at Macys and she was trying to make a purchase with her card and couldn't.  She said all the clerks were on the phone trying to find out why they couldnt process a credit card.   People are so reliant on plastic it is totally AMAZING!!  They dont' have one red cent in their pockets.  You want to see a crash?  All that has to happen is a big virus to hit Master/Visa and its good game losers.  How long do you think the tiny amount of cash at the banks and ATM"s would last if you couldn't access your digital dollars for a week?  Or a month?

PCI compliance is a joke.  They make you do all this security bullshit.  There is NO secure system.  You can make it secure today but tomorrow the criminals will figure out how to hack your new security.  And then you have to spend more money on PCI compliance.  Big fines from Visa is you don't do it and have a breach.  But who do they have to pay when THEY have a breach?  NO ONE!!

Thu, 07/12/2012 - 10:55 | 2609897 Falkor
Falkor's picture

Hopeyness... I like it ZH. Finally, we have a term for this madness-premium.

Thu, 07/12/2012 - 10:59 | 2609909 ptoemmes
ptoemmes's picture

HopeQEness, but I am trying to be way too cute.

Thu, 07/12/2012 - 11:01 | 2609916 JenkinsLane
JenkinsLane's picture

I prefer Hopium.

Thu, 07/12/2012 - 11:06 | 2609940 NotApplicable
NotApplicable's picture

Hopium cures QEzeness. Or causes it. I can't remember which.

Thu, 07/12/2012 - 10:56 | 2609898 SheepDog-One
SheepDog-One's picture

PUT THE QE BACK IN THE FUKING BASKET !!!

Thu, 07/12/2012 - 11:13 | 2609965 poor fella
poor fella's picture

Is that from the Bernank minutes?

"It puts the QE on its skin,

  Or it gets the hose again...."

 

Thu, 07/12/2012 - 11:07 | 2609944 NotApplicable
NotApplicable's picture

Interesting that it was authorities in both France and Germany.

Thu, 07/12/2012 - 11:33 | 2609903 TruthInSunshine
TruthInSunshine's picture

The new QE won't come until after November, if it even resembles anything like the old/current QE, though.  The Pavlovian salivators speaking of some September time frame are dreaming. Politics is set up just as it was back in 1979-1980, and no Fed Head is going to take blame or be accused by a massive number of economists, politicians and media bobble heads of trying to rig an election.

The Bernank's and the Fed's recent public propaganda tour was a massive failure, also.

Sad Bernank Who Broke Markets Sits on His Hands.  Bernank is sad that he can't break markets further, sooner.

At any rate, the new QE may also not take any form similar to the old/current QE.

Markets are broken, conventional transmission mechanisms of monetary policy are in 'retardation,' and the world is a significantly different place, both politically and economically, then when The Bernank fired his first toxic munitions and poisoned the well.

Thu, 07/12/2012 - 10:57 | 2609904 101 years and c...
101 years and counting's picture

cant wait for them to line up again on the long term:

http://finance.yahoo.com/q/bc?s=%5ETNX&t=5y&l=on&z=l&q=l&c=%5EGSPC

Thu, 07/12/2012 - 10:59 | 2609910 CreativeDestructor
CreativeDestructor's picture

They say gulp

Thu, 07/12/2012 - 11:01 | 2609914 eclectic syncretist
eclectic syncretist's picture

BS Bernanke at the next Fed meeting: "In Conclusion, we lowered interest rates to zero, and that didn't work, so we did QE1, which also did not work.  Then we did QE2, which failed, and now we are continuing with Operation Twist and the economy is tanking hard, so that is failing too.  Gentlemen, what shall we do?"

All: "QE3!!!!!!!!!!!  It will definitely work this time, because the American people are dumb enough to believe anything we tell them."

Thu, 07/12/2012 - 11:05 | 2609933 midgetrannyporn
midgetrannyporn's picture

we gots to do it fer da peeple!

Thu, 07/12/2012 - 11:06 | 2609942 crawldaddy
crawldaddy's picture

New and Improved QE now with aloe

Thu, 07/12/2012 - 11:10 | 2609951 NotApplicable
NotApplicable's picture

Next meeting is the A-holes in the J-hole.

Stay tuned...

Thu, 07/12/2012 - 11:04 | 2609932 crawldaddy
crawldaddy's picture

Lets use a sport analogy shall we.

 

Our team ( The world economy) is down 48-10 at the end of the third quarter.  Yet some people still hold out hope for a comeback as they chant for QB Joe QE to come into the game, an over the hill once star player.  Joe QE now a backup QB, has played a few times this season  but has shown none of the skill and star power he once had. He is but a shadow of himself, but still he has his fan base.

 So here we are, the game is all but over, yet we have these diehards still chantin for Joe QE as if this broken down backup QB is going to effect the game or score in any meaningful way.  Its kinda pathetic really.

The games over, at least we at ZH are smart enough to understand this and can at least get home and beat the traffic.

 

Thu, 07/12/2012 - 11:05 | 2609936 doc_in_the_house
doc_in_the_house's picture

Just took some spx SHORT profits

@ spx 1326-1328...was hoping to cover all my spx shorts of 1370, 1360 @ 1310...oh well...covered all...waiting for a pump today or tomorrow @ 1350+ to re-short and hold til 1290

Thu, 07/12/2012 - 11:09 | 2609939 JenkinsLane
JenkinsLane's picture

I think the Fed is really keeping it's powder dry for the forthcoming Euroquake. After that it's going to need to go full on

Ride of the Valkyries a la Apocalypse Now.

 

As I write this I can hear Schwarzenegger saying "Bennie, get to ze choppa".

 

Thu, 07/12/2012 - 11:08 | 2609946 LawsofPhysics
LawsofPhysics's picture

LMFAO!!  Fair value?  Is that like "price discovery"?  Thanks to "mark to unicorn" there is no such thing.  Too funny.

Thu, 07/12/2012 - 11:14 | 2609957 pamriallc
pamriallc's picture

Maybe 1000 as fair value but remembering that interest rates don't tell it all. There's eventual earnings growth, inflation, real, or otherwise. Trades below FV and bounces. Lots will rise during the decline, and lots will fail to rise during the rebound. Non-financial portfolio of MEGA cap equity with now larger slugs of capital in BROAD European and Emerging index securities, overweiight EM currently, 20% metals or relates, 20% cash. Portfolio yield of over 3% which is double the 10 year. Volatility? Yes. Going bust? No. Beats cash? Yes. Bats 10 year bonds in 10 years? Yes. Now back to watching the Titantic.....

Thu, 07/12/2012 - 11:12 | 2609960 LouisDega
LouisDega's picture

James Bond is married?

Thu, 07/12/2012 - 11:13 | 2609962 monopoly
monopoly's picture

I was thinking more like 660 spoos. But maybe I need to be more patient.

Thu, 07/12/2012 - 11:15 | 2609969 The worst trader
The worst trader's picture

At what point do I BTFD?

Thu, 07/12/2012 - 11:16 | 2609972 crawldaddy
crawldaddy's picture

for some reason I hear Quagmire from the Family Guy...

 

"Quantatative easing............... alll riiiight.. giggitty giggitty"

Thu, 07/12/2012 - 11:23 | 2609990 Al Huxley
Al Huxley's picture

bonds believe ES needs to be well under 1300 before deflationary concerns rear their ugly head and NEW QE can be back on the table.

Given the nature of the bond market these days, I think this should actually read

The FED has instructed the PDs to paint a picture which suggests that bonds believe ES needs to be well under 1300 before deflationary concerns rear their ugly head and NEW QE can be back on the table.

Thu, 07/12/2012 - 11:27 | 2610000 Temporalist
Temporalist's picture

Ahh trade wars...what is a depression without them?

 

California Foie Gras Ban Prompts French Call to Retaliate

"A political official in southern France is urging the nation’s restaurants to stop serving California wines in response to the U.S. state’s ban on foie gras.

California banned the sale and production of the French delicacy, a fatty goose or duck liver made by force-feeding the animals, under a law that took effect July 1. Most restaurants in the state have removed the item from their menus.

“I call on all the restaurants in France that sell Californian wine to stop doing so in a show of solidarity for our foie gras makers and, more broadly, for all food makers,” said Philippe Martin, the president of the general council in the Gers department, near the Pyrenees mountains."

http://www.bloomberg.com/news/2012-07-12/california-foie-gras-ban-prompt...

Thu, 07/12/2012 - 11:31 | 2610017 Conman
Conman's picture

BTFD, indicies going green again.

Thu, 07/12/2012 - 11:35 | 2610022 ATG
ATG's picture

If we use Alan Greenspan's old metrics of earnings yield and gold price real interest rate proxy,

with the observation that Gold and TNX may have made a temporary double bottom today at $1555 and yesterday at 1.452%,

implying a market PE of 68,

we may have the necessary ingredients for a rip-your-head-off market rally before the final deluge,

when the Fed finally steps and stands in this September to deliver the QE III and $2000 gold Merrill hypothesized out on a limb at Midnight this early AM:

http://www.cnbc.com/id/48156196

In related news, 'Gold May Have Been Manipulated like LIBOR':

http://www.cnbc.com/id/48119741

Do you think?

Anyway, we bought SPY calls just in case and identified some other raging rapids market values for fun:

http://richcash8tradeblog.blogspot.com/

 

 

 

 

Thu, 07/12/2012 - 11:37 | 2610035 fonzannoon
fonzannoon's picture

Dude WTF some CNBC contributor just came on and did a segment on the S&P fair value in relation to bonds and just used (I think) the same chart above.

Granted the shmuck was pitching how it meant a higher high was coming but sometimes I wonder....

Thu, 07/12/2012 - 12:06 | 2610114 YesWeKahn
YesWeKahn's picture

Look at this junk: SPG, it's at all time high. When this junk drops to 10, the bottom is in.

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