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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SheepDog-One's picture

GEE 20 whole ES points? Oh my gosh.

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.


BKbroiler's picture

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

redpill's picture

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



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.

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.

mrktwtch2's picture

lets get  it on..

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.


True.North's picture


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

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.

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.

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.

rubearish10's picture

That would only be if the FED is destroyed.

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.

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.

midgetrannyporn's picture

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

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.

NotApplicable's picture

Anything they want it to say.

midgetrannyporn's picture

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

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.

SheepDog-One's picture

'Massive QEIII' lol dream on.

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 .

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%



Temporalist's picture

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



Housing Rebound Signaled as Banks Resume Foreclosures


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

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

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!!

Falkor's picture

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

ptoemmes's picture

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

NotApplicable's picture

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

SheepDog-One's picture


poor fella's picture

Is that from the Bernank minutes?

"It puts the QE on its skin,

  Or it gets the hose again...."


NotApplicable's picture

Interesting that it was authorities in both France and Germany.

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.

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."

crawldaddy's picture

New and Improved QE now with aloe

NotApplicable's picture

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

Stay tuned...

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.


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

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".


LawsofPhysics's picture

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

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.....

LouisDega's picture

James Bond is married?