Here’s what Federal Reserve and government ‘stimulus’ have created – an overvalued stock market ready for an historic collapse.
jg – June 29, 2010
Bond Yields Imply The Fair Value Of The S&P Is 750
Submitted by Tyler Durden on 06/29/2010 13:22 -0500
One of the less discussed topics by the propaganda machine is that with bond yields approaching record yields, and in the case of the 2Y below them, the S&P has no place trading over 1,000. There was a time when bonds and stocks would correlate, and as bond prices surged, equities would plunge and vice versa. Now that we live in HFT days where stock values are completely disconnected from fundamentals, and even the bond market, courtesy of the Fed's seemingly endless market interference, it makes sense to extrapolate what the fair value of stocks would be implied purely based on bond yields stripping away for the Fed. Attached we present a very simple regression analysis between simple 10 year spreads and the S&P, and the 2s10s (steepness between the 2 and 10 Year) and the S&P. What both analyses indicate is that stocks are approximately 30% overvalued, at least based on historical regression patterns relying on yields to imply stock prices. Yet even though this analysis is purely statistical, here is a simple extension: with US stocks at about $13 trillion in market cap, if one assumes the suggested 30% haircut the result is $9.1 trillion in fair market value. Considering that the Fed has pumped $2.5 trillion in the form of monetary stimulus, and Obama's various fiscal stimuli now amount to just over $1 trillion, that explains the delta. Bonds are implying where stocks should be almost to the dot, absent the $3.5 trillion pumped into stocks by the administration and the Chairman. Fair value of stocks, when stripped away from the printer and Congress, is 750.
Below is a regression of the S&P to the 10 Year:
And this is a regression of the 2s10s to the S&P:
Both imply stocks are overpriced between 25 and 35%. And the Fed will do everything in its power for stocks to prevent going back down to their fair value of 750, which would nullify the entire impact of both monetary and fiscal intervention. Yet should it fail, look for the next $2.5 trillion in QE to push stock up once again to a 25% overvalued level compared to where bonds should be. Of course, should the Fed admit defeat and print, bond yields will likely drop thus resetting the baseline lower once again. We wish our Central Banking overlords all the luck in the world as the continues their attempts to fool US investors that stocks are even remotely fairly priced. We, on the other hand, will stick with the "alternative" central bank, which more and more are turning to - gold.