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    PEAK MORNING WRAP 28 September: Tech Event… Who is the standout? | US Stocks Rally

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    PEAK ASSET: AFTERNOON WRAP 27 JANUARY: | Iron ore miners sag as ASX drops 0.7% | China stocks dip weighed by policy tightening concerns; Hang Seng up|

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    PEAK ASSET: MORNING WRAP 27 JANUARY: | ASX to fall, Wall St Struggles for direction | These billionaires believe green hydrogen will provide a carbon-free future for iron ore mining |

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    PEAK ASSET: AFTERNOON WRAP 25 JANUARY: | ASX closes 0.4% higher at new 11-month high, Fatfish digital insurance subsidiary Fatberry records ‘explosive’ revenue results|

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    PEAK ASSET: MORNING WRAP 25 JANUARY: | ASX to rise | Palladium supply is drying up. These Aussie stocks could open the floodgates |

    PEAK MORNING WRAP 28 September: Tech Event… Who is the standout? | US Stocks Rally

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    PEAK MORNING WRAP 28 September: Tech Event… Who is the standout? | US Stocks Rally

    PEAK ASSET: MORNING WRAP 22 JANUARY: | ASX to fall, Apple lifts Wall Street | The tests ASX healthcare companies have upcoming in 2021 |

    PEAK MORNING WRAP 28 September: Tech Event… Who is the standout? | US Stocks Rally

    PEAK ASSET: AFTERNOON WRAP 21 JANUARY: | ASX gains 0.8pc | Greenhouse study shows AVZ Minerals could achieve lowest carbon footprint at Manono lithium-tin project |

    PEAK MORNING WRAP 28 September: Tech Event… Who is the standout? | US Stocks Rally

    PEAK ASSET: MORNING WRAP 21 JANUARY: | ASX to rise | Eco-fibre play Nanollose leads ASX healthcare sector with 292% gain |

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    PEAK ASSET: MORNING WRAP 28 JANUARY: | ASX to fall, Wall St sinks in broad sell-off | FatFish Group finds traction in Asia-Pacific insurance market as revenues surge |

    The Cotton Row Journal, week of 18-22 Jan

    Cabrera Capital Daily Game Plan

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    PEAK MORNING WRAP 28 September: Tech Event… Who is the standout? | US Stocks Rally

    PEAK ASSET: AFTERNOON WRAP 27 JANUARY: | Iron ore miners sag as ASX drops 0.7% | China stocks dip weighed by policy tightening concerns; Hang Seng up|

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    PEAK ASSET: MORNING WRAP 27 JANUARY: | ASX to fall, Wall St Struggles for direction | These billionaires believe green hydrogen will provide a carbon-free future for iron ore mining |

    The Cotton Row Journal, week of 18-22 Jan

    Cabrera Capital Daily Game Plan

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Report on impact of QE on bond market finds S&P overvalued by 33%

MrTopStep by MrTopStep
Friday, August 23, 2013
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Report on impact of QE on bond market finds S&P overvalued by 33%
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S&P 500 overvalued from parity with treasuries
The S&P 500 overvalued by 33.7%

Exclusive to MrTopStep: Veteran bond trader and MrTopStep educator Jack Broz introduced us recently to one of his firm’s quantitative advisors, economist Dr. Michael Williams. Dr. Williams has specialized in studying monetary policy as it affects the interest rate markets, Treasury bond and note yields, and their effect on other markets such as equities. This research paper is the rare academic study which is as relevant to traders and analysts as it is to economic scholars. It is the culmination of years of research and analysis and Dr. Williams has generously made it available in pre-publication form exclusively to our readers.

In the paper, which you can view and download in its entirety, Dr. Williams makes the following predictions about the impact of quantitative easing (and its inevitable tapering) on the Treasury markets and on the Treasury/equity cross-asset relationship:

  • Treasury yields will likely increase across the entire maturity spectrum with short-term yields increasing (absolutely and relative to longer-term rates)
  • Equity prices will likely decline significantly
  • Recent cross-market relationships between the US equity and Treasury markets will likely revert to pre-stimulus state, thus eroding cross-asset diversification benefits.

Before reaching those conclusions, Williams reveals several insights, some of them unexpected:

  • US Fed policy suppressed Treasury yields across the entire yield curve (…however…)
  • Lower-maturity yields were far more suppressed than longer-term yields
  • Equity prices were likely inflated due to the Fed’s policies
  • Equity/Treasury price correlations became markedly negative after QE began

Williams’ conclusion is stark and timely. From the viewpoint of someone looking at Treasury markets and then quantifying how changes in Treasury yields affect stock values, he finds that the S&P 500 as a whole is overvalued by more than a third. That big a divergence from fair value, and from being properly reflective of what quantitative easing is doing on the bond side, can mean only one thing: We are due for a major correction to the downside.

I asked Dr. Williams for his advice to traders and he said:

Traders wishing to prepare for the full effect of Fed “tapering” should be mindful of future lower bond prices, heightened bond price volatility, and lower diversification benefits from bond/equity portfolios.

To quote his report:

As can be seen, the S&P 500 Index was not greatly impacted by changes in the Fed Funds rate early on in the sample.  However, a great upside divergence is seen after the beginning of the QE programs where the actual S&P 500 Index is far above and beyond what the index “would have been” without the stimulus. For example, as of 6/14/2013, the S&P 500 Index was 1,626.73 while the filtered Index was about 1,077.97. Based on an econometric model robust to sampling window and model-specification, the S&P 500 Index is estimated to be around 33.7% overvalued.

Below you can view and download the full report, posted on Slideshare.net. Thanks once again to Jack Broz for bringing this report to our attention.

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