Value of Perfect Information

The 30 year treasury has correlated very well with the SPX as shown on the chart below (note the 30 year price is inverted).   Perhaps I should say it did correlate well into the summer time frame and then diverged when QE2 was first discussed. If you assume the bond market is correct, fair value on the SPX would be about 1,000 right now. One could argue though that the bond market has it wrong this time (at least the 30 year) based on where QE2 purchases will focus their attention (the middle of the yield curve). In the dash for yield though, relative to other maturities the 30 year should begin to draw further bids.

The next chart is the weekly Commitment of Traders report for Commercial Net Positions (US Long Bond) versus 30 year price. Commercial traders went aggressively short relative to prior positions in October and then reversed those positions pretty aggressively as well. The question then is do they continue increasing their net position or follow the YTD trend and reverse and short into strength? Friday’s CFTC report should be very telling.

Bonds spreads continue to reach new highs per the chart below (courtesy of Calculated Risk and the Atlanta Fed)

Riots in Greece and Ireland and don’t forget those “rumors” of Berlusconi having yet another affair with a 17 year old apparently moving up Italian CDS rates.  In the dash for trash the EUR v  USD perhaps it’s time to start selling the EUR.

Another simple indicator I like to use is that when investors are still choosing to buy corporate debt over treasuries lends me to believe that investors still have faith in our economy, and as such, I see the continuation of the bull.

Interesting is that investors are still moving into corporate debt. The ratio of treasuries over corporate debt is still less than one and currently at .93; investors still have confidence purchasing corporate debt in that investors are still willing to put faith in our corporations. When the ratio is more than one, investors are flocking to the safety of treasuries and confidence in our corporations is waning, and likewise it would not be good for the economy and earnings.

Interesting  is that investors are still moving into corporate debt.  The ratio of treasuries over corporate deby is still less than one and currently at .90;  investors still have confidence purchasing corporate debt in that investors are still willing to put faith in our corporations. When the ratio is more than one, investors are flocking to the safety of treasuries and confidence in our corporations is waning, and likewise it would not be good for the economy and earnings.