Greed Beats Fear With Stock-Bond Correlation at Three-Year Low

For the first time since the financial crisis began, the U.S. equity are moving independently of the bond market, a sign that the benefits and assessments are guiding investor concern over the economy.

The correlation of 30 days of measuring coefficient of the frequency with which the Standard & Poor's 500 Index moves in parallel with yields of 10-year Treasury fell to minus 0.42 from a peak of 0.89 in June. Reading 1 indicate prices move together, while zero shows no connection and less means going in opposite directions. The debt stock and ends a relationship together that began in July 2007 and lasted until the worst recession since the 1930s.

Pioneer Investments, investors and Citigroup Global Security Inc. said that the broken connection is up as the largest number of S & P 500 in a decade as earnings growth. During the bull market from 2002 to 2007, when the S & P 500 is the price and profits have doubled, the average correlation of 0.15 .
"I prefer days when the companies are rewarded or punished based on their performance," said John Carey, a fund manager at Boston-based Pioneer, which oversees about $ 250 billion. Before, "people were worried that some big events over which they had no control could influence the direction of market performance and investment," he said.

Bernanke's Promise

The S & P 500 rose less than 0.1 percent to 1,199.73 last week that China had taken steps to curb inflation. The index is up 13 percent from the Federal Reserve chairman, Ben S. Bernanke hinted on 27 August in Jackson Hole, Wyoming, that he would use a strategy known as quantitative easing to stimulate the economy. The relationship between the 500 shares and the benchmark index fell to 0.55 on 11 November, the lowest since May 3, according to Birinyi Associates Inc. in the balance of 50 days.

Futures on the S & P 500 expiring in December rose 0.5 percent to 1204.4 at 8:48 am today in London.

The relationship with the 30 days of data between the S & P 500 and Treasury yields negative last 10 years in July 2007. Climbed to 0.79 on August 14, 2007, after five days with Paris-based BNP Paribas SA halted withdrawals from three investment funds because it could not value its holdings in U.S. losses subprime mortgages affected the credit markets. The relationship between stocks and bonds not turned negative in 2008.

The S & P 500 fell 4.7 percent and the yield on the benchmark 10-year Treasury fell 33 basis points, or 0.33 percentage point on September 15, 2008, after New York, Lehman Brothers Holdings Inc. filed for bankruptcy. The correlation rose to 0.83 on October 6, 2008, as the financial crisis intensified, reaching the highest level since a month after the Iraq war began in २००३.
Profits, takeovers

Bernanke's comments in August 1927 helped end the same rate moves. weaker connections between the assets means earnings, acquisitions and valuation drive returns, Global Security Marcos, Bronzo said. The S & P 500 rose to a maximum of two years on November 5 and the rate on the benchmark 10-year Treasury fell to its lowest level since 2009 on 8 October.

While Howard Ward, Mario Gabelli's Gamco Investors Inc. said it is likely that stocks rally, loosening the correlations are not feeding their optimism.

"Correlation is moving lower because of what is now perceived a real difference in the return potential of stocks versus bonds," said Ward, whose firm oversees $ 26 billion in Rye, New York. "I understand that people are very concerned about the stock due to volatility due to economic uncertainties and because he did well in the past 10 years, but the purchase of bonds today is like buying shares in 1999," before the S & P 500 fell 49 percent, he said.

First Lost Decade

Treasury bonds returned 81 percent between 1999 and 2009 while the S & P 500 fell 9.1 percent, including dividends, for his first defeat in over a decade, according to data compiled by Bank of America Corp . 's Merrill Lynch .
As the correlations break down, the quarterly financial results are oscillating stock prices more than any other time since 2007. S & P 500 companies that beat analysts' forecasts of average profit up 0.1 percent since the earnings report, while those who lost fell by 3.3 percent, according to data compiled by November 16 Westport, Connecticut Birinyi. That's the first time in three years by beating estimates and companies joined the losers fell on average.

"There are the names of the people who produce strong earnings and profit margins, and be rewarded for it," Bronzo said, a money manager in Irvington, New York, whose firm oversees $ 22 billion. "We are returning to more normal economic environment, as we are moving beyond the financial crisis. So when the market traded at all as a group, there will be more of a distinction between sectors and names."

Beating forecasts

The third-quarter profit beat analyst forecasts of 6.6 percent of the 457 companies that have reported since 07 October. It was the sixth consecutive period in which more than 70 percent of companies beat expectations, the longest stretch since at least 1993.

Analysts expect 87 percent of the S & P 500 higher incomes will be published next year. That would be the highest since at least 2000, estimates more than 10,000 analysts .
"There is no better opportunity for asset managers to overcome," said Eric Teal, chief investment officer at First Citizens Bancshares Inc. in Raleigh, North Carolina, which manages $ 5 billion. "In recent years, many of the macro forces have driven the stock yields far more fundamental and are beginning to drive the market."

Stock, junk bonds

The shares that trade at price-earnings ratio below average and dragged the benchmark indices in 2010 - as Hewlett-Packard Co. and Merck & Co. - should benefit as the return on capital differ, Carey said. MFS Investment Management James Swanson recommends technology companies because they have money to return to shareholders.

Hewlett-Packard has nearly $ 15 billion in cash, the 12-highest amount in the S & P 500. While at least 28 of the 38 analysts covering the Palo Alto, California-based company should invest in the largest maker of computer world, the stock has fallen 18 percent this year, pushing the value up to 8 3 times 2011 estimated earnings.

Merck, the drugmaker's second largest in the world, has a price-earnings ratio of 9.2 times forecast next year. Whitehouse Station, New Jersey company, is down 3.3 percent this year compared with the S & P 500 gain 7.6 percent and earnings per share excluding certain items is projected growth of 13 percent next year, the best annual growth since 2007, according to analysts' average.

"My Goodness"

"My God, these prices are very good for these stocks," said Carey, company health care. The 51 pharmaceutical manufacturers, device manufacturers and health insurance companies in the S & P 500 trading 12 times annual earnings, compared with a 10-year average of 19.2 .
While the benchmark index for U.S. stocks is up 77 percent since reaching a minimum of 12 years, March 9, 2009, prices on incomes remain below historical levels. More than 88 percent of S & P 500 are cheaper than their average since 2005, as planned next year, compared with 66 percent of the half-decade.

Procurement collected this year, with $ 651 000 000 000 dollars in U.S. deals announced in January, compared with 635.8 billion U.S. dollars for all of last year.

Similar performance

strong correlations made it difficult for funds to be distinguished. The standard deviation, or variation in the returns for funds invested in the largest U.S. companies fell to 4.1 percent in the second quarter, according to data compiled by Lipper and Bloomberg. That was the lowest since at least 2000. The figure rose to 9.8 percent last quarter as weak correlations.

Returns money managers reflect each other, regardless of the strategy. An index of hedge funds focused on distressed corporate bonds has returned 8.5 percent this year and Chicago-based Hedge Fund Research Inc. In the same period, indicator of Latin American funds returned 7.1 percent. The correlation between the two has risen to about 0.28 points higher than the average of 12 years.

"The investment can be more focused on the development process," wrote Tobias Levkovich, head of Citigroup, U.S. equity strategist New York, in a report this month. "Returning begin to diverge, investors can probably be well served by the purchase of the shares they consider attractive without having to worry about the macro conditions that entire groups can vary."