US Stocks Trading at Fair Value to TED Spread
Interbank stress is out of the picture for now.
Back on our side of the pond, we have the Treasury bill market, which has been knocked so off course in the past year by various default scares, flights-to-quality, flights-from-quality, quality-time-in-flight (if you know what I mean and I think you do) that we have seen negative T-bill rates. Yes, you can pay Uncle Sam for the privilege of lending to him; may I have another, sir?
When you subtract the artificial T-bill rate from the made-up LIBOR number you get the TED spread, often used as a measure of interbank stress even though no one who lived through 2008 will ever allow a major bank to push up daisies on their watch. Let’s revisit and update an analysis from April 2010’s No Dread in TED Spread.
I divide the December 1988-onward sample up into periods based on the degree of central bank interference; the first demarcation occurred in August 2007 with the European Central Bank’s backstopping of BNP-Paribas (BNPQY.PK). Others then go to QE1, from QE1 to last November’s expansion of currency swap lines by central banks, and the period thereafter. These are attractively color-coded in the chart below.
What do the markers depict? These are the regression residuals of the simple model Russell 3000 = ƒ(TED). What you see in the last period, marked with magenta, is a sideways-slide around zero. This indicates the Russell 3000 (IWV) is fairly valued given the current TED spread. Not over-valued; not under-valued, but rather almost exactly fairly valued.
But here is the bullish news: The current TED spread is still higher than it was in August 2011, a period when various European commercial banks looked as if they were going to choke on sovereign debt. Twenty-four years of data indicates a lower TED spread is conducive to higher stock prices.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.