The world is a better place today -- or so it seems looking at the S&P futures, which are trading 0.6% above fair value.

The positive disposition is striking considering that Standard & Poor's cut its credit rating for Italy by one notch to A from A+, an economic sentiment survey out of Germany for September was weaker than the prior month, and Reuters reported that the Bank of China has stopped foreign exchange forwards and swaps trading with several European banks.

A working theory is that the futures market has been bolstered by a burgeoning belief that Greece will convince troika inspectors (ECB/EU/IMF) to grant the next bailout tranche.  This idea percolated in afternoon trading yesterday and was cited as the catalyst for why the market was able to recoup a sizable portion of earlier losses. 

The S&P 500, which had been down as much as 2.3%, closed Monday with a 1.0% loss.

Solid gains in European markets (1-2% for the major bourses) have played a supportive role this morning, as they have traders thinking some bargain hunting is in order knowing the S&P downgrade of Italy was taken in stride.

In addition, we suspect some participants are banking on the idea of a Fed bounce following the conclusion tomorrow of a two-day FOMC meeting.  That perspective is interesting because conventional wisdom is that the FOMC will proceed with what is being dubbed "Operation Twist" and that this operation will have little, if any, impact on the real economy.

Whatever the case may be, long-term investors should not lose sight of the fact that twist, or no twist, the U.S. equity market offers a great deal of relative value versus Treasuries with a forward four quarter earnings yield of 8.80% that dwarfs the 1.98% yield on the 10-year note.  The average spread between these two over the last 16 years is 150 bps.

Much has been said about the idea that consensus estimates are far too high for the current economic environment.  We probably will see estimates come down further as we move closer to the third quarter reporting period, but bear in mind that the forward four quarter consensus estimate could be cut by as much as 60% before the spread between the forward earnings yield and the current yield on the 10-year note is in-line with the historical average.

Separately, it was reported this morning that housing starts declined 5.0% in August to a seasonally adjusted annual rate of 571,000 (Briefing.com consensus 590,000) while building permits rose 3.2% to a seasonally adjusted annual rate of 620,000 (Briefing.com consensus 585,000.

There were insignificant revisions for both series for July.

The August starts/permits data was nothing extraordinary, either in terms of how it compared to consensus expectations or in the grand scheme of things.  Builders are clearly operating in conservative fashion in a demand-challenged environment.

There was little reaction by the futures market to this report, which completes today's economic offerings.  The focus, therefore, will remain on Europe, and Greece in particular, and what the latest developments there mean for world (dis)order.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.