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Where the Puck is Going

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Where the Puck is Going

I skate to where the puck is going to be, not where it has been.
Wayne Gretzky

Where the Puck Is Going: Market Shadows Newsletter (Nov. 18 12)

This week:

Death of an Indicator: Bad indicators, dead indicators. Remembering the yield curve.

Market Forces: Monetary and Fiscal Policy

Charting the Universe: Approaching a Low?

The seasonal setup from Thanksgiving has been “up” for the last nine years. I’m expecting a bounce here.

Molson Coors Can Score When the Puck Drops Again

Simply rebounding to [the highs of this year] would bring a total return of almost 20%. That looks quite appealing on a low risk stock, especially in a ZIRP [zero interest rate policy] world where 10-year treasuries now yield less than 1.6%.

Glimpse into Future: Soaking Up the Gravy

Stocks may not be expensive relative to the economic data, but they’re not cheap either. If they should run to reach the 2007 highs from here, a gain of around 10%, they would be approaching a historical extreme, but if industrial production continues to expand at the current pace or faster as QE3 cash filters through the economy, there would be room for stocks to reach new highs.

 

There’s no free lunch however. The cost of the money printing will show up in higher commodity prices which squeeze producers, middlemen, and retailers, and ultimately lead to disastrous unintended counter effects. We’re not there yet. The process of bubbleification may just be starting. But with that will come the unintended consequences of monetary expansion that sow the seeds of chaos. 

Death of an Indicator

Excerpt:

The current yield curve, and the Federal Reserve Bank of Cleveland's estimated probability of a recession, suggests that the chances for a recession in the near future are low. That is if the yield curve indicator is functioning as it has during the last half a century.

 

 

But we don't know that the yield curve is still functioning in the same manner it has. The Cleveland Fed cautioned:

Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next October is 8.2 percent. So although our approach is somewhat pessimistic as regards the level of growth over the next year, it is quite optimistic about the recovery continuing...

 

Of course, it might not be advisable to take these numbers quite so literally, for two reasons. First, this probability is itself subject to error, as is the case with all statistical estimates. Second, other researchers have postulated that the underlying determinants of the yield spread today are materially different from the determinants that generated yield spreads during prior decades. Differences could arise from changes in international capital flows and inflation expectations, for example. The bottom line is that yield curves contain important information for business cycle analysis, but, like other indicators, should be interpreted with caution."

Mish - who believes we are already in a recession - is completely discounting the continued predictive ability of an inverted yield curve... "Forget about probabilities and statistics and measures of so-called leading indicators (such as the stock market which does not lead), and the yield curve that is useless when zero-bound. Instead, simply focus on data from around the globe, especially new orders." (Plunging New Orders Suggest Global Recession Has Arrived)

According to Mish: "The yield curve is artificially distorted by Fed policy and cannot invert with the Fed holding short-term rates at zero."

The economy is not a stock market indicator; the stock market is not an economic indicator

In Leading Economic Indicators, examining five common economic indicators, Mish observed:

Time and time again I hear ‘The stock market acts six months in advance.’ Six months in advance of what? I fail to see how it is acting six months in advance of anything. If one is looking for leading economic indicators, the stock market is surely not one of them.

 

Also note that if one wants a stock market indicator the economy is surely not it. Look at the plunging GDP in comparison to the stock market for recent proof. Look at the homebuilder chart above for recent proof. Look at the historic S&P 500 chart for proof. Seriously, the S&P is a hopeless leading economic indicator and the economy is an equally hopeless stock market indicator...

Read the full newsletter: Market Shadows Newsletter (Nov. 19, 2012)

****

Free Trial to Phil’s Stock World here >

 

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Wed, 11/21/2012 - 11:22 | 3001938 moneybots
moneybots's picture

According to Mish: "The yield curve is artificially distorted by Fed policy and cannot invert with the Fed holding short-term rates at zero."

 

According to the math, that sounds about right.

Wed, 11/21/2012 - 10:09 | 3001699 ebworthen
ebworthen's picture

"Puck" rhymes with "Fuck".

Where the fuck is the recovery?

Wed, 11/21/2012 - 11:12 | 3001898 falak pema
falak pema's picture

it rhymes with duck which has a double meaning; your either duck the puck or you end up in the soup. 

Wed, 11/21/2012 - 10:43 | 3001800 SokPOTUS
SokPOTUS's picture

Kickin' back on the beach with Santa and the Easter Bunny...

Wed, 11/21/2012 - 10:34 | 3001777 orangegeek
orangegeek's picture

You're asking about something that doesn't exist.  Never has.  Ben and Barry emptied the till to win a second term and barely made it.

 

The "now we're really fucked" part of the depression that started in 2006 should kick in very soon.

 

And Ben and Barry both know it too.

Wed, 11/21/2012 - 09:53 | 3001651 NEOSERF
NEOSERF's picture

If we could just count less people as unemployed that would be a big help...perhaps we could cut the amount of weeks people get, that would be a nice cut to the unemployment rate...

Wed, 11/21/2012 - 09:42 | 3001630 sessinpo
sessinpo's picture

Goodness. These threads are laughable. I'm banking big. I posted when I went short equities and have maintained about a 20% PM (physical) position. Then I posted on 11/16/2012 (http://www.zerohedge.com/news/2012-11-15/name-author-how-capitalists-are...) the expectation of:

"I surmise that once Congress goes on vacation for the Thanksgiving holiday, we will see some sideways to upward movement in the indexes. Everything will be driven by circumstances in Europe and the Middle East for a week or so. So in other words, nothing."

 

This market is so easy to read right now, if you can't see it and profit from it, you probably shouldn't be in the markets at all. Out of all the calls I've made, the worst blunder I've probably made was that this would be BB's last term. This remains to be seen. Still a good chance of a 1987 type crash before the year is ended but I'm running out of time on that one.                                      

Wed, 11/21/2012 - 10:45 | 3001805 tango
tango's picture

The market is crystal clear ... In the long run. In the medium run, it can also be understood provided we avoid one of the slew of potential problems that could explode any minute (politics, EU, Mideast, massively bad jobs report surprising the "experts" one more time).

I am not going to cash but In times of market upheaval, heading into Treasuries. As long as folks are fools and rush to buy our debt in times of trouble, it's a no-brainier.

Wed, 11/21/2012 - 09:31 | 3001604 Imminent Crucible
Imminent Crucible's picture

Is it just me, or is there something unspeakably perverse about the Cleveland Fed trying to use the yield curve as an economic predictor KNOWING FULL WELL that the Fed is overtly, publicly crushing the yield curve flat for its own nefarious purposes ("to force investors out of safe havens and into riskier instruments" ~Bernankster).

It's a Dali economy. The surrealism is so thick you can cut it with a knife.

This is a terrible time for investing, as the preservation of capital is now the only feasible approach. As Kyle Bass put it, "This is the most difficult environment to invest in", or maybe Doug Casey phrased it better: "There are no investments left, only speculations."

Wed, 11/21/2012 - 12:43 | 3002255 RockyRacoon
RockyRacoon's picture

From the article:

The Cleveland Fed cautioned:

Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next October is 8.2 percent. So although our approach is somewhat pessimistic as regards the level of growth over the next year, it is quite optimistic about the recovery continuing...

 

Of course, it might not be advisable to take these numbers quite so literally, for two reasons. First, this probability is itself subject to error, as is the case with all statistical estimates. Second, other researchers have postulated that the underlying determinants of the yield spread today are materially different from the determinants that generated yield spreads during prior decades. Differences could arise from changes in international capital flows and inflation expectations, for example. The bottom line is that yield curves contain important information for business cycle analysis, but, like other indicators, should be interpreted with caution."

Wed, 11/21/2012 - 13:53 | 3002513 Imminent Crucible
Imminent Crucible's picture

Yeah, I read the article. What I want to know is why the Cleveland Fed didn't come right out and say, "We at the Fed put the yield curve through the wringer, so we're not predicting anything based on a model we deliberately destroyed. And furthermore, we're quite optimistic about the recovery continuing---as long as by "recovery" you mean the continued expansion of the money stock so that Congress can keep squandering trillions and calling it GDP growth."

Wed, 11/21/2012 - 14:14 | 3002618 RockyRacoon
RockyRacoon's picture

Well that's completely different.  You wanted the unvarnished truth.  Good luck with that.

Wed, 11/21/2012 - 09:23 | 3001589 LongSoupLine
LongSoupLine's picture

Since 70% of GDP is the "consumer" and 70% of the consumer is on SNAP and 70% of real GDP is the Fed...well, it's just all fucked.

Wed, 11/21/2012 - 09:00 | 3001557 mrpxsytin
mrpxsytin's picture

-

Wed, 11/21/2012 - 08:10 | 3001479 Bindar Dundat
Bindar Dundat's picture

The only real indicator of the economy working is .....Oh shit...jobs?

Wed, 11/21/2012 - 11:08 | 3001882 Urban Roman
Urban Roman's picture

So if the puck is circling the drain, I need to get aheade of it?

Wed, 11/21/2012 - 09:02 | 3001564 mrpxsytin
mrpxsytin's picture

I hear there was 100% employment in the gulags... Boy those were the days! When a man, woman, or child could go out and clear the wilderness with their bare hands.

Wed, 11/21/2012 - 09:01 | 3001558 Popo
Popo's picture

Wages actually, more so than the unemployment rate. Ie: If 75% of the labor force is earning twice as much as last year and 25% is sitting at home playing Halo we'd be doing great. And if wages drop by half and unemployment goes to 0% we're still screwed.

Wed, 11/21/2012 - 10:33 | 3001775 fourchan
fourchan's picture

im on the halo couch.

Wed, 11/21/2012 - 11:03 | 3001870 Enslavethechild...
EnslavethechildrenforBen's picture

I use the lunch truck indicator. The little gall inside that makes me a burrito say's everybody is losing their homes, she says the rich politicians have all the money

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