Where the Puck is Going

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


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)


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