According to their explanations, MSI highlights movements of an asset class that are specific to it and not explainable by another observable market variable. Market surprise signals mispricings and dislocations. It is computed as a normalised average of the absolute value of market-model errors. Surprises over 1.0 / 2.0 have a 16% / 2% probability of occurring.
They go on:
The commodities’ MSI has risen sharply since summer 2009 and currently stands near extreme levels (the likelihood of such situation is less than 5%). In particular, energy prices are more than 50% undervalued on a long-term horizon and livestocks
almost 40% undervalued.Similarly, equities’ MSI has risen with several equity indices 10% or more overvalued.
Click on chart to enlarge, courtesy of Societe Generale.
Among others, they also have an alert on iTraxx X-Over index and Baltic Dry Index.
Well, I just want to have an understanding, what are inter-market relations and potential consequences for markets.
Of course, the prices have been moving upwards since the beginning of the year, anyway ... although the demand dynamics observable in the real life are still quite sour.
Because the markets are forward looking, and often used as leading indicators, everything is about expectations.
So, everything you need "is just a little patience" ... as "the market has not priced in the economic recovery yet":This past spring, we also emphasized that the rebound in oil prices from the lows of the first quarter was not driven by an improvement in oil fundamentals, or expectations of improved fundamentals, but was rather due to a normalization of credit markets that allowed the market to arbitrage physical surpluses. This can be seen by looking at the long-dated, or 5-year forward oil price, that has traded mostly sideways for nearly a year, dipping to a low of $65/bbl and reaching a high of $85/bbl ... Consequently, the 2Q2009 rally in prices was driven by a rally in timespreads which came in spite of deteriorating fundamentals. As we emphasize last spring, the driver of this seemingly counter-intuitive dynamic was a normalization in credit fundamentals that allowed the industry to arbitrage physical surpluses at
much lower costs, which tightened timespreads despite no improvement in
fundamentals and created a $25/bbl rally in oil prices.
Economic Cycle Research Institute (ECRI) tells us today, that " U.S. Economic Recovery Is "Far From Fragile":
September 25, 2009 (Reuters) - A weekly gauge of future U.S. economic growth climbed higher in the latest week, while its yearly growth rate reached a new all-time high, reaffirming projections of a brisk, uninterrupted recovery.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to a 60-week high of 127.8 in the week to Sept. 18 from an downwardly revised 126.1 the previous week, which was originally
reported as 126.2.It was the highest WLI reading since July 25, 2008, when it also stood at 127.8.
The index's yearly growth rate rose to a fresh record high of 24.3 percent from last week's high of 22.9 percent.
Last week, ECRI Managing Director Lakshman Achuthan told Reuters that the group expects an "unstoppable" recovery with "no relevant roadblocks." Fears over mounting unemployment, debt-laden consumers, and dips in recovery are typical of recessionary times, he said.
"With WLI growth climbing to a fresh record high, the economic recovery is far from fragile," Achuthan said onFriday.The index rose in the latest week because of stronger housing activity, ECRI said.
ECRI doesn't try to predict stock prices per se, but we can assess stock market risk. This risk is not a constant and really depends on where you are in the business cycle - an issue addressed by the USLLI and WLI.
...............For over a year dire recession predictions have garnered headlines, despite objective data to the contrary. The fact is that median real home prices, which have been at the epicenter of growth concerns, stopped falling and rose from September 2006 through March of 2007, while GDP rebounded to above trend in the second quarter.
These realities blindsided Wall Street, forcing major houses to slash their 2007 rate cut forecasts last June from a range of 75 to 100 basis points to zero.
................
For the past half a year, GDP measures show the economy growing solidly above trend. In the third quarter, the same report shows inflation falling to a 44-year low. That was a textbook Goldilocks economy.Looking ahead, we're facing a broad based slowdown in economic growth, but have plenty of room to slow without slipping into recession. Most importantly, the objective ECRI leading indexes that correctly forecast past recessions - in real-time and without false alarms - remain above past recessionary readings.
Also, it is significant that the Fed has cut 75 basis points in six weeks. While the credit crisis is certainly a major concern, most observers underestimate the extent of receding underlying inflationary pressures. This means the Fed has more leeway to cut rates to alleviate the home price downturn and broader economic slowdown.
These are the nuances of the current U.S. growth rate cycle slowdown. One thing is for sure. The path of the USLLI and WLI will change, and we'll change our tune accordingly, because ECRI's outlook is not based on gut feel, but rather an objective reading of the fundamental drivers of the business cycle. This approach has kept us from being blindsided by recessions for many, many years.
One of the pluses of ECRI's Weekly Leading Index is that it's rarely revised, only three times since its inception in 1986.
Achuthan said a lack of revision was a central goal of Geoffrey Moore, former commissioner of the Bureau of Labor Statistics, who established a host of economic series including the WLI and what is now the Conference Board's monthly index of leading economic indicators.
'This index is not optimized, it's not revised and fitted. The weights of components are not optimized in retrospect.' Frequency of the data was another important factor for Moore, who Achuthan said saw the need to make economic data more useful and practical for decision makers in business and government. One of the big advantages of the WLI is that it's weekly and can offer quick reads, and he said perhaps the first read, on whether the economy is firming or slowing.
'Other important factors for an indicator are that it doesn't miss a turn in the economy and it doesn't give you a false signal of a turn in the economy.'
The WLI is based on six components: money supply, JoC-ECRI Industrial Materials Price Index, housing activity, bond market measures, stock prices, and job market measures. ECRI uses a pragmatic mix of indicators for most components, looking at a broad array of measures for example in money supply.
Achuthan said money supply is a big question marks for 2008. 'It jacked up very strong in 2007, at over 11%, and it will be tough maintaining strong growth rates.' Achuthan warned that money supply is often overlooked saying simply, 'The Fed can move the economy through money supply.'
The WLI relies heavily on prices for signals. Prices of course are never revised, which is a plus, and they are the most timely of all data. Stock prices offer what Achuthan
described as 'collective wisdom' on business conditions and profit growth, while the commodity index, which excludes precious metals, offers information on demand in the industrial economy. The level of interest rates of course is a determining factor for future business development with the WLI reading focused on corporate bonds. The exact mix of factors within these categories is proprietary but Achuthan's description points to an exceptional devotion to detail.
You focus on ECRI in Jan 2008, but may have missed this March post, which includes link to detailed jan. 2008 post too.
ReplyDeletehttp://kirklindstrom.blogspot.com/2008/03/ecri-calls-it-recession-of-choice.html
I am rather concerned that I have spent so much time with ECRI ...
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