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Michael Parmar

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  • Deconstructing Market Expectations [View article]
    The full data set used was from 1950q1.

    Calculating SDs is probably better done with GARCH modelling which ends up giving you varying sizes of the SE across time as volatility in the market fluctuates. Alternatives are exponentially weighted moving averages to generate means which a company like Risk Metrics uses (or used to, they might have moved on).

    The specification presented here is a simplified version of the suite I use. Across them, i was observing this relatively rare phenomenon of markets significantly outside the expectations channel, which prompted me to write about it.

    This last happened when the market priced in QE1.

    As we have just seen, the market "correctly" anticipated QE3.

    The next step is where this article was focussed....
    Sep 13 02:03 PM | Likes Like |Link to Comment
  • Deconstructing Market Expectations [View article]
    Thanks for your clarifications. I have read the book.

    Indeed we agree. I would go one step further and say testing the "rigour " of assumptions is a false premise since they are that: assumptions.

    Your point I think can be summed up as: garbage in, garbage out. Statistical methods ensure that if you put garbage in, there is a high probability (not certainty) you will get garbage out, consistently.

    As you put it " deconstruction is useful to determine motives" . Hence my title "deconstructing .. expectations".

    If you would like a further discussion on the finer points of where we might differ in views, I would be happy to respond if you would like to message me.
    Sep 13 01:45 PM | Likes Like |Link to Comment
  • Deconstructing Market Expectations [View article]
    Thanks for the comment. I think i said it in the article, and it should be evident from the first figure that average (real) quarterly S&P500 front runs GDP growth at crucial turning points by 2-3 quarters.

    Post October 2007 all time high was a real "black swan" event for the markets since EVEN if expectations CORRECTLY forecast GDP growth and expected downturn, the market and expectations turned more severely without any front running - there was no warning. In other words, many in the market at the time were already pricing in economic faltering. The vicious cycle/systemic nature of the collapse was what no-one priced in.

    Yes, most large institutional investors do not simply take the fed forecast at face value but it does trigger revisions across other forecasters and institutional investors.
    Sep 13 10:38 AM | Likes Like |Link to Comment
  • Deconstructing Market Expectations [View article]
    Indeed, 65% it was calculated using +/- 1 standard deviation of the estimate. I tried to avoid using overly technical stuff in the article

    A 2012q3 S&P500 95% upper bound is 1397, and we are sitting just above that .

    Using that metric, the market has only been out of the 95% expectations channel 3 times over the last decade : once on the way down post post-Lehman, once with QE1 and now. 2009 Q4 was the only time when all closing prices were above the 95% expectations channel, using this particular expectations driven specification. To day for 2012 Q3 about half of the values only are above the 95% upper bound.

    The 95% Lower bound forecast for average nominal S&P500 next quarter using current Fed forecast is 1272. for my illustrative revised downward forecast, it is 1265.

    There is a way to factor in all the headwinds, that is the power of this forecasting methodology. And yes, it is a moving target which the appropriate set up allows you to track as new information comes in.

    I don't use 95% confidence intervals in practice; I rather look for what future factors are driving current expectations that i might be missing.


    This technique forms a discipline: it keeps me looking out for new factors that i might be missing that drive expectations and then i can test these and if significant, work out whether they are transitory or long lasting
    Sep 13 10:18 AM | Likes Like |Link to Comment
  • Deconstructing Market Expectations [View article]
    Respectfully, I think you missed the point and may not be aware of the rigorous statistical techniques which include things like checking for bias in estimates.

    This is not deconstruction in the metaphysical sense, it is in an analytical sense.
    Sep 13 09:52 AM | Likes Like |Link to Comment
  • Deconstructing Market Expectations [View article]
    Thanks for your comment and insightful views.

    I agree with the perverse logic you are stating and that expectations can easily be circular: either the economy improves or the Fed saves the economy, its probably a good explanation of how we got here (backward looking).

    At the moment, we have a reasonably sound upward trend forming. driven by the EXPECTATION that the economy won't enter recession.

    The next step of that thinking, which is what this forecast is about -is when people start to question whether the economy will improve as fast as they expect at the moment. IF something (like a revised fed forecast) triggers that line of questioning, then the market will take a less steep climb than priced in at the moment. In the interim, it could correct, but not significantly.

    I hope this clarifies points.
    Sep 13 09:47 AM | Likes Like |Link to Comment
  • Daily State Of The Markets: The Bernanke Put 'Will' Return [View article]
    Lets not forget the Fed mandate is inflation and jobs. Not inflation and stock market or stock market... economic data going SOUTH +anchored inflation pressures/inflation in target = "Bernanke Put."

    rapidly deteriorating monetary policy transmission mechanism/velocity of circulation of money (possible new Lehman crisis) will also lead to "Bernanke put"
    Aug 2 08:36 PM | Likes Like |Link to Comment
  • Daily State Of The Markets: While We Wait [View article]
    Quite an optimistic (complacent?) view? I wonder what is driving your market models.

    Market expectations seem to be very high regarding moves but I would urge caution because

    1. Greece is lurching towards us - they have missed targets and last statements out of IMF/Germany/ECB was "if targets missed, we won't pay". While this might be political theatre, we are back to the troika/Greece game of chicken which could have spillover effects to other markets (Spain/Italy - especially since the Euro slowdown is affecting them badly).

    2. Spain is hinting at needing a full scale bailout and with its local govts needing bailouts that step looks closer. The counter to this is of course "super Mario" but he said - we will save the euro, not "Save Greece". Any expectation that he has the unilateral power to announce new (fiscal) policy (e.g. extensive bond buying, banking license for ESM) for europe is pure wrong. It is and remains the protector of the currency, with an inflationary mandate.

    2. Euro is at a very competitive level yet EU demand/manufacturing output is going down with unemployment rising. China is slowing and no major policy moves to fix that either. In short, we are getting recessionary prints across the board (including some US data) which are being ignored by the market.

    3. food and oil prices up and comments out of central bankers are not "we are facing deflationary threats" which would trigger QE measures: inflation is there in the big and essential items.
    given that central banks have a primary mandate to fight inflation, their remarks today and tomorrow - that inflation has come down but is not beaten and we have NEW inflationary pressures - is likely to scare markets

    4. The Iran issue hasn't gone away and they have passed in parliament a law allowing the govt to block the states of hormuz in retaliation to any futher sanctions, which look like they are on their way. That puts them on a collision course with Israel/US. Coupled with the Syrian situation, things don't look too bright in that neck of the woods. => oil price pressure upwards.

    All the above - to me - don't seem to be priced into equities but are beginning to be priced into fixed income and gold (now below $1600/oz at time of writing)
    Aug 1 10:19 AM | Likes Like |Link to Comment
  • Daily State Of The Markets: Either Hope Trumps Fear Or ... [View article]
    Good Article
    Jun 13 09:49 AM | Likes Like |Link to Comment
  • U.S. futures are off to a strong start after notable gains in Asian and European markets. Dow +0.8%. S&P +0.8%. Nasdaq +1%.  [View news story]
    look out for mean reversion
    May 29 05:36 AM | Likes Like |Link to Comment
  • The Case For 'Dollar Backwardation' [View article]
    so why do central banks hold gold, and have been buying in the last year?

    to speculate? or for nostalgia?
    May 25 04:25 AM | Likes Like |Link to Comment
  • China's GDP: Reading The Fine Print [View article]
    thanks - i stand corrected and will bear that in mind. it makes a big diff.
    Jan 21 07:11 PM | Likes Like |Link to Comment
  • Adverse Selection, Price Discovery And Coordinated Central Bank Action [View article]
    Thanks!
    Jan 20 03:36 PM | Likes Like |Link to Comment
  • Risk markets have turned a bit as word begins to leak out of Athens about a deal between Greece and its private bondholders. What few details there are seem to confirm what has been leaked over the past week - NPV losses to bondholders in the 65-70% range. Stoxx 50 rallies about 0.5%, now -0.2%.  [View news story]
    details also being reported of some holdouts on the March 20 14.5bn bond payment, they want an extra sweetener
    Jan 20 01:09 PM | Likes Like |Link to Comment
  • China's GDP: Reading The Fine Print [View article]
    with falling/low euro for the next few months and probable double dip recession in EU (china's biggest trade partner), there is less scope for growth in exports and more scope for growth in EU imports.

    That puts downward pressure on Fareast market GDP growth, a significant one at that.
    Jan 17 06:53 PM | Likes Like |Link to Comment
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