Building A “Market” Portfolio With Statistical Factor Weights

Building a “market portfolio” has obvious benefits for portfolio design. The asset allocation is relatively objective in the sense that Mr. Market chooses the weights. History suggests this is a competitive strategy. Even if it’s not slavishly followed, market weights can be useful for guidance in portfolio design and management. But the necessary task of estimating market values can be problematic, especially if the portfolio includes so-called alternative asset classes and strategies. A possible solution: using a statistical factor model to estimate a market portfolio.
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Macro Briefing: 13 December 2017

An upset victory for Dems in Alabama’s Senate race: The Hill
Federal Reserve on track to hike interest rates today: Reuters
Vote on final GOP tax bill expected next week: LA Times
US Sec. of State offers direct talks with N. Korea with no conditions: Reuters
UK loses jobs at fastest pace in two years: Bloomberg
Italy’s industrial output picking up speed: Bloomberg
Pension liability burdens for US states trending up: Fitch Ratings
US producer prices pop in Nov, suggesting inflation will rise: Reuters
If Trump fires Mueller, a constitutional crisis may follow: American Prospect
Nearly half of small US businesses in Nov expect stronger economy:  Haver

2018 Comes Into Focus

The year is winding down, which means that we’re knee-deep in newly minted 2018 investment outlooks. All the usual caveats apply, of course, but there’s a generous helping of perspective too. As an example, here’s a select sampling from recent publications that caught our eye:
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Macro Briefing: 11 December 2017

US-Japan-S. Korea military drills aim to counter N. Korea Threat: NY Times
Southern California wildfires continue to wreak havoc: CNN
China’s inflation rate ticks lower in November: MNI
Bitcoin futures debut with a sharp increase: Reuters
Economists expect widespread rates hikes by central banks in 2018: Bloomberg
Payrolls in US rise 228,000 in November, beating expectations: Bloomberg
US wage growth still well below pre-2008-crisis rate: Paul Krugman
Investor optimism is unusually high: Heisenberg Report

Book Bits | 9 December 2017

Blood Profits: How American Consumers Unwittingly Fund Terrorists
By Vanessa Neumann
Review via Kirkus Reviews
An alarming, and often alarmist, survey of how spending by consumers might support terrorist organizations and organized crime enterprises, especially drug cartels.
Neumann, the president of Asymmetrica, a consultant group that advises governments and corporations about combating illicit trade, refers to Venezuela, where she was born, to demonstrate how a leftist government takeover can become just as easily mired in corruption as a rightist one. Throughout the book, the author relies on examples from her personal life, her work as a consultant, research studies (from the United Nations and other sources), and her deeply felt ideology. She warns that terrorist groups and drug cartels have learned to join forces to assist each other in their lethal activities, and such an unholy partnership sometimes depends on the corruption of government officials.
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Research Review | 8 December 2017 | Momentum Investing

Implementing Momentum: What Have We Learned?
Adrienne Ross (AQR Capital Management), et al.
December 2017
An abundance of academic evidence and theory exists on the efficacy and intuition behind momentum investing, yet a limited number of studies discuss the feasibility of running momentum portfolios in practice. And no study to date has directly analyzed implementation costs for a live momentum portfolio. As a result, many are still quick to dismiss momentum as difficult or costly to implement because of its high turnover. In this paper, we use seven years of live data to evaluate the implementability of momentum investing. We show that live momentum portfolios are capable of capturing the momentum premium, even after accounting for expenses, estimated trading costs, taxes, and other frictions associated with real-life portfolios.
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Macro Briefing: 8 December 2017

UK and EU announce breakthrough in Brexit negotiations: Reuters
Congress sends bill to Trump to avert gov’t shutdown: Bloomberg
China’s export growth beats expectations in November: RTT
IMF: rising bank debt poses “large risks” to China’s economy: BBC
Jobless claims in US fall for third week: Reuters
US job cuts jump 30% in Nov vs. year-earlier level: CG&C
Consumer credit for US rises in Oct by most in 11 months: MarketWatch
Wildfires rage across Southern California: Bloomberg