Suddenly business as usual for small-cap investing is in need of a makeover, thanks to a new research paper (a landmark study for asset pricing) that revisits, reinterprets and ultimately revives the case for owning these shares — after controlling for quality, i.e., “junk”. Cliff Asness of AQR Capital Management and several co-authors have dissected the small-cap effect anew and discovered that there is a statistically robust small-cap premium across time after all, but only for companies that aren’t wallowing in financial trouble of one kind or another. The paper’s title says it all: “Size Matters, If You Control Your Junk.”
The stock market crashed; it collapsed; it tanked. Or as MarketWatch.com described yesterday’s 1.34% decline: “S&P 500 plunges from major resistance.” Oh, my… that sounds serious. But before we dig a bunker, let’s put yesterday’s price action into perspective. Was the slide unusual? Well, maybe, although “unusual” depends on your expectations for volatility. What does that mean? Depends on who’s speaking. But no worries. A quick tour of market stats will (hopefully) clear up the ambiguity.
● As Fed ends meeting, it’s expected to remain ‘patient’ about raising rates | AP/Fox
● Orders for US Durable Goods Stumbled in December | AP/ABC
● Sales of new homes in US spike in December | LA Times
● Consumer Confidence in U.S. Rises More Than Forecast on Jobs | Bloomberg
● US corporate earnings disappoint, stock indexes fall | AP/Philly.com
● PMI: US services sector activity growth accelerates in January | Reuters
● German GfK Consumer Sentiment At 13-Year High | RTT
● Greece will not default on bailout debts – PM Tsipras | BBC
Estimates of US GDP growth for 2014’s fourth quarter have been rising in recent months, but the current outlook still anticipates a substantial slowdown from Q3’s strong advance. The economy is projected to increase 3.6% in Q4 (real seasonally adjusted rate), based on The Capital Spectator’s new median point forecast for several econometric estimates. That’s a solid rate of growth, but the latest outlook still represents a substantially lesser pace vs. the 5.0% increase previously reported for Q3.
● Doubts grow about mid-year rate hike, but Fed won’t express any | MarketWatch
● U.K. GDP Growth Moderates In Q4 | RTT
● Greece debt repayment in full is ‘unrealistic’, says Syriza | BBC
● Market reaction muted after S&P drops Russia to ‘junk’ | Reuters
● China 2014 factory profit growth hits two-year low | Reuters
● Texas factory activity flat in Jan., Dallas Fed survey shows | El Paso Times
Traders and investors tend to operate in parallel universes, using different analytical toolkits and looking at markets from radically different perspectives. But sometimes there’s common ground. David Varadi’s recent investigation of what he calls error-adjusted momentum (EAM) to normalize returns by way of volatility is an example. Although he’s focused on developing short-term trading signals, EAM serves double duty as a risk measure for monitoring the potential for severe market corrections. That’s of interest to traders, of course, but it’s a topic of import for long-term investors as well. As such, this signal potentially offers valuable intelligence for managing asset allocation over a medium- to long-term horizon via looking for productive times for rebalancing.
● Greece Chooses Anti-Austerity Party in Major Shift | NY Times
● Freddie Mac: US 30-yr mortgage rate hits 20-month Low | SelectedLoans
● NABE Survey: US firms plant to raise wages | Reuters
● Ifo: German Jan Business Sentiment Higher Than Expected | RTT
● BOE Forbes: UK Rates Could Rise Sooner Than Currently Thought | MNI
● What’s driving the price of oil down? | Econobrowser
● American Insecurity: Why Our Economic Fears Lead to Political Inaction
By Adam Seth Levine
Summary via publisher (Princeton University Press)
Americans today face no shortage of threats to their financial well-being, such as job and retirement insecurity, health care costs, and spiraling college tuition. While one might expect that these concerns would motivate people to become more politically engaged on the issues, this often doesn’t happen, and the resulting inaction carries consequences for political debates and public policy. Moving beyond previously studied barriers to political organization, American Insecurity sheds light on the public’s inaction over economic insecurities by showing that the rhetoric surrounding these issues is actually self-undermining. By their nature, the very arguments intended to mobilize individuals—asking them to devote money or time to politics—remind citizens of their economic fears and personal constraints, leading to undermobilization and nonparticipation.
Earning a respectable investment is hard. Holding it on to it is even harder, according to a variety of studies over the years that have analyzed the portfolios that investor build and own. The news is at once disturbing and baffling. Disturbing because a large population of individuals have earned painfully low returns over long stretches of time; baffling because the solution to climbing out of the performance hole is ridiculously easy… in theory.
● ECB unveils massive QE boost for eurozone | BBC
● US Jobless claims off 7-month high, but oil layoffs a concern | CSN
● Oil jumps as Saudi king’s death feeds market uncertainty | Reuters
● U.S. Fears Chaos as Government of Yemen Falls | NY Times
● PMI: Eurozone Private Sector Growth Accelerates In January | RTT
● PMI: German private sector expands faster in January | Reuters