Are Lower Yields Signaling Higher Risk?

A funny thing happened on the way to higher interest rates: yields took a surprising turn lower. The 10-year Treasury yield yesterday dipped under 2.47%, near the lowest level since a swoon in late-May pushed this benchmark rate to an intraday low of roughly 2.40% at one point. There are several explanations making the rounds for the current decline in the price of money: Rising anxiety over escalating tensions with the Russia-Ukraine crisis by way of a new phase of US and European sanctions; worries that the Eurozone’s feeble recovery is deteriorating again; concerns that the US economy’s housing sector is in trouble, perhaps with ramifications for the broader economy down the road. Whatever the cause, the crowd’s appetite for bonds is on the rise again.
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Q2:2014 US GDP Nowcast: +3.2% | 7.28.2014

The US economy is expected to post a substantial rebound in the government’s initial estimate of second-quarter GDP that’s scheduled for release on Wednesday, according to the Capital Spectator’s median econometric nowcast. Following the surprisingly sharp 2.9% decline for Q1 GDP (real seasonally adjusted annual rate), the US Bureau of Economic Analysis (BEA) is projected to report a 3.2% increase for its “advance” Q2 data on July 30. The current nowcast for Q2 is slightly below last month’s update that anticipated a 3.3% rise.
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Book Bits | 7.26.14

Asset Rotation: The Demise of Modern Portfolio Theory and the Birth of an Investment Renaissance
By Matthew P. Erickson
Summary via publisher, Wiley
In Asset Rotation, portfolio management pioneer Matthew P. Erickson demonstrates a time-tested approach to asset management that has worked throughout the history of capital markets, in good times and bad. Providing investors with strong participation in rising markets, but more importantly with a discipline to reduce participation in prolonged declines. Over time this revolutionary approach has yielded superior returns, with significantly reduced levels of risk; providing the engine for true, long-term sustainable growth. The investment world as we know it has changed, and the paradigm has shifted. What has worked in the past may no longer work in the future. No longer may bonds be regarded as a safe haven asset class, as for the first time in generations, investors in fixed income face losses as interest rates rise from historical all-time lows. For those adhering to a conventional Modern Portfolio Theory based investment approach to asset management, what was once regarded as safe and stable, may very well soon become our greatest impediment.
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Housing: The New Risk Factor

Housing remains a weak spot for the US economy, as suggested in yesterday’s news of a surprisingly large decline in new home sales for June. The report follows last week’s update on new residential construction, which also slumped more than expected last month. On a brighter note, existing home sales, which constitute the lion’s share of transactions for residential housing, posted a sharper-than-predicted gain for June. Nonetheless, housing’s overall profile looks mixed at best. Given this sector’s influential link with the business cycle, it’s fair to say that housing is a leading risk factor at the moment.
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Jobless Claims Drop To 8-Year Low

Is it a game-changer? A tipping point? A moment when the economy finally turned a corner for the better in a meaningful way? Possibly. Meantime, one can argue that this is why the stock market has been rallying this year: anticipating better economic news. And we certainly have some in this morning’s weekly update of new filings for unemployment benefits. Initial jobless claims unexpectedly dropped to 284,000 on a seasonally adjusted basis for the week through July 19. That’s the lowest level since February 2006 and a strong sign that the moderately stronger gains in private payrolls in recent months will continue if not accelerate.
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Research Review |7.24.13 | Momentum Investing

Momentum Has Not Been ‘Overgrazed’: A Visual Overview in 10 Slides
Claude B. Erb | May 10, 2014
The return to “momentum” does not seem to be the victim of “overgrazing”. Conceptually, overgrazing occurs when too much capital chases too few investment opportunities which in turn leads to low returns. The “equity risk premium”, the “size premium” and the “value premium” seem to be getting close to a no-man’s land of return-free risk. A high degree of belief in “the kindness of strangers” could be driving the low equity risk premium, size premium and value premium. A high degree of disbelief in momentum could be driving what appears to be a trend large cap momentum excess return of about 7%.
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The Great Deceleration In The Monetary Base

The Federal Reserve’s tapering is underway. The central bank’s quantitative easing (QE) program that generated record levels of monetary liquidity in recent years is on track to fade into history by the end of the year. The approaching demise of QE lays the groundwork for what’s widely expected to be the first interest rate hike sometime next year, probably around mid-2015, based on the consensus projection. The details and timing still depend on the incoming economic data, of course, as Fed Chair Janet Yellen reminded last week. But barring a run of weak numbers, which looks unlikely at this point, it appears that the tapering will roll on.
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The Case For Higher Rates Looks Weak… Again

Some analysts are again projecting that the age of higher interest rates has finally arrived. The Fed is tapering and the US economy is expanding moderately, despite a first-quarter setback. David Kotok last week wrote that the central bank’s tapering has now passed the tipping point and reflects a “tightening” of monetary policy. Recent inflation readings have perked up as well. The consumer price index jumped 2.1 percent through May on an annual basis, the most in more than two years. But last year’s mild rise in interest rates, measured by the benchmark 10-year Treasury yield, has reversed course again and has trended lower so far in 2014. The great rise in rates has been delayed once more. What gives?
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