Monthly Archives: February 2014

Personal Consumption Expenditures: Jan 2014 Preview

Monday’s report on personal consumption spending for January is projected to show a gain of 0.3% vs. the previous month, based on The Capital Spectator’s median econometric forecast. That’s slightly below the previously released 0.4% increase for December. Meanwhile, the Capital Spectator’s median forecast for January is slightly higher than a consensus prediction based on a survey of economists.
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ISM Manufacturing Index: Feb 2014 Preview

The ISM Manufacturing Index is headed for a marginal decline to 50.5 in Monday’s February update (scheduled for release on March 3), based on The Capital Spectator’s median econometric forecast. By comparison, the index was estimated at 51.3 in the January report. Meanwhile, the Capital Spectator’s average projection is moderately below a consensus forecast drawn from a survey of economists.
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Asset Allocation & Rebalancing Review | 27 Feb 2014

Equities in developed markets and foreign junk bonds continue to hold the edge as the performance leaders, based on our standard set of ETF proxies via a 250-trading-day window (the rough equivalent of 1-year returns). Meanwhile, broadly defined measures of bonds and stocks in emerging markets are still bumping along at the bottom of the performance ledger for investable products that represent the major asset classes.
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Thinking About Black Swans & Risk Management

The Telegraph’s Jeremy Warner wonders if the political crisis that recently overturned the government in the Ukraine could be “the next Black Swan for West’s financial markets?” It’s a reasonable question, although a true Black Swan event, by definition, is unpredictable. Thinking about uncertainty deserves attention in designing and managing investment portfolios, but there’s only so much blood to be extracted from this stone. What we can’t fathom can still hurt us, but substantially reducing the potential fallout from the unknown unknowns is difficult if not impossible as a practical matter. Market risk, by contrast (price volatility, for instance) can be slightly less threatening to our wealth, assuming that we manage it prudently.
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Q1:2014 US GDP Nowcast: +2.4% | 2.25.2014

The winter is taking a toll on the outlook for GDP growth in this year’s first quarter. The US economy is expected to expand by 2.4% (real seasonally adjusted annual rate) in the first three months of 2014, according to The Capital Spectator’s new median econometric nowcast. The projected gain is down slightly from the previous 2.6% nowcast for Q1:2014, which was published on February 10.
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Estimating Recession Risk With Potential GDP

There are countless ways to quantify the risk of a new recession. Unfortunately, every methodology is flawed, which implies that it’s essential to analyze the beast from multiple angles. Monitoring the ratio of potential GDP to actual GDP deserves to be on the short list. It’s a timely topic because the Congressional Budget Office recently updated its estimate of potential GDP. The good news is that comparing this metric with reported GDP suggests that recession risk is still low, or at least it was through 2013’s fourth quarter.
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Book Bits | 2.22.14

Panic, Prosperity, and Progress: Five Centuries of History and the Markets
By Timothy Knight
Summary via publisher, Wiley
With the financial markets seemingly careening from one crisis to another, it’s vital for today’s investors and traders to have an historical perspective on market performance during times of great turmoil. In this book, Tim Knight provides an exhaustive analysis of financial market behavior prior, during, and following tumultuous events since 1600. Making copious use of charts and basic technical analysis, Knight demonstrates how external shocks tend to create extreme reactions in the financial markets and how these predictable reactions provide opportunities for investors and traders to profit. Knight traverses five centuries of financial market history, from Tulipmania in the 1600s to the contemporary sovereign debt crisis.
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Chicago Fed Nat’l Activity Index: Jan 2014 Preview

The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to rise slightly to +0.37 in the January update that’s scheduled for release on Monday (Feb. 24), according to The Capital Spectator’s median econometric forecast. In the previous release for December, the three-month average was +0.33, a reading that equates with economic expansion. Only values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate for January, CFNAI’s three-month average is projected to remain at a level that’s historically associated with growth, and at a rate that’s moderately above trend.
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