Monthly Archives: August 2012

Thinking About The Big Finale For Interest Rates

If you had to pick one chart that summarizes the big picture in economics and finance over the past generation or so, what would choose? How about the benchmark 10-year Treasury Note yield? Not only does this history tell us quite a lot about where we’ve been in macro and markets, the 10-year yield’s track record also provides perspective on where we may be going and what we should expect.

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Income & Spending Update Boosts July’s Economic Profile

Today’s update on personal income and spending offers a fresh batch of data for thinking that recession risk remains low. Disposable personal income (DPI) continued to inch higher in July on a month-over-month basis. Meantime, personal consumption expenditures (PCE) staged a sharp revival in July, rising 0.42% vs. June—the best monthly improvement since February. As a result, the year-over-year trends for these indicators look considerably better—signs that income and spending may be stabilizing at moderate growth rates.

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Exports & A Strong Dollar: Not Necessarily Perfect Together

It’s become fashionable in this election cycle in some circles to promote the idea of a strong dollar as a key part of the solution to the economic ills that plague the U.S. But simple “solutions” in economics aren’t always what they seem. That’s a caveat worth considering when it comes to America’s growing exports and how it relates to the value of the dollar. Arguing that America should have a strong dollar may sound good in a political speech, but the details can be messy.

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Research Review | 8.28.2012 | Risk Parity Investing Strategies

Will My Risk Parity Strategy Outperform?
Robert Anderson (University of California, Berkeley), et al. | July 2012
We gauge the return-generating potential of four investment strategies: value weighted, 60/40 fixed mix, unlevered and levered risk parity. We have three main findings. First, even over periods lasting decades, the start and end dates of a backtest can have a material effect on results; second, transaction costs can reverse ranking, especially when leverage is employed; third, a statistically significant return premium does not guarantee outperformance over reasonable investment horizons.

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Estimating The Optimal Rebalancing Rules

Asset allocation and rebalancing are a powerful team with a history of improving the odds of earning a decent return. But in order to harvest the associated risk premium, you’ll have to deal with two big challenges. One is behavioral—rebalancing works best in a contrarian context, i.e., buy low, sell high. The other hurdle is technical—deciding when to rebalance, and by how much.

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Book Bits | 8.25.2012

The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims
By Tamar Frankel
Q&A with author, via The New York Times/DealBook blog
Maybe “Ponzi scheme” should have its own spot in the Dewey Decimal System. Along with biographies of the schemers, a growing stack of scholarly references, legal tomes and articles aims to collect knowledge about this age-old crime. But the latest entry in the category, “The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims” by Tamar Frankel, takes a different approach. While Professor Frankel is a legal scholar who has been on the faculty of the Boston University Law School since 1968, her book explores the psychology of the financial criminals and what makes them tick. She was inspired by a colleague who referred to them as “those mimics of trustworthiness: con artists.” She spent more than a decade researching the book, analyzing more than a hundred Ponzi schemes.

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Durable Goods Orders Rise In July, But Business Investment Slumps Again

New orders for durable goods rose by a healthy 4.2% last month, according to the U.S. Census Bureau, but the increase is marred by the ongoing drop in a widely monitored subset of these orders: business investment, defined as new orders for capital goods excluding aircraft and defense. Does the ongoing weakness in business investment tell us that we should ignore the otherwise encouraging news for broadly defined durable goods orders? If there are more clouds on the macro horizon than the top-line number suggests, what does that imply for the economy? In search of some perspective, let’s take a closer look at the numbers.

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Closet Indexing In The Age Of ETFs

Ian Salisbury at Marketwatch reminds us that some actively managed mutual funds may be loading up on ETFs. The preference to hold index funds in a portfolio that’s supposed to be a collection of individually chosen securities can be a warning sign that you’re paying actively managed fees for beta. Or in the parlance from the neighborhood of my youth, “You’re getting ripped off, bud.”

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Jobless Claims Rise Slightly Last Week, But The Trend Is Still Encouraging

Jobless claims rose modestly last week, the Labor Department reports, but reviewing the numbers in context with recent history suggests that this indicator is still on track to trend positive. New filings for the week ended August 18 increased by 4,000 to a seasonally adjusted 372,000, the highest level in five weeks. But that pales as a relevant factor compared with the year-over-year change for unadjusted claims, which posted a 10% decline as of last week. That’s in line with recent history and an encouraging sign that the labor market continues to heal, albeit slowly.

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