This morning’s monthly release on manufacturing activity in the New York Fed region offers an early peek at the macro profile for August. Unfortunately, the numbers are unusually ugly. Is this an early warning sign for the US business cycle? Maybe, but it’s too soon to know for sure. That won’t stop the usual suspects from jumping to defnitive conclusions. But in the wake of a recovery that’s now in its sixth year, an obvious question arises: could macro’s pessimists, after being wrong for so long, finally be right this time?
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Housing starts are expected to total 1.166 million units (seasonally adjusted annual rate) in tomorrow’s update for July, according to The Capital Spectator’s average point forecast for several econometric estimates. The projection represents a slightly lower level of residential construction activity vs. the previous month.
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US interest rates may be set to rise next month, at the Federal Reserve’s policy meeting, but the outlook for tighter monetary policy isn’t weighing on real estate investment trusts (REITs). Highly prized for relatively rich yields, REITs are said to be among the more interest-rate sensitive slices of the capital markets—not quite as vulnerable as bonds but considerably more so vs. stocks. But that theory looks a bit wobbly these days in the wake of a modest rally in securitized real estate securities.
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● A solid rebound for US industrial output in July
● US consumer sentiment eases for second month in August
● US wholesale price inflation ticks lower in July
● Is there still a case for a Fed rate hike?
● Japan’s economy contracts in Q2

● Capitalism: Money, Morals and Markets
By John Plender
Review via The Economist
Worries about the impact of economic inequality on social cohesion lend new urgency to moral questions about markets. But, as John Plender points out in his new book, “Capitalism”, discontents about its effects are as old as the world’s most powerful -ism itself. The pursuit of profit has been “unloved” since Socrates declared that “The more [men] think of making a fortune, the less they think of virtue.” Anti-business sentiment characterises the lampooning of Trimalchio’s feast in Petronius’s “Satyricon”, and persists through Molière’s miserly 17th-century lucre-seekers to the portrayals by Charles Dickens and Emile Zola of dreadful 19th-century bosses and the modern incarnation of greed on the screen, Gordon Gekko in “Wall Street”.
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Industrial activity posted a solid rebound in July, according to this morning’s update from the Federal Reserve. Production increased 0.6% last month, marking a robust acceleration from the flat-to-sluggish readings that have prevailed this year. July’s surprisingly strong rebound, in fact, is the biggest monthly gain since last November.
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US industrial production is expected to increase 0.1% in today’s July report that’s due later this morning vs. the previous month, according to The Capital Spectator’s average point forecast for several econometric estimates. The average prediction represents a slight deceleration in growth after the previous month’s 0.2% advance.
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● US retail sales rise a solid 0.6% in July
● US jobless claims inch higher, but 4-week avg at 15-year low
● Bloomberg’s US Consumer Comfort Index remains close to 2-month low
● US import prices slide in July, the most in 6 months
● Eurozone GDP rise 0.3% in Q2, slightly weaker than expected

Retail spending in the US jumped 0.6% in July, delivering an encouraging rebound from the previous month’s flat performance. The monthly gain could be noise, of course, but the sight of the year-over-year trend reviving as well suggests that consumer spending may be stabilizing, albeit at a lower level of growth compared with the peaks in recent history.
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Momentum and Markowitz: A Golden Combination
Wouter J. Keller, Adam Butler, and Ilya Kipnis
May 16, 2015
Mean-Variance Optimization (MVO) as introduced by Markowitz (1952) is often presented as an elegant but impractical theory. MVO is “an unstable and error-maximizing” procedure (Michaud 1989), and “is nearly always beaten by simple 1/N portfolios” (DeMiguel, 2007)… In our opinion, MVO is a great concept, but previous studies were doomed to fail because they allowed for short-sales, and applied poorly specified estimation horizons… In this paper we apply short lookback periods (maximum of 12 months) to estimate MVO parameters in order to best harvest the momentum factor. In addition, we will introduce common-sense constraints, such as long-only portfolio weights, to stabilize the optimization. We also introduce a public implementation of Markowitz’s Critical Line Algorithm (CLA) programmed in R to handle the case when the number of assets is much larger than the number of lookback periods. We call our momentum-based, long-only MVO model Classical Asset Allocation (CAA) and compare its performance against the simple 1/N equal weighted portfolio using various global multi-asset universes over a century of data (Jan 1915-Dec 2014). At the risk of spoiling the ending, we demonstrate that CAA always beats the simple 1/N model by a wide margin.
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