Bubble talk is on the march these days, and for an obvious reason: trailing return is high. But as I’ve discussed before (see here, for instance), I prefer to describe the ebb and flow of market prices as a reflection of fluctuating expected return. On the surface it’s a cosmetic distinction. But managing portfolio risk in a productive way requires looking at markets as offering a constantly changing menu of risk premiums. It’s more exciting to think in terms of bubbles, but such a focus can be distracting when it comes to our primary objective of earning a satisfactory return across a multi-year span. The reality is that we’re usually making decisions amid shades of gray vs. stark, clear extremes. Accordingly, our investment process should reflect this reality.
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There’s a bullish tailwind blowing across the major asset classes at the unofficial start of summer. But there’s a new feature to the current rally. Compared with the previous update in April, the range of returns at the moment is less extreme compared with recent history. There’s also less red ink weighing on our standard list of ETF proxies via 250-trading-day windows (the rough equivalent of 1-year returns). Take note too that of the declines that remain, the losses are relatively slight these days.
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To all of you who sent your condolences and support, through emails, flowers, cards, thoughts and prayers… thank you so much for helping me move through a rough week after losing my mom. Painful as this is, the burden’s a bit lighter because all of you reached out. Thank you.
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Family responsibilities came a-calling last night. My beloved mother, Eva Picerno, passed away. Her 94 years finally caught up with her. But she went peacefully, in bed, watching her favorite show—Dancing With The Stars. Her passing isn’t terribly surprising—the finale came after a long, slow decline. But her New England spirit kept her optimistic and cheerful to the end. Her graceful exit comes nearly three years after my dad, Joseph, slipped over to the other side. I miss them terribly. As the only child of loving, devoted parents, I was given a great gift. But now duty calls one more time for my mom and it seems appropriate to take a breather from macro and markets. At some point, soon after the Memorial Day holiday, these pages will again be buzzing with the usual commentary and number-crunching. Meantime, in honor of my mom, The Capital Spectator will go dark in the days ahead as your editor transitions from sober-minded analyst to grieving son struggling to say good-bye one last time.

Economic momentum remained broadly positive in April. It may not feel like growth, but the macro trend remains firmly skewed toward expansion, based on the latest profile of last month’s numbers. Indeed, the April update of a diversified set of 14 economic and financial data sets betray minimal signs of stress in the search for business cycle risk.
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● Think Like a Freak: The Authors of Freakonomics Offer to Retrain Your Brain
By Steven D. Levitt and Stephen J. Dubner
Summary via publisher, HarperCollins
Levitt and Dubner offer a blueprint for an entirely new way to solve problems, whether your interest lies in minor lifehacks or major global reforms. As always, no topic is off-limits. They range from business to philanthropy to sports to politics, all with the goal of retraining your brain. Along the way, you’ll learn the secrets of a Japanese hot-dog-eating champion, the reason an Australian doctor swallowed a batch of dangerous bacteria, and why Nigerian e-mail scammers make a point of saying they’re from Nigeria.
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Residential construction picked up last month, according to the US Census Bureau. Housing starts beat expectations and increased to an annualized rate of 1.072 million units on a seasonally adjusted basis—the most since last November. More permits were issued last month as well: 1.080 million (annualized) in May, the highest number since the recession ended in mid-2009. The monthly gain delivered a dramatic boost to the year-over-year in comparison for starts, which increased more than 26% last month vs. a year earlier. That’s the strongest annual rate since last November. Permits, however, slumped a bit in the annual comparison, decelerating to a slim 3.9% advance.
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Housing starts are expected to total 946,000 in tomorrow’s update for April, based on The Capital Spectator’s median econometric forecast (seasonally adjusted annual rate). The projection represents no change vs. the previously reported 946,000 for March.
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Today’s reports on jobless claims and industrial production offer a mixed review for the macro outlook. On the one hand, the sharp decline in new filings for unemployment benefits to a seven-year low is a powerful signal for expecting continued growth in the labor market for the near term. But the surprisingly big slump in industrial output last month throws a bit of cold water on any celebration over the lesser pace of new layoffs. Even so, it’s premature to read too much into the monthly dive in industrial production since the year-over-year trend is still advancing at a decent pace.
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Economic growth slowed to a crawl in the first three months of this year, but a rebound is projected for the second quarter, according to The Capital Spectator’s median econometric nowcast. GDP is expected to rise 2.8% during the April-through-June period (real seasonally adjusted annual rate). This is an initial estimate that uses limited Q2 data and so the projection is a preliminary review that will be updated several times in the weeks ahead as new economic indicators are published and existing data are revised. The final nowcast for the quarter will be published shortly ahead of the official Q2:2014 GDP report. The US Bureau of Economic Analysis (BEA) is scheduled to release its “advance” Q2 estimate on July 30, 2014.
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