Optimism got a break with today’s release for personal income and spending in February. As expected, modest growth prevailed last month as Americans spent a bit more vs. January. The gain marks the second monthly increase in a row. February’s 0.3% rise for both disposable personal income (DPI) and personal consumption expenditures (PCE) isn’t particularly impressive, but the fact that both indicators posted a decent rise in a month that suffered a heavy blow from Old Man Winter is an encouraging sign. More importantly, the year-over-year comparisons remain comfortably above zero, which implies that the recent fears of the worst for the business cycle have been excessive after all.
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Tomorrow’s report on US personal consumption spending for February 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 January’s 0.4% increase. Meanwhile, the Capital Spectator’s median forecast for February matches the consensus predictions in three surveys of economists.
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Selection bias is everywhere in financial journalism, and for obvious reasons (obvious if you’re in the publishing business). The average reader isn’t interested in a rigorous study of investment track records… yawn. No, the average reader wants sexy stories and profiles of a man (or woman) who beat the odds and delivered stellar returns. Or so it seems, based on a casual review of the usual suspects. I stumbled across another one recently, and it pushes all the obvious buttons. The basic message: the road to uncommonly high returns can be found with an extreme strategy. In this case, the short cut to the promised land runs through a “concentrated” value portfolio that keeps the number of holdings to a minimum and focuses on a select list of securities with the highest expected return. What else do you need to know? Goodbye indexing, so long multi-asset class diversification. They’re done. Now that you have the superior formula, sit back and drink in the success.
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It may get worse before it gets better for the US economy. GDP is expected to expand 2.0% (real seasonally adjusted annual rate) in the first three months of 2014, according to The Capital Spectator’s median nowcast. The revised estimate is below the previous 2.4% nowcast for Q1:2014 that was published on February 25.
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After asset allocation and rebalancing, choosing weights for each asset in the portfolio is next in line among the critical decisions that determine investment results. Once you make reasonable choices on the asset classes to hold, and how and when to rebalance those assets, your focus should turn to asset weights. But choosing weights is tricky, considerably more so compared with asset allocation or rebalancing. As a practical matter, you can use some intelligent rules of thumb for designing a portfolio that’s probably in the neighborhood of long-term optimal (the highest expected return for a given level of risk) with regards to asset allocation and rebalancing. Deciding how to weight the assets, by contrast, carries a much higher analytical burden for engineering a satisfying outcome.
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● Against Austerity: How We Can Fix the Crisis They Made
By Richard Seymour
Summary by publisher, Pluto Press
Five years into capitalism’s deepest crisis, which has led to cuts and economic pain across the world, Against Austerity addresses a puzzling aspect of the current conjuncture: why are the rich still getting away with it? Why is protest so ephemeral? Why does the left appear to be marginal to political life? In an analysis which challenges our understanding of capitalism, class and ideology, Richard Seymour shows how ‘austerity’ is just one part of a wider elite plan to radically re-engineer society and everyday life in the interests of profit, consumerism and speculative finance.
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The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to decline slightly to -0.04 in the February update that’s scheduled for release on Monday (Mar. 24), according to The Capital Spectator’s median econometric forecast. In the previous release for January, the three-month average was +0.10, 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 February, CFNAI’s three-month average is projected to remain at a level that’s historically associated with growth, but at a marginally below-trend pace.
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Some investors are under the illusion that they’re immune to asset allocation and all it implies for choosing how to design and manage a strategy. I frequently read stories in the financial press that suggest that the framework of a multi-asset-class portfolio is optional, perhaps even irrelevant, depending on the article. It’s not, although it’s easy to delude yourself into thinking otherwise. The romance of the money game is always tempting us to behave like artists; in fact, we should focus on acting more like engineers.
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Today marks the first press conference for the new Fed Chair Janet Yellen. Although she faces a complicated set of decisions for monetary policy in the months and years ahead, she still has one advantage that supported her predecessor’s tenure in recent years: a moderately positive macro trend.
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Housing starts fell again in February, inching lower by 0.2% from January. That’s the third monthly decline in a row. The rate of descent is slowing, which constitutes the only good news for this data series these days, but that’s more than offset by the fact that for the first time since 2009 the number of starts (seasonally adjusted annual rate) has slipped for three straight months. That’s a worrisome sign, but it’s premature to assume the worst. Indeed, the sight of a healthy upturn in the number of newly issued housing permits last month holds out the possibility that there may be a spring thaw waiting in the wings for starts.
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