The assumption by some economists that consumer spending and income is “rolling over” took a blow in today’s February update from the Bureau of Economic Analysis. Disposable personal income (DPI) increased a respectable 1.1% last month while personal consumption expenditures (PCE) advanced 0.7% in February, or the most in five months. The year-over-year trends for both series looks sluggish, however, which certainly doesn’t inspire confidence about the second quarter and beyond. But based on the numbers through February, it’s still a tough case to argue that DPI and PCE are caught in a downward spiral.
ISM Manufacturing Index: March 2013 Preview
The ISM Manufacturing Index is projected to rise to 54.8 in Monday’s update for March, based on The Capital Spectator’s average econometric forecast. That reflects a modest increase over the 54.2 reading for February. By contrast, the consensus forecasts in two surveys of economists predict a modest decline for ISM’s March report.
New Jobless Claims Rose Last Week
Jobless claims increased last week, dashing hopes that we’d see a new five-year low in the weekly number in today’s report. New filings for unemployment benefits in the US rose 16,000 to a seasonally adjusted 357,000—the highest since mid-February. Is this a sign that the labor market is poised for a slowdown? Yes, if new claims continue to trend higher. For now, it’s best to reserve judgment and assume that the recent improvement in this leading indicator–i.e., falling levels–is intact. We’re still a long way from an ominous signal on this front and history suggests that it’s short-sighted to think otherwise until the data tell us there’s trouble ahead in a clear and unambiguous way.
Asset Allocation & Rebalancing Review | 28 March 2013
US stocks and US REITs, along with foreign REITs/real estate, have climbed the most this year as the first quarter winds down. By contrast, foreign government bonds in developed markets, emerging market stocks, and foreign corporate bonds are the main laggards. This horse race is defined by relative changes in an equally weighted ETF-based portfolio of all the major asset classes (excluding cash) that’s created at last year’s close and left to wander at Mr. Market’s whim.
Research Review | 3.27.13 | Equity Risk Premium
Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2013 Edition
Aswath Damodaran (NY University) | March 23, 2013
Equity risk premiums are a central component of every risk and return model in finance and are a key input in estimating costs of equity and capital in both corporate finance and valuation. Given their importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. We begin this paper by looking at the economic determinants of equity risk premiums, including investor risk aversion, information uncertainty and perceptions of macroeconomic risk. In the standard approach to estimating equity risk premiums, historical returns are used, with the difference in annual returns on stocks versus bonds over a long time period comprising the expected risk premium. We note the limitations of this approach, even in markets like the United States, which have long periods of historical data available, and its complete failure in emerging markets, where the historical data tends to be limited and volatile. We look at two other approaches to estimating equity risk premiums – the survey approach, where investors and managers are asked to assess the risk premium and the implied approach, where a forward-looking estimate of the premium is estimated using either current equity prices or risk premiums in non-equity markets. In the next section, we look at the relationship between the equity risk premium and risk premiums in the bond market (default spreads) and in real estate (cap rates) and how that relationship can be mined to generated expected equity risk premiums. We close the paper by examining why different approaches yield different values for the equity risk premium, and how to choose the “right” number to use in analysis.
Durable Goods Orders Rebound In February
New orders for durable goods increased 5.7% in February, the best month since last September, the Census Bureau reports. But the good news was marred by a 2.7% retreat in business investment (new orders for capital goods less defense and aircraft) last month. The mixed news extends to the year-over-year changes, with new orders overall rising 3.8% vs. year-earlier levels while business investment slumped 1.1% in February compared with a year ago. Today’s update isn’t going to impress anyone, but the numbers du jour at least provide some support for thinking that the long-running deceleration in growth for new orders may have run its course.
Chicago Fed: Economic Activity “Improved” In February
US economic growth remained “above trend” last month, according to the Chicago Fed National Activity Index, a weighted average of 85 indicators. For the fourth consecutive month, the three-month average of the index (CFNAI-MA3) posted a reading above zero: +0.09 in February. That’s a modest slowdown from January’s revised +0.28, although the dip is in line with last week’s econometric forecast. In any case, the main takeaway is clear: recession risk was low as of last month.
Don’t Overlook The US Dollar Factor For Oil Prices
It’s no secret that oil prices and the US dollar exchange rate have an economically robust relationship. The global market for crude oil, after all, is generally priced in greenbacks. It would certainly be surprising if there was no link between the world’s most important commodity and the planet’s reserve currency. But if this connection is conspicuous and inevitable, it’s not always fully appreciated, according to a new study that aims to remind readers of the historical record. “An appreciation (depreciation) of the dollar exchange rate is typically accompanied by a decline (rise) in both global oil prices and oil production, indicating a fall (rise) in global oil demand,” write two economists from Ghent University in “The U.S. Dollar Exchange Rate and the Demand for Oil.”
Book Bits | 3.23.13
● Investing in the Age of Sovereign Defaults: How to Preserve your Wealth in the Coming Crisis
By Peter Treadway
Q&A with author via publisher, Wiley
Q: What is the principal theme of your book?
A: The governments of the major Western democracies are broke. Including Japan. They already have huge debts. And now they are facing a huge increase in health and retirement entitlements to be honored. They will default on these one way or the other and/or on their sovereign debt outstanding. They will target investors and the private sector in general – the so-called rich- for confiscatory taxes. The book tries to offer ways for investors to survive in this environment.
Macro-Markets Risk Index | Update | 3.22.2013
Business cycle risk remains low, according to the implied estimate of economic conditions based on an index of four key markets. The Capital Spectator’s Macro-Markets Risk Index (MMRI) closed yesterday (March 21) at 12.8%–well above the danger zone of 0% and within the 10%-to-15% range that’s prevailed so far this year. When MMRI falls under 0%, recession risk is elevated. Readings above 0% equate with economic growth.