Private payrolls in the U.S. increased by 118,000 last month, according to the ADP Employment Report. As expected, that’s a slowdown from October’s 157,000 rise (on a seasonally adjusted basis). Many economists will chalk up the slower rate of growth to Hurricane Sandy’s negative influence. Maybe. For now, it’s a plausible argument. Nonetheless, today’s ADP number tells us to remain cautious on expecting anything other than a comparably lower rate of jobs growth when the Labor Department publishes the official November payrolls report on Friday.
Will The Housing Recovery Survive The Fiscal Follies?
What are the arguments for thinking that the U.S. economy will remain on a slow-growth course and avoid a new recession? Unfortunately, there are fewer sources of statistical support these days, but the strongest ones—relatively speaking—remain payrolls and real estate. Today’s estimate from ADP (scheduled for release at 8:15 am ET) is expected to post a slower rate of jobs growth for November, but not enough to challenge the notion that the economy is still growing. The nascent real estate revival is the other conspicuous point of optimism… if we can keep it.
A Long, Strange Season For Macro Analysis
Analyzing the business cycle in real time is a task that’s always threatening to lead us astray, but in the current climate the hazard may go into overdrive. All the usual gremlins are with us, but there are additional complicating factors to consider these days, including: the uncertainty and high-stakes poker of the fiscal cliff negotiations in Washington; a recession in Europe that coincides with a (dormant?) fiscal crisis on the Continent; and deciding how, or if, Hurricane Sandy’s lingering effects are distorting the incoming data.
ISM: Manufacturing Activity Contracts In November
An early peek at economic activity for November tells us to keep our optimism in check. The ISM Manufacturing Index dropped to 49.5 last month, the first dip under the neutral 50 mark since August. In short, we have a new data point that turned negative for profiling the economy. Is it a robust sign that the economy’s tanking, or is this another head fake courtesy of Hurricane Sandy’s distortions on the economic trend? The answer—not to be confused with the speculation in the here and now—is waiting for us in the near-term future.
Major Asset Classes | November 2012 | Performance Review
The fiscal cliff is drawing closer in the US as the recession in Europe rolls on, but the major asset classes overall posted a modest gain for November. The Global Market Index (GMI) earned 0.8% last month and is up 9.8% on the year. The big winner in November: foreign stocks in developed markets as tracked by MSCI EAFE, which climbed 2.4% last month. But EAFE’s fixed-income counterpart (Citigroup World Government Bond Index ex-US) was on the leading edge of losses, closely followed by REITS—each posting 0.4% declines. Otherwise, the month-to-date numbers were red-ink free.
Book Bits | 12.1.12
● Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks
By Frank Travers
Excerpt via publisher, Wiley
I recently read an article printed in the financial press that questioned the viability of hedge funds as an asset class. Following the bear market decline and the corresponding volatile market environment, the article suggested that investors had begun to question whether or not hedge funds actually hedge and whether or not the asset class was doomed. Managers responded that it had become too hard to find profitable shorts, as all the best shorts quickly become crowded trades—which can lead to short squeezes.
The author of the article suggested that many hedge fund managers had become overconfident going into the market decline and had begun to invest outside of their core mandates and, even worse, did not do a good job of matching the liquidity of their fund’s underlying investments with that of their underlying investors….
What is most striking about the article (titled ‘‘Hard Times Come to the Hedge Funds’’) is that it was written by Carol Loomis and was published by Fortune magazine in June 1970.
Is October’s Weak Spending & Income Report Another Victim Of Sandy?
Personal income and spending in October was sluggish, and that’s the charitable interpretation. But any talk of weak growth these days is quickly followed by the word “hurricane,” along with the excuse that the devastating storm that struck the Northeast U.S. in late-October took a bite out of what would have been a more favorable profile for the month. There’s a lot of debate about how much to blame on the weather, if at all. The Bureau of Economic Analysis notes in its income and spending report today that the storm was a factor in some degree that reduced wages and salaries. The implication, of course, is that what nature has taken away the economy will replace down the line. As such, the weather factor is an issue for the future, for good or ill. Meantime, on to the numbers as reported this morning.
There’s Another Recession Out There Somewhere… Now & Forever
Lakshman Achuthan of Economic Cycle Research Institute toured the TV circuit again yesterday to revive and defend his firm’s long-standing forecast that recession risk is high (see interviews on Bloomberg, and Yahoo Finance). He asserted that the recession started several months ago, noting that this past July marks the peak in the current business cycle for the U.S. The supporting evidence for this analysis, he explained, is patently clear in the behavior of three indicators. It all sounds plausible, but there’s plenty of room for doubt too. The main problem is the ambiguity of the model, as it was outlined. Transparency and clarity regarding the underlying process are essential in business cycle analysis, particularly if you’re arguing in no uncertain terms that the forecast is a virtual certainty. Essential, that is, if you’re trying to evaluate the legitimacy of the prediction. Unfortunately, those features were in short supply in yesterday warnings.
Q3 GDP Revised Up, Jobless Claims Down
One up, one down. That’s a good thing when it comes to the latest macro data points. GDP in the third quarter increased at a faster pace than initially reported and jobless claims continue to fall in the wake of the storm-related surge that drove new filings skyrocketing earlier in the month. The GDP news is a convincing sign that the economy continues to roll along in a slow-growth mode. The post-hurricane decline in jobless claims is also a positive, although the rate is a bit sluggish. What does it all mean? Let’s take a closer look, starting with today’s update on initial claims.
Managing Expectations & Expected Returns
One of the most influential lines of research in financial economics over the past generation has been the “discovery” that asset returns are predictable. The predictability, as documented in the literature, isn’t much help to day traders. Instead, numerous studies lay out the empirical case for arguing that a) expected returns fluctuate, and b) they fluctuate with some degree of recurring patterns relative to various factors, such as dividend yield and price-to-earnings ratio across medium- and long-term horizons in the equity market, for instance. This news surprised a lot of economists, including several who have helped lay the groundwork for indexing, which is widely favored by investors who think that forecasting generally is bunk. So far, so good, although it’s easy abuse this discovery, as a recent research paper from Vanguard reminds.