As an investment strategy, equal weighting has two powerful attributes: it’s simple and it’s competitive. That’s a tough combination to beat. For some thoughts on why equal weighting does well, take a look at my article in the December issue of Financial Advisor: Model-Free Investing.

New filings for unemployment benefits dropped again last week, falling 4,000 to a seasonally adjusted 364,000. That’s a relatively modest decline, but it’s encouraging because it follows last week’s big drop that pulled new weekly claims down to a 3-1/2 year low. The fact that the previous tumble didn’t reverse offers one more data point for thinking that the recent slide in jobless claims is the real deal. If so, the outlook for the labor market is somewhat brighter, which of course is the critical variable these days in reading the macro tea leaves for the U.S.

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ECB unleashes a wall of money
Financial Times | Dec 21
If the answer to the eurozone crisis was a “wall of money”, it was provided on Wednesday by the European Central Bank. More than 500 banks borrowed a total of €489bn in three-year loans – equivalent to about 5 per cent of eurozone gross domestic product and the largest amount provided in a single ECB liquidity operation.
A Central Bank Doing What It Should
NY Times | Dec 22
After long resisting the kind of financial force Washington used at the height of the financial crisis in 2008, European central bankers on Wednesday pumped nearly $640 billion into the Continent’s banking system. The move raised hopes that the money could alleviate the region’s credit squeeze.

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In the great debate about whether there’s another recession heading our way, economist Andrew Smithers, head of Smithers & Co. and author of Wall Street Revalued, weighs in with a persuasive argument that the year ahead will be no stranger to risk and so it’s premature to dismiss the idea that a new downturn is lurking. A persuasive argument isn’t always the same as fate, but regardless of your macro outlook it’s helpful to consider an array of opinions if only to stress test your own convictions. The world is awash in forecasts, of course, but Smithers’ take strikes me as valuable for framing the linkages in markets, politics, and the economy. It’s a thankless task, of course, but someone’s got to do it and he does a commendable job in a new research note sent to clients today.

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A number of analysts tell us that the weak housing market has been the main impediment to stronger growth in the broader economy. One recent study advises simply that Housing Is The Business Cycle. Unfortunately, that relationship has only brought trouble in recent years, courtesy of a housing market that fell off a cliff and remained flat on its back. But thinking about residential real estate in something other than a deeply negative light is topical again this morning after reading today’s update on housing starts and newly issued building permits for November. Both series posted handsome gains on the month. Yes, we’ve been here before only to see the apparent rebound sputter out. But the latest rise is accompanied by something else we haven’t seen in a while: a rising trend over recent months. Could this be the long-awaited turning point for housing?

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How Long Do Housing Cycles Last? A Duration Analysis for 19 OECD Countries
Philippe Bracke (London School of Economics) | Oct. 2011
19 OECD countries. I provide two sets of results, one pertaining to the average length and the other to the length distribution. On average, upturns are longer than downturns, but the difference disappears once the last house price boom is excluded. In terms of length distribution, upturns (but not downturns) are more likely to end as their duration increases. This duration dependence is consistent with a boom-bust view of house price dynamics, where booms represent departures from fundamentals that are increasingly difficult to sustain.

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Will the threat come from within or without? Or are we set to be a two-time loser? Perhaps the more pressing question is whether it’ll come at all?

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● Frontiers of Modern Asset Allocation
Edited by Paul D. Kaplan
Summary via publisher, Wiley
Building on more than 15 years of asset-allocation research, Paul D. Kaplan, who led the development of the methodologies behind the Morningstar Rating and the Morningstar Style Box, tackles key challenges investor professionals face when putting asset-allocation theory into practice. This book addresses common issues such as:
• How should asset classes be defined?
• Should equities be divided into asset classes based on investment style, geography, or other factors?
• Should asset classes be represented by market-cap-weighted indexes or should other principles, such as fundamental weights, be used?
• How do actively managed funds fit into asset-class mixes?
Kaplan also interviews industry luminaries who have greatly influenced the evolution of asset allocation, including Harry Markowitz, Roger Ibbotson, and the late Benoit Mandelbrot. Throughout the book, Kaplan explains allocation theory, creates new strategies, and corrects common misconceptions, offering original insights and analysis. He includes three appendices that put theory into action with technical details for new asset-allocation frameworks, including the next generation of portfolio construction tools, which Kaplan dubs “Markowitz 2.0.”

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Is this the real deal? Yesterday’s update on new jobless claims, which fell to a 3-1/2 year low last week, suggests that the labor market will continue growing, perhaps at slightly faster rates than we’ve seen in 2011. “This is unexpectedly great news,” says Ian Shepherdson at High Frequency Economics. But skepticism abounds, and rightly so. There have been several false starts to the recovery since the Great Recession was officially declared at an end in June 2009. There’s no way to know for sure if the latest drop in new filings for unemployment benefits signals a true turning point for the better this time, but the possibility can’t be dismissed either, at least not yet.

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Now we’re getting somewhere. Initial claims for new jobless benefits fell last week by a hefty 19,000 to settle at a seasonally adjusted 366,000. That’s the lowest tally since May 2008, which is to say before the Lehman implosion that turned a financial problem into a macro crisis. That’s a significant change for this leading indicator and it implies that the U.S. economy is poised to muddle through at a stronger pace in 2012.

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