The ISM Manufacturing Index is expected to decline slightly to 58.1 in tomorrow’s update for September vs. the previous month, based on The Capital Spectator’s median econometric point forecast. The estimate is still well above the neutral 50.0 mark and so the current outlook remains firmly in growth territory.
Continue reading →

Private nonfarm payrolls in the US are projected to rise 204,000 (seasonally adjusted) in tomorrow’s September update of the ADP Employment Report, based on The Capital Spectator’s median econometric point forecast. The expected monthly gain matches August’s increase.
Continue reading →

The Treasury market’s inflation forecast via 10-year Notes continues to fall and the US stock market has turned wobbly too. That’s a troubling combination… if it continues. The antidote to this mini re-run of heightened disinflation risk is economic growth. This week’s updates on payrolls will stress test the case for expecting moderate growth to roll on, starting with tomorrow’s estimate on private-sector jobs for September via ADP, followed by Friday’s official numbers from the Labor Department. Meantime, Mr. Market is downsizing his outlook for inflation. The yield spread on the nominal 10-year Note less its inflation-indexed counterpart slipped to 1.95% yesterday (Sep. 29)—the lowest in more than a year.
Continue reading →

PIMCO’s star manager, Bill Gross, is moving on to Janus. By some accounts, the Janus brand will be rejuvenated with the arrival of the “bond king,” a moniker earned over a long run of outsized returns in plying the waters of fixed income. But his track record in recent years has looked increasingly wobbly, a familiar strain that tends to arise eventually as the challenge of beating the market rises for everyone through time. The main lesson here, however, is less about quantitative results vs. what might be called manager risk. When your favorite stock picker (or in this case bond picker) abruptly heads for the exit, for whatever reason, dealing with the blowback can be cumbersome.
Continue reading →

Tomorrow’s update on US personal consumption spending for August is projected to rise 0.4% vs. the previous month, based on The Capital Spectator’s median econometric point forecast. The prediction reflects a strong rebound after July’s 0.1% decrease.
Continue reading →

● Open Secret: The Global Banking Conspiracy That Swindled Investors Out of Billions
By Erin Arvedlund
Summary via publisher (Portfolio)
In the midst of the financial crisis of 2008, rumors swirled that a sinister scandal was brewing deep in the heart of London. Some suspected that behind closed doors, a group of chummy young bankers had been cheating the system through interest rate machinations. But with most eyes focused on the crisis rippling through Wall Street and the rest of the world, the story remained an “open secret” among competitors…. Now Erin Arvedlund, the bestselling author of Too Good to Be True, reveals how this global network created and perpetuated a multiyear scam against the financial system. She uncovers how the corrupt practice of altering the key interest rate occurred through an unregulated and informal honor system, in which young masters of the universe played fast and loose, while their more seasoned bosses looked the other way (and would later escape much of the blame). It was a classic private understanding among a small group of competitors—you scratch my back today, I’ll scratch yours tomorrow.
Continue reading →

Looking backward delivered another inspirational session for the bulls in the land of macro today. The US economy grew faster than previously estimated in the second quarter, according to this morning’s revision from the Bureau of Economic Analysis. GDP expanded 4.6% during the three months through this past June (real seasonally adjusted annual rate). That’s the best pace since the end of 2011 and a healthy improvement over last month’s 4.2% gain for Q2. But if growth is picking up, why is Mr. Market’s inflation forecast going down?
Continue reading →

The real-world challenges of dealing with fat tails—the higher frequency of extreme returns than a normal distribution implies—have received a lot of attention since the market crashed in 2008, and rightly so. Modeling asset prices based on an assumption of normally distributed performance runs into trouble when Mr. Market throws a hissy fit. As a result, a lot of models crashed and burned during the Great Meltdown in late-2008. We’re all older and presumably wiser now. But while it’s tempting in the post-crash era to allow non-normal distribution modeling to dominate portfolio analysis and design, reality is a bit more nuanced.
Continue reading →

Asset Allocation and Bad Habits
Andrew Ang, et al.
September 17, 2014
This article documents the “bad habits” of investors in asset allocation practices. Whereas financial markets exhibit momentum over multi-month horizons but more reversion to the mean over multi-year horizons, many investors act like momentum investors even at these longer horizons. Both these patterns are well known anecdotally but have not been well documented statistically, especially together. This article therefore addresses two empirical questions. First, How do funds reallocate based on past returns? The authors provide direct evidence using the CEM Benchmarking data on pension fund target allocations over a 22-year period. Second, What are momentum/reversal patterns in financial markets returns? Evidence is provided using more than a century of data. Merging the findings from the two data sets provides evidence consistent with the premise that investors chase returns over multi-year horizons, which is likely to hurt their long-run performance. However, the statistical evidence on pro-cyclical multi-year asset allocations and multi-year mean reversion patterns in asset-class returns is on the borderline of statistical significance.
Continue reading →

Barry Ritholtz asks the right question—Why hedge?–in the wake of last week’s announcement that California Public Employees’ Retirement System (Calpers), the elephant in the room in the world of pension funds, is ending its decade-long experiment with hedge funds. The allure of these products in the wider world has been driven primarily by the hope that the funds will deliver outsized returns relative to the usual suspects. But smart investors like Calpers have also been drawn to the risk-management aspects of these hedge funds—i.e., low correlations with conventional portfolios of stocks and bonds. After the financial crisis of 2008, the focus on owning stuff that acted differently in times of elevated market stress while offering relatively high expected returns through time required no explanation. But a funny thing happened on the way to nirvana—the results fell short of the sales literature.
Continue reading →