Housing starts in December rose a bit more than expected, the US Census Bureau reports, but the modestly upbeat news was marred by the decline in new building permits in last year’s final month. As a result, the overall profile for these leading indicators remains muddled at best. On a year-over-year basis the trend certainly looks sluggish, in contrast with the generally brighter news from other key economic reports in recent months.
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Once upon a time there was only one factor—the market, a la the capital asset pricing model. But after a half century of crunching the numbers since CAPM was born, “now we have a zoo of new factors,” as Professor John Cochrane observed a few years ago. In theory, identifying more factors opens the door for building superior risk-adjusted portfolios. But some practitioners worry that “the proliferation of factors is deeply troubling,” as Research Affiliates explained recently. Why? Because not all factors are created equal and securitizing what looks like a productive risk premium on paper is tricky when it comes to real-world results.
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● US Homebuilder confidence declines slightly in January | Housingwire
● UK Sep-Nov Jobless Rate Falls More Than Expected | RTT
● Bonds, shares, gold supported ahead of expected ECB action | Reuters
● Brent crude oil rises above $48.50, but outlook remains weak | Reuters
● Gold Prices Top $1,300 an Ounce for First Time in Five Months | Bloomberg
● Behind Drop in Oil Prices, Washington’s Hand | NY Times

Housing starts are expected to increase to an annual pace of 1.036 million in tomorrow’s update for December, according to The Capital Spectator’s median point forecast for several econometric estimates. The projection represents a marginally higher level of residential construction vs. November’s 1.028 million units.
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The global economy was growing moderately at the end of last year, but the pace of the expansion slowed to a 14-month low, according to the December update of the JPMorgan Global All-Industry Output Index. “The underlying dynamics of the survey are weaker across the board, with indices for output, new orders, backlogs and employment all tracking lower,” the press release noted. But if this is a prelude to a global recession in the year ahead, it’s not obvious to a number of widely followed forecasting groups.
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● Economy Gives Obama Slight Lift Ahead of Sixth State of the Union | NBC
● German ZEW economic sentiment rises to 11-mo high in Jan | Investing.com
● German producer price deflation worsens increasing pressure on ECB | IBT
● China economy expands 7.4% in 2014; lowest since 1990 | USA Today
● As Growth Slows, China Pins Hopes on Consumer Spending | NY Times
● Global economic growth is expected to increase marginally in 2015 | UN

How’s that rebalancing strategy working out for ‘ya? Results will vary, of course, depending on when we run the analysis, the architecture of the strategy, and a number of other variables. Deciding if the results are satisfying or disappointing could be due to any number of factors, such as the choice of assets, the rebalancing rules, or the selection of ETFs to implement the strategy. But whether you’re running a backtest to kick the tires on a rebalancing idea or monitoring an existing portfolio in real time, keeping an eye on risk and return–and understanding what’s driving results–is critical. The good news is that this essential task is relatively easy thanks to R, the data analysis software. As a brief illustration, let’s kick the tires on a simple 60%/40% US stock/bond strategy with a couple of ETFs.
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● Will The Fed Take a Dovish Turn? | Tim Duy’s FedWatch
● Chinese stocks plummet 8% as regulators prick stock bubble | Fortune
● Euro near 11-year low as investors bet on ECB quantitative easing | Reuters
● Syriza says it is ready to rule Greece and Europe ‘should not be afraid’ | Euronews
● China Likely To Miss 2014 Growth Target | RTT
● What the Swiss FX shock says about risk models | VoxEU

● Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again
by Peter J. Wallison
Essay by author via San Diego Union-Tribune
If there were ever any doubt that the lesson of the financial crisis has not been learned, it was dispelled last month, when the six federal regulatory agencies charged by the Dodd-Frank Act with defining the terms of a high-quality prime mortgage backed away from the idea. Instead, they issued a final rule that equates a prime mortgage with a loan that has no minimum down payment and no required minimum credit score.
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Considering the heightened uncertainty in global markets at the moment, today’s update on US industrial production for December looks ok. Although production slipped 0.1% last month vs. November, “warmer-than-usual temperatures reduced demand for heating” and translated into “a sharp drop in the output of utilities,” the Federal Reserve advises. As a result, industrial production ex-utilities posted a healthy 0.7% increase last month. Note too that manufacturing activity–the main component in industrial activity–expanded 0.3% in December, according to the Fed.
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