361 Capital Weekly Research Briefing

361 Capital portfolio manager, Blaine Rollins, CFA, previously manager of the Janus Fund, writes a weekly update looking back on major moves, macro-trends and economic data points. The 361 Capital Weekly Research Briefing summarizes the latest market news along with some interesting facts and a touch of humor. 361 Capital is a provider of alternative investment mutual funds, separate accounts, and limited partnerships to institutions, financial intermediaries, and high-net-worth investors

361 Capital Weekly Research Briefing

November 12, 2012
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA

$6 Billion spent on the 2012 U.S. Elections and little was changed…
Now that the elections are over and both the Fiscal Cliff and Monetary Cliff are less than 2 months from occurring, it is once again time for Washington D.C.’s favorite game (as depicted in the picture above). Expect a current kick of the can to be made into the First Quarter 2013 when the newly elected Congress can get time to size up the U.S. Financial situation. Then the real games will begin which global investors and the rating agencies will be waiting for. It will be a fragile situation to balance the long-term fiscal situation with the weak current economy, but that’s why Congress gets paid the big bucks. Until a deal is complete, expect the market to have volatile moves on every rumor and press conference that occurs surrounding the Fiscal and Monetary cliffs.

Byron Wien notes the difficulty in a Fix and worries about 2013…
The fiscal cliff would slice about 3% from GDP, which is growing about 4% in nominal terms (2% in real terms and 2% inflation), and he notes both presidential candidates say they would seek a deferral of the scheduled tax hikes. Even Obama would be unlikely to let all of the Bush tax cuts expire and sequestration of spending also would likely be delayed temporarily. But the task facing Washington is a tough one, Wien says. “There is no way we can bring down the enormous annual U.S. deficit without both cutting expenditures (24% of GDP) and also raising taxes (17% of GDP). We are facing a potential crisis and Washington will have to respond to that challenge. I think a workable compromise will be reached no matter who wins the presidential election, but there is likely to be some negative impact on growth next year even so.” (Barron’s)

Jamie Dimon, CEO of JPMorgan, is hopeful that the short-term cliffs can be solved…
“The foundation of business is pretty strong, housing looks like it is turning, household formation is going up, and consumers are still spending…If we solve the short-term ‘fiscal cliff’ and the longer-run fiscal issues, the economy can boom.” (CNBC)

Two former Congressmen are less optimistic and see more volatility…
“If it looks like that is happening you could have a couple really bad days on Wall Street,” Dick Gephardt said at an event hosted by National Journal magazine. “You could have the markets drop by 1,000 or 2,000 points.”… Both Gephardt and Robert Bennett, a former Republican senator from Utah, said Congress would likely postpone making a long-term decision over spending cuts and tax increases. “It will be a kick-the-can-down-the-road kind of resolution, [and] the question is how many things will be added to that train as it is moving through and what shape will they be,” said Bennett. Gephardt said he is very skeptical Congress will reach any big deal. He argued that, even with Obama’s victory, nobody has a mandate and nobody has leverage because voting on the difficult issues facing Congress is “poison.” (Marketwatch)

Not to add any pressure, but the cliffs need to be fixed VERY SOON as European growth is now being impacted…

(JPMorgan)

 A look at the stock sectors since Tuesday shows that investors are most worried about Energy & Financials under the Status Quo…


(Bespoke)

It was a RISKOFF week for most all financial assets…

The High Yield ETF chart has our attention now…
Issuance of High Yield Debt has ripped back in 2012 to allow companies to refinance higher cost debt and clean up their balance sheets. While issuance has been heavy in past months, appetite for that risk is beginning to cool as spreads narrow back to historic lows. If credit investors are more cautious, equity investors will become more cautious. So keep an eye open on the HYG and JNK ETFs.

But as the WSJ notes, maybe the worries in corporate credit spreads are validated by deteriorating balance sheets…


(WSJ)

Meanwhile, evidence of credit lending drunkenness are growing…
We are, however, starting to see some signs of speculative primary market activity. According to JPM, six toggle notes have been issued in October ($2.6bn). These are debt securities that give borrowers the option to skip coupon payments, increasing the face value of the debt instead (payment in kind or PIK). It is roughly the corporate equivalent of option ARM mortgages. Also October saw 11 so-called dividend deals in which the proceeds from a bond sale are used to pay a dividend to the shareholders. This is considered a more risky transaction because rather than using cash to refinance existing debt or acquire a business, the company simply pays it out, causing its leverage to increase. In the mortgage world this is the equivalent of using a home equity loan to take a vacation rather than to put an addition to the house or to repay credit card debt. In spite of some of the more risky transactions, on average the deals have been far less speculative in nature than during the 2006-07 period. This trend of potentially loosening lending standards (such as toggle notes or dividend deals) in the leveraged finance markets will be important to watch going forward. (Soberlook)

Another wild chart has been in the sharp decline of Utility equities…
The Index is sharply oversold and now down -10% from its August highs. Initially the decline was due to the reallocation of monies to less defensive stocks, but now the group has been grabbed by sellers worried about the potential large increase in the dividend tax rate in 2013.

(stocktiger)

A post-election thought from the largest bond fund manager…
@PIMCO: Gross: What to buy: muni bonds & intermediate Treasuries. What to sell: 3-4% dividend paying stocks now at risk to higher tax rates.

@SlopeOfHope: Social Networking Stocks in a Nutshell…

Painful Market tweet of the week…
@JeffMacke: $AAPL could be just the 6th co in history to reach a mkt cap >$500b then rip off bulls’ faces and pour salt on their fleshless skulls

(Bespoke)

Why the World needs another significant Apple product launch…


(
ISI Group)

Ray Dalio/Bridgewater’s “All Weather Portfolio” to navigate all growth and inflationary conditions…


(CSSAnalytics) 

Indiana moves its pension plan assumption to 6.75%…or the lowest among the largest muni pension plans.

The State of Indiana’s public pension fund has become the first public fund to drop its projection of future investment returns to below 7.0 percent. That is just one step among several big moves that the Midwestern state has been taking to improve the performance of its $26 billion retirement system. Bad news about public pension funds has become part of our daily diet: not enough money to cover future liabilities; misuse of public funds; battles with labor unions. To mitigate some of the pain, state officials across the country are taking actions that range from changes to the funds’ investments to cutting public services and increasing employer contributions.

The State of Indiana has taken a different route to solvency, starting with the merger of its bifurcated system, agreed to by the Indiana General Assembly in 2011. Next came a decision that gave the newly integrated fund the lowest investment return assumption among 126 large public systems followed by the National Association of State Retirement Administrators (Nasra). In July 2012, the Indiana Public Retirement System became the first to drop below 7.0 percent when the newly formed 9-member board agreed that it could not expect more than a 6.75 percent average investment return on its pension assets over the next 30 years. (InstitutionalInvestor)

So a financially successful individual in California will now work 9 months a year to pay the government…
@firstadopter 74% top marginal rate in Cali Jan 1st. OUCH!

If you forgot the Federal top tax rate changes for the 2013 Fiscal Cliff…
 

The U.S. falls from #10 to #12 in the 2012 Global Prosperity Index ranking…
The U.S. now ranks as the 20th healthiest economy in the world and 12th for Entrepreneurship & Opportunity.

(Prosperity) 

A good interview with Jeff Weiner, chief executive of LinkedIn…
Q. Leadership is one of those words that everybody has a slightly different take on. How do you define it?
A. Simply put, it’s the ability to inspire others to achieve shared objectives, and I think the most important word there by far is “inspire.” I think that’s the difference between leading and managing. Managers will tell people what to do, whereas leaders will inspire them to do it, and there are a few things that go into the ability to inspire. It starts with vision, and the clarity of vision that the leader has, and the ability to think about where they ultimately want to take the business, take the company, take the team, take a particular product. (NYTimes)

Unfortunately funny tweet of the week…
@DynamicHedge: So, a waffle magnate, a military contractor, and the head of the CIA walk into a bar…

As your kids and your client’s kids are looking at colleges for 2013, don’t forget to look to Canada and the U.K…
More American teenagers are thinking about picking up a passport and heading abroad for their college years as a way of attending a top-rated school at a lower cost, Canadian and British college recruiters say. More than 10,000 Americans are earning graduate and undergraduate degrees in Canada, and 15,000 are pursuing degrees in the United Kingdom. Even with extra fees for international students, colleges and universities outside the United States, in many cases, cost less than the tuition at private colleges or the out-of-state charges at public universities. (SeattleTimes)


Couldn’t agree more: Go Ducks, beat Stanford, then Oregon State, then whoever is left…
NFL games are far too conservative… coaches need to loosen up, air it out, embrace creativity. This is why the NFL needs Chip Kelly. In the meantime, if you’re a football fan, and your team kicks a field goal on fourth-and-1 on the 25 yard-line, leave the stadium and don’t come back. That decision, which happens in almost every NFL game on a weekly basis, is the equivalent of an MLB manager starting a guy with a .300 On-Base Percentage instead of a guy with a .400 On-Base Percentage, because the guy with a .300 OBP is 6-5 with great shoulders and a handsome smile. Baseball had its “Moneyball” revolution. The NFL will too, but first, Chip Kelly needs to win a national championship. (ThePostGame)

Blaine Rollins, CFA, is managing director, senior portfolio manager and a member of the Investment Committee at 361 Capital. He is responsible for manager due-diligence, investment research, portfolio construction, hedging and trading strategies. Previously Mr. Rollins served as Executive Vice President at Janus Capital Corporation and portfolio manager of the Janus Fund, Janus Balanced Fund, Janus Equity Income Fund, Janus Aspen Growth Portfolio, Janus Advisor Large Cap Growth Fund, and the Janus Triton Fund. A frequent industry speaker, Mr. Rollins earned a Bachelor’s degree in Finance from the University of Colorado, and he is a Chartered Financial Analyst.

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