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
December 16, 2013

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



“sightseeing”

(500px/PistolWish)

“There’s a difference between knowing the path and walking the path.” Morpheus, The Matrix (1999)

All eyes are on the decision at the Fed this week. Even if you could look through the binoculars and see the Taper answer, would it help you make money? Maybe for that one day it could help you tack on a few basis points. However, the big money managers know the Taper is coming at some point. They are watching the global economic data points and they like what they see. It will be a heavy week of data to look through and possibly the last solid week for companies to update investors (or pre-announce) before the market goes into holiday mode. So while the market is in decline and fearing the Taper, I say “Bring It”. Let’s get the day out of the way so that we can see how investors want to position for 2014.

For those thinking the post-Thanksgiving Day action will lead to a significant decline very soon…

This study of previous declines by The Leuthold Group suggests that the warning signs are not flashing ‘Danger’ yet.

“MarketEarly”

And over at RenMac, Jeff deGraaf shows you that history suggests you should buy the close on Tuesday…

“DecSeasonality”

And this study shows that 41% of the Market’s average annual return is made from Dec. 22nd to Jan. 6th…

We’re getting close to what is historically the best time of the year for stocks. I took all of the historical data for the Dow Jones from 1896 through 2010 and found that the streak from December 22nd to January 6th is the best time of the year for stocks. (December 21st and January 7th have also been positive days for the market but only by a tiny bit.) Over the 16-day run from December 22nd to January 6th, the Dow has gained an average of 3.23%. That’s 41% of the Dow’s average annual gain of 7.87% occurring over less than 5% of the year. (It’s really even less than 5% since the market is always closed on December 25th and January 1st. The Santa Claus Stretch has made up just 3.8% of all trading days.)

(CrossingWallStreet)

“SantaClaus”

Looking beyond the Santa Rally, Tom Lee’s team at JPMorgan shows you that 5 year old Bulls turn into stronger 6 year old Bulls…

In further work, they show that it is a recession which ends a Bull Market. Given the current global credit & liquidity situation, improving consumer/business sentiment, and slowly increasing global GDP momentum, I would bet against a recession in 2014. Even 2015 would be a stretch.

“Comparison”

JPMorgan also shows that markets +20-30% typically are UP 75% the following year posting an average gain of +8.1%…

So now you know where the Strategists get their UP mid-single digit targets for 2014 Equities.

“Valuation”

If you are looking for fuel for another gain in equities in 2014…

Bond funds are on track to have another -$20b outflow in December, making for an almost -$260b a.r. outflow over the past eight months. However, given that +$1.3t poured into bond funds over the past five years, there’s much more to go, particularly if bond yields continue to rise. This could provide quite a lift for equities in 2014, offsetting some of the negatives from rising bond yields.

(ISI Group)

Also, setting up further buying pressure could be the current state of earnings expectations…

As the chart shows, earnings guidance and economic activity have diverged. If better than expected economic activity continues, could businesses be setting themselves up for upside January earnings surprises and higher guidance?

“NegativeCorp”

(Strategas)

This economist was spot on for 2013. Here is what he is thinking for 2014…

After wallowing in an economic “soft patch” for the past two years, the global economy is likely to emerge in 2014 with modest growth of 3.3 percent compared with 2.5 percent this year, according to a forecast from Nariman Behravesh, chief economist of IHS (NYSE:IHS), the global leader in information and analytics. “The easing of the twin headwinds of private sector de-leveraging and public sector austerity will bolster the improved outlook, especially for the developed economies,” Behravesh says. “Many emerging economies will also likely enjoy stronger growth in 2014, pulled along by export-led growth to the United States, Europe and China. That said, the global growth rebound is likely to be quite modest.”

(IHS)

For last week, all XL sectors finished lower with Biotech pressured Health Care and Bond proxied Utilities leading the way…

“Sectors”

Internets continued to lead among the sectors, while International equities lagged the U.S….

“MarketMovers”

Regarding the International Markets, this sell off has been very broad based…

Will many of these markets be coiled springs post Wednesday’s Fed announcement?

“MultipleCharts”

(FatPitch)

Millions of GE investors will receive a +15% dividend hike in their stocking…

It now yields 3.2% which is icing to the +28% price gain YTD.

“GE”

Dividend hikes are cool, but their new CAT scan technology is incredible…

“CATscan”

Even after 40 years of service, X-ray computed tomography (better known as CT scans) can be a challenge to capture. If the patient moves even a nudge, the image will come out blurry. But with GE’s new Revolution CT, doctors will be able to image the entirety of your innards in the span of a single heartbeat. Literally. The Revolution leverages a high resolution camera paired with a motion correcting system—the medical equivalent of your camera’s image stabilizer—to quickly and easily capture previously-uncooperative organs like a beating human heart.

(Gizmodo)

Not sure what this camel was thinking as it snows for the first time in 100+ years in Egypt…

@ReemAbuRegeilah: A #camel enjoying the snow at St. Catherine’s in #Egypt

“EgyptSnow”

But Energy markets are enjoying December’s global cooling…

“UNG”

Prices for ocean vessels to carry dry bulks (coal, iron ore, grains) are moving to 3 year highs…

This is not due to rising energy costs, but instead rising global economic activity and tightening supply for ships.

“DailyChart”

(Dryships)

U.S. homeowners are no longer underwater. Home Equity is soon to be worth more than Mortgage Debt…

“AmericanHousing”

(TheEconomist)

If your client is a seller of assets, suggest that his next deal be negotiated with food in the room…

“EatNegotiate”

(HarvardBusinessReview)

We had many comments about our China air filter pictures last week. Here is a broader picture…

@TheAtlantic: China’s air pollution is so awful, you can see it from space

(The Atlantic)

“ChinaPollution”

And this recent jump in pollution is causing the locals to rethink their priorities…

Some Chinese who recently returned home are having second thoughts. Eric Huang, originally from the mainland, moved to Shanghai from Hong Kong in 2012, drawn by the opportunity to invest in new growth companies as head of fund management for Hong Kong developer Shui On Land Ltd. The former China portfolio manager for the real-estate fund at Deutsche Bank also thought his daughters would benefit from being exposed to Mandarin and Chinese culture. But the smog has him regretting the decision. The family has been sick for three weeks, starting with his older girl and now back to her for a second round. He has to make time for visits to hospitals, which are overcrowded with smog-related cases. Many meetings were canceled, because traffic was disrupted by the smog. “I thought Shanghai was the best place in China to live in, but now I just want to escape,” Mr. Huang said. “I feel bad subjecting my daughters to the dirty air.”

(WSJ)

While our kids were learning how to code last week, Google made a bigger leap into the area of robotics so that they could hire all the future programmers…

Google confirmed on Friday that it had completed the acquisition of Boston Dynamics, an engineering company that has designed mobile research robots for the Pentagon. The company, based in Waltham, Mass., has gained an international reputation for machines that walk with an uncanny sense of balance and even — cheetahlike — run faster than the fastest humans. It is the eighth robotics company that Google has acquired in the last half-year. Executives at the Internet giant are circumspect about what exactly they plan to do with their robot collection. But Boston Dynamics and its animal kingdom-themed machines bring significant cachet to Google’s robotic efforts, which are being led by Andy Rubin, the Google executive who spearheaded the development of Android, the world’s most widely used smartphone software.

(NYTimes)

“GoogleRobot”

Finally, Jared Dillian wrote a great piece last month on how investing is a Full Time Job. I could not have written a better piece and have asked him to share his thoughts with our readers. You can download the full piece from the link below.

I’m sure I’m not the only one who’s had this experience, but being the sole financial guy in my family, I get asked for free financial advice all the time. Hands down, the biggest question I get asked is whether XYZ uncle should get a broker, or to handle investing on his own. My answer depends on the financial acumen of the person asking me, but more and more I send people down the broker path, believe it or not.

(TheDailyDirtnap)

Have a great week. Enjoy the fireworks both in the Markets and on Mt. Etna…

“Fireworks”

(500px/SalvoOrlando)

In the event that you missed a past Research Briefing, here is the archive…

361 Capital Research Briefing Archive

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, 361 Capital is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of 361 Capital.

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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