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 23, 2013

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA



@jfahmy: Two things I learned a long time ago: Don’t fight the Fed and don’t call Eddie Vedder daughter.

For the final act of 2013, the Fed unleashed its TAPER on the markets…
And even though the physical move of $10 billion was a surprise to 2/3rds of the economists, strategists, and market participants, the accompanied press release let investors know that inflation is still non-existent and future tapering and interest rate actions will be driven by progress on job creation. And by meeting the market’s wishes, the Fed unleashed the big GREEN flag for the Santa Claus rally to begin.

It was a good year. It was a really good year for investors with a RISK appetite…
The signals were all there for you. The equity markets flew out of the gate early on. Junk Bond spreads tightened to new post 2008 lows. Small Caps, Cyclicals, and Low Quality Stocks outperformed all year. And safe investments, led by U.S. Treasuries, underperformed. All eyes should remain on Bond yields in 2014. While I would expect asset flows to continue to leave RISK free Treasuries, I would continue to be fearful of a painful rip higher in yields which could whack the Equity markets. I would be very happy to be LONG equities unless the 10 year quickly moves to a yield starting with 4. Here is your chart to watch…

(ChartWatchers)

We have complimented Equities with the breadth of their upward move all year…
If you are looking for another reason to love your LONG equity position, Dan Greenhaus at BTIG has it for you in this chart. This lift in equity valuations is just not a few giant whales, it is the entire ocean swimming to the up and right. Unlikely that this market will get stopped on a dime in 2014. And be sure to look at this Outstanding Book of charts that @boes_ has put together for you…
(BusinessInsider)

With 2013 now nearly in the books, it is time to look back at some of the GREAT MONEY MAKING CALLS and most responded to notes in our Weekly Research Briefing. So cue up the Pearl Jam and let’s take a quick look…

Hats off to the Leuthold Group for their great call that we highlighted in our year end note in 2012. The airline index has doubled since then.
December 24, 2012
Airlines are up 30%+ YTD. Capacity additions have been quite subdued in the last 6 years so this combined with continued growth in demand has led to rising yields in 4 of the last 6 years which is unheard of in U.S. aviation. If you are upset at always having someone sit in the middle seat next to you, buy some airline stocks and you can at least smile while you feel like a sardine.

Again, the early move in the Cyclical stocks were a great read for the whole economy and market in January…
January 21, 2013
Pay attention to the cyclicals… They are telling you that things will be even better in 6-12 months…
Markets Suggest Better US Economy – In just 13 trading days, i.e., ytd, transportation shares have surged +7.3%, industrials +5.4%, homebuilders +9.7%, retailers +5.0%, and banks +4.3%. Junk bond yields have plunged -40bp.
(ISIGroup)


Joshua Brown saw the psychology turning in this great piece…

January 21
Josh Brown gets it… Escaping the Fear Factory…
Animal Spirits are returning to the equity markets as five-year highs are penetrated with a persistent and lusty thrusting from below. The same is true in the corporate bond market as investors line up for the latest offering like sneaker aficionados on Air Jordan launch day. Not every waking second is being spent on avoiding loss – people are once again looking to win, a psychological seachange as important as any quantitative market indicator you want to present to me, I promise you that.
(TheReformedBroker)


Seems almost like yesterday that the Dow was at 14,000. Barron’s paid for its subscription price in 2013. Nice job guys and gals…

February 4
The Market is close to solidly breaking out of its 13 year trading range and the only front page action is on this Barron’s cover?
Are the major newspapers and magazines waiting for Apple to hit new highs before they pick up the front page sharpie? Don’t even tell me about a bull market in equities until the plastic surgery commercials get priced off of CNBC.
(Barron’s)


Bridgewater even beat the drums to borrow money and BUY RISK…

February 18
So while Corporate Boardrooms are feeling better about the economy and taking on RISK via M&A, Bridgewater’s global research is telling them to BUY more RISK in the financial markets…
Bridgewater Associates LP, the $140 billion hedge fund founded by Ray Dalio, is betting on global stocks and oil as it expects money to move into equities and other assets amid increased economic confidence. Bridgewater, the world’s biggest hedge fund, is bullish on stocks, oil, commodities and some currencies as it expects cash to shift to riskier assets, co-chief investment officer Bob Prince said on a client conference call on Jan. 23. “You want to be borrowing cash and hold almost anything against it,” Prince said, according to a transcript of the call obtained by Bloomberg News. “We are at a possible inflection point right now with respect to the pricing of economic conditions in markets and then the actual conditions that are likely to occur.”
(Bloomberg)


Gold was the most oversold asset class in the World in April and it never recovered…

April 15
For now, Gold remains the top Oversold major asset class in the World…

(@macromon)


In May, Bill Gross called the top in the Bond markets…

May 13
Even the Largest Bond Fund Manager in the World called the top last week…to the exact day even…
@PIMCO: Gross: The secular 30-yr bull market in bonds likely ended 4/29/2013. PIMCO can help you navigate a likely lower return 2 – 3% future.


And Leo raised a glass to the old Bull…

So a well-deserved toast to the end of the 32 year old Bull Market in Treasury Bonds…


We highlighted one easy area of the market to make money in as the yield curve steepened. Hopefully you tucked away a few shares ahead of its big move…

May 13
While rising long yields are bad for bond investors, the widening spread between the 2yr and 10yr Treasury yields is great for Bank stocks and those with large money market funds like Charles Schwab…



At midyear, we were reminded that strength in equities often leads to more strength…

July 1
In the U.S., equities have had a great run. History shows that 6+ month runs are typically followed by further gains…

(paststat)

For asset allocators, it was also important to miss underperforming groups…

July 8
The CIO of JPMorgan Asset Management oversees $170b in Equities. Guess what he ISN’T buying?
Which parts of the market are you shying away from? Those sectors where the companies usually pay high dividends, such as utilities, real estate investment trusts, MLPs [master limited partnerships], some of the consumer-staple companies, and telecom companies—companies where investors really have focused just on the dividend, and have driven stock prices up to levels where they don’t make a lot of sense. Unsurprisingly, those stocks have suffered the most in the last few weeks. And those sectors still look expensive.
(Barron’s)


In July, Facebook gave you the green light to LEAN IN and Buy…

August 5
Facebook is definitely done underperforming and it has benefited the Nasdaq100…
Shares of Facebook surpassed their initial offering price of $38 on Wednesday morning, a key milestone for the firm around 14 months after its deeply flawed IPO. The firm’s shares have been on a tear since its excellent Q2 report, and press reports this week suggested Facebook would start to further expand its growing advertising business by offering 15-second television-style spots in user news feeds.
(TradeTheNews)


Tesla, Solar City, SpaceX. 2013 was the year of ‘What can’t Elon Musk do?’

September 9
@dailydirtnap: If Elon Musk ran Ford – Detroit would be the United States of America’s Capital.

With the Q3 drawing to a close, Lazlo also reminded us that the Q4 was a near lock to be LONG…

September 16
Lazlo Birinyi points out that strength begets further strength going into the 4th quarter of the year…
Interesting to see that it also tends to set up an equally good following year.

(MarketWatch)


The Q1 – Q3 market strength also worked for the International markets…

September 30
Even more interesting is to note that previous global equity strength leads to even further Q4 gains…

(WayneWhaley)


Seeing the empty stadiums in the NFL, NHL, and NBA this month makes me think this effect isn’t just limited to college stadiums…

September 30
Then there is that small issue that today’s college kids don’t go to their college football games…
Declining student attendance is an illness that has been spreading for years nationwide. But now it has hit the Southeastern Conference, home to college football’s best teams and supposedly its most fervent fans, giving athletics officials reason to fret about future ticket sales and fundraising. As it turns out, Georgia students left empty 39% of their designated sections of Sanford Stadium over the last four seasons, according to school records of student-ticket scans. Despite their allocation of about 18,000 seats, the number of students at games between 2009 and 2012 never exceeded 15,000. Winning isn’t even necessarily a solution. The average student crowd to see last year’s Georgia team—which finished the season ranked No. 5—was almost 6,000 short of maximum capacity. Even at Alabama, 32% of student seats went unused by students between 2009 and 2012, when the Crimson Tide won three national championships.
(WSJ)


Our Lego Man chart was one of the more commented on non-financial pieces of the year…

October 28
When you step on a Lego Man barefoot in the middle of the night, you might be interested to know…

(DailyMail)

Bears were reminded in November that Equity sentiment surveys are difficult to use in bull markets…

November 11
Elevated equity sentiment remains a poor indicator of future market weakness…
I have always liked market sentiment indicators on the low side as they give much better reads on when to buy a market. But as this chart illustrates, market strength typically leads to further strength. (data from 1963 to today)

(RenaissanceMacro)

And thanks to Liz for this great chart suggesting that this party in Equities is just getting started…

November 25
At Schwab, Liz Ann Sonders points out a favorite chart of mine as a reason that equities have plenty of room to run in the long term…
As the chart below shows, the 10-year average of annual market returns is still running below typical long-term performances. “Notice the long-term pattern of this chart,” she says. “Investors don’t spend a lot of time hanging around the median line, but instead the market tends to trend in one direction for multi decades (well-overshooting the mean) before heading back down to well-undershoot the mean. “Being less than five years into the upcycle, history suggests we have more room to run,” she says.
(WSJ)


Tom Lee was bullish all year and here he reminded us that a +20% year is not a big deal…

December 2
While many might think that a 20%+ move in equities is rare, JPMorgan notes that it actually occurs 1/3 of the time…
What may surprise investors is how a 26% YTD gain is rather “un-extraordinary.” Take a look at Figure 4 below. We have listed the annual return of the S&P 500 (and Dow prior to 1928) since 1897 and grouped them according to their annual gain. There are 116 years of data represented below. Of these, 20 years saw returns of between 20%-30%. And an additional 14 years saw returns above 30%.
(JPMorgan)


If the Santa Claus rally continues thru year end, this will be the most accurate chart of 2013…

December 16
And over at RenMac, Jeff deGraaf shows you that history suggests you should buy the close on Tuesday…

And finally, we wish you the happiest of holidays. May your holiday be merry and bright and your travels safe.

(HarriAho)

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

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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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