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
February 3, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

@SciencePorn: By balancing temperature, humidity and lighting, a Dutch artist created a cloud in the middle of a room.

Proof that a volatile atmosphere can be beautiful…

For many of us who don’t manage 100% long only risk portfolios, Volatility has been sorely missed, but not forgotten. While the International equity markets have been the playground for Volatility for the past 3 months, in January, the big V decided to visit the S&P 500 (via 2 big UP days and 3 big DOWN days). So don’t be a stranger, stick around for a while and let the Hedged investors pocket some returns.

As Bespoke charts, the market is working towards its 5th longest streak without a 10% correction…

(BespokeInvest)

Emerging Markets were the source of the initial Volatility. Interesting to see that it is primarily to blame on the debt of 3 countries…

There is not a lot of agreement, in our view, as to whether there is an EM crisis or not. As our EM team notes, ~65% of the spread widening shown on Figure 5 is attributable to a mere 3 countries: Argentina, Ukraine and Venezuela.
(JPMorgan)

The U.S. Dollar is also making it very difficult for EM investors to stay in their Long positions…

The Trade Weighted Broad U.S. Dollar continues to strengthen, providing an ongoing headwind for emerging market equities. The EEM depicts a negative relation to the broad U.S. dollar index, as weakness in domestic EM currencies relative to the U.S. dollar can lead to inflationary pressure and a greater debt burden. During the phase when the U.S. dollar was consistently weakening and U.S. yields were falling, many EM countries borrowed in U.S. dollar terms in order to reduce debt payments. Now that these trends have reversed, there may be a persistent negative force impacting emerging markets.

(Prime Executions Inc.)

But you know how skittish investors can be…EM Credit Spreads said ‘Boo’ and EM Equity investors clicked SELL.

(@FastFT)

If you have a stomach lining made of stainless steel, Ben Carlson reminds us of the potential reward in investing into EM Equities…

At times like these I like to keep a clear head and view the markets through a historical lens. Each situation will be different but it helps to know how these markets have acted in the past. Since the inception of the MSCI Emerging Markets Index in 1988 through the end of 2013, EM stocks have returned nearly 1,900% or roughly 12.1% per year. Compare that with the nearly 1,200% gain or 10.4% a year in the S&P 500. Ten thousand bucks invested in the EM index grew to almost $196,000 while you got around $130,000 in the S&P 500. Sounds great, but you have to be an extremely aggressive and patient investor to be able to stomach the ups and downs in emerging market stocks.

(AWealthOfCommonSense)

With all the focus on Emerging Markets, many overlooked the peak week of the earnings season, which is turning out well.

With just over 1/3 of S&P 500 companies reporting, 4Q13 results have been better than expectations with 73% of S&P 500 companies beating…

In the world of Big Cap Tech Stocks, it was easy to spot the Rotten Apple this reporting season…

Hats off to Facebook which put up an impressive advertising number that looks to only get stronger with new products and user growth…

As for Apple, the potential for growth has become too tied to the iPhone which disappointed investors…

Though it beat expectations on revenue and EPS, Apple had a huge miss on the only thing that really matters, iPhone sales. It sold 51 million units, a 6.7% jump in sales year-over-year, which was lower than sell-side expectations of 54.7 million. The whisper number was 56-57 million. On the earnings call with analysts, Apple hinted the low growth was due to a contraction in North American iPhone sales. Apple CEO Tim Cook blamed changes in carrier policies for the North American sales drop. Previously, customers could upgrade their iPhones after less than 24 months. Today, carriers are strictly enforcing a 24 month upgrade period. Cook thinks that in 3-6 months this will wash out, and be less of a drag on iPhone sales growth.

(BusinessInsider)

Looking at the individual U.S. Equity sectors shows several breakdowns (Consumer Cyclicals, Consumer Staples & Energy) as well as many sectors on the way to breaking down (Financials, Materials, Industrials & Tech). Only Utility stocks seem to have any near term traction and that is not a group that you want leading Equities…

(TheFatPitch)

I continue to believe that falling interest rates during a window of changing Fed action is a positive for equities and risk assets, but currently the market disagrees with me. Instead, the markets have Bonds taking from Equities either because it sees a zero sum game or a flight to safer Treasuries.

Junk Bonds are trying to hold onto their Fixed Income peers, but the weight of Equities is heavy…

Back to Utilities, the longer daily chart looks impressive…

(StockCharts.com)

Among more economic sensitive Equities, Homebuilders continue to try and keep pace with Treasuries…

For January, only the Utility and Health Care sectors paid the bills…

Biotech, Metals/Miners and anything Fixed Income led among the ETFs…

For January, Large Cap portfolio managers needed to own the Green and avoid the Red to keep ahead of their peers and indexes…

I know many of you have pro athlete clients. Heidi Moore wrote a good piece this weekend that you should put in front of them…

How to manage your money like…a pro athlete? Sports stars have become synonymous with bankruptcy, but their smarter strategies can work for you surprisingly well.

(TheGuardian)

And for your clients who aren’t pro athletes, Jason Zweig also had a good piece last week to encourage your clients to save more…

Americans need to save more—not just a little more, but vastly more, according to a new study by two leading investment analysts. To be assured of having enough money to fund a comfortable retirement, you should save a total of 22 times the annual income you want to earn when you retire. That is higher than many previous estimates, but it offers near-certainty of hitting your target. For instance, if you want $100,000 in annual income (not counting Social Security), then your magic number is $2.2 million in total retirement savings. You can hit that magic number if you are prudent and willing to save money like mad.

(WSJ)

If you are the parent of a student in Colorado or Washington, your role just became even more important…

DENVER — All day long, customers at LoDo Wellness Center, one of Colorado’s new recreational marijuana stores, reach into the refrigerator and pull out tasty ways to get high. They buy sparkling peach and mandarin elixirs, watermelon Dew Drops, and sleek silver bags of chocolate truffles, each one packed with marijuana’s potent punch. “The stuff just flies off the shelves,” said Linda Andrews, the store’s owner. As marijuana tiptoes further toward the legal mainstream, marijuana-infused snacks have become a booming business, with varieties ranging from chocolate-peppermint Mile High Bars to peanut butter candies infused with hash oil.

Retail shops see them as a nonthreatening way into the shallow end of the marijuana pool, ideal for older customers, tourists staying in smoke-free hotels or anyone who wants the effect without the smoke and coughing. But the popularity of edible marijuana has alarmed parents’ groups, schools and some doctors, who say the highly concentrated snacks are increasingly landing in the hands of teenagers looking for a sweet, discreet high, or of children too young to know the difference between pot brownies and regular ones.

(NewYorkTimes)

Congrats to our many Friends and Clients in Washington. Same teams next year in Glendale, AZ?

(@JasonRomano)

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.