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

April 14, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA


 

The only thing worse than being an investor in tech stocks right now is to also have an address in San Francisco…

It has been a great run in new tech stocks. Their growth is not over and there will still be many stocks that reward investors. But with 5-10 fold moves in many names over the last 5 years, the Contrarian in you must take note of the very positive newsstand covers on the sector combined with $3 billion ransom demands to create anti-capitalistic zones in San Francisco. The stars have lined up to lighten up your high growth technology weighting and also to put that Mission District condo on the market.

(re/code)

(Forbes)

This flip in returns of 2014 v. 2013 is most interesting…

(PensionPartners)

Also, a sign of a flip in the market is that the IPO market looks to have broken…

@IPOtweet: A Renaissance Capital unoriginal series: Breaking Bad. 16 IPOs scheduled this week – 10 got through and 6 broke issue

Technology Stock Tweet of the Week:

@howardlindzon: 3d stocks like $VJET seem healthy if you turn this chart upside down and look at it from outer space

If you need any sign of sure schizophrenia in the markets, look no further than this chart…

The recent extremes in Put/Call activity would give you the sense that few investors have any idea how to position their risk.

As we have discussed, the High Growth Revenue stocks are the group which has underperformed the most. Because of its past outperformance, it is also the group that was most over-owned by the Hedge Funds…

(Goldman Sachs)

As a result, many of the largest hedge funds have had a rough 6 weeks. As their Long positions have underperformed and their Short positions have outperformed, the top performing hedge funds have seen a reversal. Because many use leverage, they have needed to shrink their risk book as their positions moved against them. And with so many top performing hedge funds all owning the same high growth, momentum names, the unwind has happened very suddenly. Here is one of the largest hedge funds shrinking their risk book and returning capital to investors…

Hedge fund Coatue Management plans to return more than $2 billion in capital to investors in its flagship fund after extreme volatility in technology stocks led to a 9 percent loss in March… Laffont said the market’s move in March was as “sudden and deep as some of the gut-wrenching dislocations of 2000-2002 and 2008-2009.” During the month, Coatue’s long positions moved five- to 10-times more than the broader market, he wrote… In response to the market move, Coatue has reduced its gross and net exposure to levels near historic lows. “This puts us in a position to go back on the offense when we choose, even though this approach means it might take us longer to recoup our losses,” Laffont wrote.

(CNBC)

Also not helping is that Hedge Funds’ largest position, GM, is self-destructing…

(Goldman Sachs)

Here is a GM chart. Down -20% YTD. It was a cheap stock at year end with the consumer auto buying wind at its back. Then it imploded on the massive recalls and cover-ups of bad engineering and resolution. Now the stock is VERY cheap, in the doghouse and its Management team gets to spend the rest of 2014 in Washington D.C.

It was a difficult week for the XL sectors. Only Utilities finished higher, which is never a good sign for risk taking…

More broadly, the Energy Commodities, as well as the Emerging Markets, posted positive returns…

For Bulls, one of the most distressing signs in the market was the breakdown in the financial sector. Some early earnings releases were to blame. Most of the banking industry will be reporting over the next 2 weeks, so let’s see if the results get any better.

(stockcharts.com)

The beginning of April historically has been more difficult for the markets. Tax payment related selling has often received blame…

BAD NEWS: Selling to Pay Taxes? Federal receipts in March were up an astounding +11.2% y/y. And on Friday, my accountant told me that many of his clients were in a state of shock regarding their April 15 tax returns. In particular, the tax on most capital gains is up to 23.8% from 15% in 2012, and the ACA new tax rate is 3.8% on other passive income. There may be some selling of equities to pay taxes. That said, it doesn’t seem to be hurting the economy. Stay tuned.

(ISI Group)

This study shows that the markets typically have a spring after the 14th day of April…

@RyanDetrick: Over the past 40 years, April has bottomed on April 14 – then rallied the rest of the month. $SPX

Meanwhile, this is the non-consensus opinion right now. But if correct, this opinion will put plenty of birdseed in the tray of the investors…

Roadrunner: “It’s been a fantastic mkt,” said Roadrunner, the market’s top vol trader. “The best thing about having no investors,” he continued, “is that when others are panicked, I don’t need to hold anyone’s hand, I do exactly what I want.” And having positioned for an Apr bear-trap as investors dump stocks, blowing themselves up to pay last yr’s hefty capital gains tax bills, he zipped away from his vol longs. “This move was so obvious, and needed, healthy, I’ll be selling a lot of vol in the next couple wks.”

Roadrunner II: “I don’t study charts,” continued Roadrunner. “I just look for the way things behave at certain levels,” said the savvy escape artist. “The mkt feels like it’s put in its high for the yr.” Above 1,850 in the S&P, vol softly dies, it’s a trap. “Maybe we get back up to 1,900, and the lows are unlikely to be below 1,700; the VIX range should be 13-20, it’s that kind of yr,” he said. “The most interesting thing will be how tech stocks act when they try to retest their highs in a couple mths.” And off he sped. Beep Beep!

(EricPeters/WkndNotes)

And it is unusual for the market to go straight down forever. A potential bounce point is nearing and will be watched by many…

(stockcharts.com)

Also, recall that for the market to completely roll over into a -20% Bear and end the Bulls run, we typically have an economic recession setup. And it is very difficult to see a 2014 or even early 2015 recession setup with the current data that we have in front of us:

– Credit markets remain solid with High Grade and Junk Bonds still showing near record low spreads

– Greece even returned to the market for the 1st time since the financial crisis and issued 5 year debt at 5%

– Commodity prices are firming and now even money is finding its way into the Emerging Markets

– While IPOs may have slowed or stopped in the U.S. market, M&A is continuing at a solid rate.

– And look at these trucking spot rates. No sign of a U.S. recession in this data.

(Goldman Sachs)

The largest price ever paid for a home in the U.S. is also not a signal of a soon to occur slowdown…

A sprawling estate, situated on prime waterfront property along the U.S. East Coast, has sold for $120 million, setting a new record in the United States. The sale of Copper Beech Farm, in the Connecticut town of Greenwich, was finalized Friday, according to the Greenwich Time newspaper. “This is the most expensive property sold in America,” real estate agent David Ogilvy told the newspaper.

(Yahoo)

Here is a chart of the business cycle. As ISI Group notes, we are in the circled transition period and investors are acting accordingly by reducing weights in the Early Cyclicals and moving into the Heavier Cyclicals which will benefit from rising incremental margins following volume growth…

(ISI Group)

One of the best reads last week came from Howard Marks’ pen on how to be a great investor. Here are some quotes, but read the whole piece…

“The real question is whether you dare to do the things that are necessary in order to be great. Are you willing to be different, and are you willing to be wrong? In order to have a chance at great results, you have to be open to being both.”

“Most great investments begin in discomfort. The things most people feel good about – investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy – are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.”

“Superior investment results can only stem from a better-than-average ability to figure out when risk-taking will lead to gain and when it will end in loss. There is no alternative.”

“Unconventional behavior is the only road to superior investment results, but it isn’t for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes.”

(OaktreeCapital)

There was a basketball game last Monday. One team shot 100% from the free throw line and the other shot 54%. Guess who won?

Before the NCAA men’s basketball championship game, I pointed out that Connecticut was unusually accurate from the free-throw line this season, ranking fifth of 351 teams in Division I. Then the Huskies did even better, hitting 10 of 10 free throws to help them defeat Kentucky 60-54 on Monday to win the national title — and finish the season ranked fourth in free-throw accuracy. Kentucky, meanwhile, hit just 13 of 24 free throws. It was Kentucky coach John Calipari’s fifth-straight NCAA tournament loss in which his team’s missed free throws were greater than the final margin.

(FiveThirtyEight)

Sports pic of the week…

@judahsmith: Waffle House with the Masters Champ! #wemadeit #twogreenjackets

Stay nimble and flexible. Remember that lightning helps fertilize the soil…

MeredithFrost: Incredible shot of a storm approaching a field of bluebonnets in Round Rock TX via @JasonRWeingart

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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