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
August 13, 2012

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

From its high on Tuesday to its low Friday morning, the Dow traded in a range of 121 points (0.92%). To put this in perspective, this was the lowest intra-week high low range since January 2007.


While volatility was lacking on the week, there were some interesting price movements. Yields on U.S. Treasuries, Oil Prices, European stocks, and the S&P500 all moved to new two month highs, signifying an interest in risk taking. Junk bond yields fell to 6.85% which is 100bps lower than two months ago (junk bonds are typically a great tell of risk taking in the market). While demand for income and yield has run wild in the markets in 2012, it was interesting to see the prices of REITs come under such pressure last week (IYR -2.1%). Someone know something about future rent increases or just a shift towards riskier securities?

As for the markets this week, here were the most interesting movers:

  • South Korea/EWY +6.2%
  • Gold Miners/GDX +5.1%
  • Home Construction/4.3% (interesting given the backup in Treasury yields)
  • Spain/EWP +4.2%
  • Japan/EWJ +3.7% (big outperformer for this quiet giant)
  • Emerging Markets/EEM +2.8%
  • Energy/XLE +2.8%
  • Nasdaq100/QQQ +1.9% > SmallCap/IWM +1.7% > LargeCap/SPY +1.2%
  • Utilities/XLU -0.8%
  • 20+ Yr Treasury Bond/TLT -1.0%
  • U.S. Real Estate/IYR -2.1% (an interesting move lower)
  • Natural Gas/UNG -3.7%

Among the top worries in the markets, Europe was on vacation last week…
But China posted another set of disappointing data with industrial output falling to +9.2%, the weakest growth rate since early 2010. Exports also contracted for the fourth month in a row, to gain only +1% y/y.

Mixed economic signals from global consumer names…

  • McDonalds failed to report positive global monthly same store sales for the first time since early 2003.
  • Disney – The park and resort business continued to generate impressive growth, especially in the U.S., with sales up 8.5% (10.2% domestic and 2.2% international). Attendance at domestic parks increased 1% with 7% higher per capita spending as Disney continues to gradually flex its pricing power.

About that big move in junk bonds…

Junk bonds have managed to be all things to all people this year. They’ve lured fixed-income investors fed up with miserable yields on Treasuries and anything with an investment-grade rating. They’ve siphoned off beleaguered stock investors who see in junk a similar risk profile to equities, but one augmented by reliable coupon income. And they’ve rewarded all comers with a 9.83% 2012 return, and we’re not even halfway through August. As with any bull run, this one has led to questions of when it will end. (Barrons)

Asset returns 5 years after the start of the financial crisis…Go Corn…


Regarding Corn, maybe we haven’t yet seen the peak price…
“We’re going to see very high prices,” said Joseph Glauber, USDA chief economist. According to the USDA, 44% of the U.S. Midwest was suffering from “extreme” or “exceptional” drought this week, up from 36.8% a week ago.(FT)


As the price of Corn trades to all-time highs, more calls for a pause on ethanol…
“The UN has called for an immediate suspension of government-mandated U.S. ethanol production, adding to pressure on Barack Obama to address the food-versus-fuel debate in the run-up to presidential elections. Most U.S. ethanol is made from corn…The UN intervention will be seized upon by state governors, lawmakers and the meat and livestock industry, who have expressed alarm at surging prices for corn. Members of the Group of 20 leading economies – including France, India and China – have already expressed concern about the U.S. ethanol policy.” (The Financial Times)

And as the Fed packs up for the Tetons, will the markets find S’mores or Bears in Jackson Hole?
The Fed is really in a box right now…the fund manager suggested Fed Chairman Ben Bernanke’s “hands appear to be tied” ahead of a closely watched speech on the economic outlook later this month in Jackson Hole, Wyo. “If he doesn’t deliver in Jackson Hole … you’ll see these risk markets react and fall back,” Kashkari said. Investors clamoring for more quantitative easing “suggests there’s downside risk from here if the Fed doesn’t move,” he added. (Neel Kashkari, now PIMCO, former TARP chief) (CNBC)

Your roadmap to the fiscal cliff…

Strong words for lawmakers in the D.C. Capital newspaper this week…
“Congress isn’t gridlocked — it’s just totally irresponsible.”
Simply put, this is no way to run a country. The problem is not gridlock or ideological fervor. The problem is an increasingly irresponsible government that has for far too long been far too easily let off the hook. Whichever party emerges victorious in November, and whatever happens in the lame-duck session, this much is certain: Unless taxpayers begin demanding their president and Congress act responsibly and do the actual work they were elected to do, “gridlock” will be the least of our problems. (TheHill)

So, in other words, the U.S. Post Office costs each U.S. household $15 per month…
The U.S. Postal Service said its loss for the quarter ended June 30 widened to $5.2 billion from $3.1 billion a year earlier, and affirmed it expects to default on a second payment to the U.S. Treasury due next month. The loss widened as mail volume continued to decline, falling 3.5% during the quarter… “We have reached the point where we must conserve cash in order to fund operations,” Chairman Thurgood Marshall Jr. said at the meeting… The Postal Service hasn’t changed its forecast that it will temporarily run out of cash in October.


This week’s thought on the European endgame from the Brookings Institute…
The Happy Scenario: A Gradual Workout of the Problems (10% probability)
The Most Likely Scenario: Things Get Worse Before They Get Better (65% probability)
The Disaster Scenario: It All Falls Apart (25% probability)

If the Disaster Scenario hits, here is Der Spiegel’s estimates of the consequences…

As for The Economist…


Meanwhile, capitalism is slowly dying in Italy…
Micaela Pallini stood amid the heady perfume of anise-scented sambuca in the Roman distillery run by her family for five generations and pointed to a gleaming row of bottles rolling off a packaging line. She recently had a chance to double production of the popular Italian liqueur and expand the reach of the 137-year-old company by hiring more people for a joint venture with an Italian partner. “But we didn’t pursue it,” said Ms. Pallini, the chief executive of Pallini liquors, which sells spirits including sambuca and limoncello worldwide. “If the venture failed, Italian laws make it almost impossible to cut our work force to adjust costs,” she said. “It’s a risk we couldn’t afford to take.”… the Pallini dream of taking the business to greater scale and profitability has met with obstacles. For one, labor costs are prohibitively high because of an array of taxes that mostly go toward supporting Italy’s lumbering government and an extensive social safety net. Wages are set through collective bargaining. For an average worker with net take-home pay of 1,100 euros a month, Ms. Pallini said, the total cost to her company, including taxes and social charges, is 2,500 euros.

However the bicycle business is booming in Greece…
The high cost of road tax, fuel, and repairs is forcing Greeks to ditch their cars in huge numbers. According to the government’s statistics office, the number of cars on Greek roads declined by more than 40% in each of the last two years. Meanwhile, more than 200,000 bikes were sold in 2011, up about a quarter from the previous year. (Reuters)

Another top performing investor, Paul Singer, is frustrated in 2012…
“Global financial markets currently feel like they are in a period of calm before a storm, possibly centered on the European situation,” Singer wrote, adding that when the storm arrives, “we are ready to don our foul-weather gear […]It is more difficult than ever to select ‘good’ First World investments based on careful financial analysis, fancy models, instinct or any other method,” Singer wrote. “Recommending shifts among bonds, which have almost no yield, highly volatile stocks and cash with zero yield is a thankless task.” (Reuters)

While John Paulson digs for alpha in the Las Vegas desert…
Paulson & Co., the hedge fund run by billionaire John Paulson, purchased more than 875 acres of land in a resort community in the Las Vegas area, a bet on a housing recovery in the region as the supply of homes shrinks. The $17 million purchase at Lake Las Vegas in Henderson, Nevada, was made through the Paulson Real Estate Recovery Fund, which seeks to build houses on raw land and resell the properties to homebuilders, said a person with knowledge of the deal. (Bloomberg.com)

The big news over the weekend was the addition of Rep. Paul Ryan (aka the budget finance geek) to the 2012 GOP ticket:

  • Mitt Romney did much more this weekend than announce a running mate. He unveiled a significant change in strategy. The 2012 election is now a choice, not just a referendum. (WSJ)
  • Romney’s original intention was to make the 2012 election a referendum on President Obama’s management of the economy. Ryan makes it a choice between two competing plans for deficit reduction. (WashPost/EzraKlein)
  • Ryan deserves a lot of credit for publishing his budget proposal. Unlike other Congress-folk, who eagerly condemn America’s budget mess but offer no specific solutions for it, Ryan had the balls to actually publish a specific plan. Ryan’s basic premise in his budget proposal is right: If we do nothing, we’re screwed. You can disagree with how Ryan proposes to solve the problem (and I very much disagree), but at least he’s acknowledging the problem and offering a solution. The Democrats, meanwhile, and even Mitt Romney, just keep hoping you won’t notice there’s a problem. For the U.S. to solve its debt and deficit crisis, the head-in-the-sand approach is as cowardly as it is ineffective. Over the next couple of decades, we have hard choices to make. It’s time both sides acknowledged that, published their respective proposals, and started making these choices. And Ryan deserves credit for sticking his neck out. (BusinessInsider)
  • @carney: Romney gets it right with Ryan. Now this election gets serious. It’s a straight fight between radical fiscal reform and Europeanization.
  • @ReformedBroker: Paul Ryan told CNN he has “a lot of grunge” on his iPod. Can I vote twice?
  • @IngrahamAngle: Fun tidbit: Ryan is in top physical shape 4rigors of trail bc he is a P90X’er. He does it evry day,60 mins. Efficient & brutal workout.
  • “There are a lot of people in the other party who might disagree with Paul Ryan. I don’t know of anyone who doesn’t respect his character and judgment.” (Mitt Romney, announcing his running mate)
  • ”We Americans look at one another’s success with pride, not resentment, because we know, as more Americans work hard, take risks, and succeed, more people will prosper, our communities will benefit, and individual lives will be improved and uplifted.” (Paul Ryan, acceptance speech)

Of course it may all come down to job and income potential when the polling curtain is closed…


Don’t feel too bad for their 99.2% unemployment rate…
Today, the Shakopee Mdewakanton are believed to be the richest tribe in American history as measured by individual personal wealth: Each adult, according to court records and confirmed by one tribal member, receives a monthly payment of around $84,000, or $1.08 million a year. The financial success of the 480 members of the Shakopee Tribe — whose ancestors 150 years ago were hunted down, slaughtered, and eventually exiled from Minnesota — derives from their flourishing casino and resort operation, which on weekends swells the population of their tiny reservation to the size of a city. “We have 99.2 percent unemployment,” Stanley R. Crooks, the tribe’s president, said as he smiled during a rare interview. “It’s entirely voluntary.” (NYTimes)

I enjoy getting input from others around the U.S., and this was by far the most delivered story of the week/month/year…
A California school district is shouldering $1 billion in interest on a $105 million bond in a deal intended to defer most of the payments for 35 to 40 years. The Poway Unified School District structured its 2011 sale of capital-appreciation bonds to avoid debt service until 2033, with the largest sums — more than $300 million each — due in 2046 and in 2051, according to data compiled by Bloomberg. The district of 33,000 students, about 20 miles (35 kilometers) northeast of San Diego, issued the debt to modernize schools in July 2011. It was part of as much as $179 million in borrowing approved in a 2008 referendum that passed with 64% of the vote. The San Diego County Taxpayers Association now regrets that it endorsed the proposal. (Bloomberg) (Congrats to the voters in Poway, CA for borrowing $6,500 per household with a payment plan that is still over 30 years away and not callable or pre-payable. The financial world is most interested in your plans to repay this debt. Will it include ankle monitors for each current resident to make certain they do not move from the city? Or maybe future earnings liens on all Poway High School graduates? Jon Stewart from the Daily Show will be calling soon.)

Most appropriate quotes for the week…

  • “You cannot escape the responsibility of tomorrow by evading it today.” – Abraham Lincoln
  • “Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas Edison
  • “Americans can always be counted on to do the right thing… after they have exhausted all other possibilities.” -Winston Churchill

On a per pop basis, Grenada won the 2012 Summer Games…


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.

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





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