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

October 22, 2012
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA

It was all about Earnings last week, and investors were fine with the numbers, until Friday

U.S. multinationals selling everything from soda to computer chips to industrial gear are reporting that demand remains uncertain, highlighting the precarious state of the global economy and suggesting a recovery will be slower to take hold than had been hoped. (WSJ)

It was difficult to find much optimism in the larger or midcap cap earnings releases:

  • Caterpillar – The decline in the sales and revenues outlook reflects global economic conditions that are weaker than we had previously expected. In addition, Cat dealers have lowered order rates well below end-user demand to reduce their inventories. Production across much of the company has been lowered, resulting in temporary shutdowns and layoffs. Lower production will continue until inventories and dealer order rates move back in line with dealer deliveries to end users… “As we’ve moved through the year, we’ve seen continued economic weakening and uncertainty. It’s definitely impacting our business with dealers intending to lower inventories and mining customers delaying some projects and reducing orders,”… “we are not expecting any improvement in world economic growth until maybe the second half of 2013.”
  • IBM – “if you look at the third quarter performance, we did start off the first two months of the quarter on a stronger trajectory than we saw for the full quarter, as we saw a falloff in our growth rates in the third month of the quarter.”
  • McDonald’s – “as we begin the fourth quarter, global economies remain challenging and our comparable sales for October are currently trending negative.”
  • Goldman Sachs – “There is still so much political uncertainty out there that is driving markets. A speech by Politician X or Politician Y drives markets up or down as much as any economic situation,” said David Viniar, Goldman’s finance chief. “In that environment, it is very hard to have conviction and very hard to take risk, both for our clients and for us.”
  • Albemarle (chemicals) – “We expect market and economic conditions to remain unstable for the foreseeable future.”
  • Steel Dynamics – “Looking ahead, we have seen softening in agriculture, transportation and certain areas within energy, related to natural gas exploration; however, automotive and manufacturing appears strong and residential construction has shown incremental improvement, as housing starts and rents have improved in the face of declining inventories. We believe volumes could continue to be challenged in the fourth quarter, as fluctuations in immediate customer needs and hesitancy for customers to carry inventory persists.”
  • Xilinx (semis) – “Our backlog heading into the quarter is down sequentially. Additionally, we believe continued macroeconomic uncertainty may result in unpredictable customer ordering patterns. We expect continued growth in our new products but will most likely experience declines from our base and mainstream products.”
  • Linear Tech (semis) – “While the automotive market continues to show strength on higher bookings, this increase was offset by lower bookings in our other major markets, particularly the industrial and computer markets. Forecasting continues to be difficult in the current environment. Though customer inventory levels appear to be at reasonable levels, demand continues to be sluggish and orders have not shown signs of improvement as we begin the second quarter. Given this weakness, we expect that this will be a difficult quarter as we remain cautious about the economy and the global market.”

One major bank summed the results up well…
Managements are lowering guidance, indicating downside to 4Q EPS. Fully 20 companies have provided 4Q guidance following their 3Q earnings announcements and 18 of these firms have reduced 4Q profit guidance. The midpoint of guidance was below the mean consensus estimate in all but two cases. Although guidance tends to be downbeat, this is especially negative. 4Q EPS estimates for reported companies are down by just 40 bps. We expect further negative 4Q EPS revisions will occur most likely as a result of reduced margin estimates.
(Goldman Sachs)

Confirming some of the earnings releases that we have read is the weak outlook for job growth..

But even with Friday’s large selloff, the week finished on a positive note (except for tech stocks)…

The positive buoy for the market was in the much better than expected economic releases…


Housing Starts were especially strong…

And the need for new housing supply is reflected in the rapidly correcting inventory situation…

(Capital Economics)

More fuel for upside in equities is the continued improvement in European bond yields…


Also, pessimism among investors remains near recent highs…


Within the Equities market, are Dividend stocks in a bubble?


Within Real Estate, one of the early entrants into the foreclosure to rental investment scene is exiting…
Earlier this year, proponents of investing in foreclosed homes were projecting a return of at least 8 percent a year from renting them out. But the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California, the sources said. It’s not clear what kind of return Och-Ziff had expected to earn from renting out homes. The average cost of renting a home nationally grew at 0.9 percent in the third quarter from the previous three-month period. That growth rate is down from 1.3 percent in the second quarter, according to Reis Inc., a commercial real estate research firm. Meanwhile, the median price paid for all new and resale houses and condos in the San Francisco Bay Area in August was $410,000 — up 10.8 percent from $370,000 in August 2011, according to DataQuick. Och-Ziff’s move could indicate that institutional investors may have to dial back their expectations, especially with regards to rental income. (Reuters)

Are you looking at this chart on a PC, Tablet or Smartphone?


Quote of the Week:
“We can blow it if we go over that fiscal cliff… It would make a return to recession very likely.”
(Former Treasury Secretary Summers)

For our many friends in Texas…
@darrenrovell: Does this prove that Texas is an Aggie state now?

John Gurdon won a 2012 Nobel Prize for science last week. Here is an early report card of his…


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 Research Briefing Archive


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