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 19, 2013
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA



Interest rates continue to make an epic climb up and to the right…


In 20 years of interest rates, the absolute level remains low…


…But in percentage terms, this increase in rates has been historic…



Since the May peak in interest rates, the loss of capital in bonds and their proxies has been substantial…
The positive performance in high yielding MLPs shows the strength in the U.S. energy infrastructure sector.


REITs, on the other hand, have been hit the hardest due to their significant 4 years of outperformance, plus the increase in competition pushing down new investment cap rates…


What will cure the ills of the bond market? Increased certainty of the next Fed head would help. The economist pool and the markets would prefer Janet Yellen. But the White House has let it be known that the betting line odds should start at 66.6% for Larry Summers. And with every mention of a fraternity brother in the big chair, another full shot glass is sent to the Treasury bond market. Combine the Fed Chair decision with the talk of the September taper and it isn’t just the locals who are selling bonds…

Foreign holders dumped a whopping $40.8 billion of long-term Treasuries; the biggest exodus from bonds in the history of the U.S. Worse, June was actually the third month of mass dumping in the past four, for a total of $79 billion. China, the biggest holder of our bonds, unloaded $21.5 billion, while Japan, the second-largest holder, dumped $20.3 billion.


And the locals are continuing to sell bond funds and ETFs…

Outflows from U.S. bond mutual funds and ETFs have risen to $19.7B in August so far from $14.8B in July, TrimTabs says, making this month’s figure the fourth-highest on record. Since the beginning of June, $103.5B has left bond funds, or 2.7% of total assets. The sell-off, which has been prompted by fears of Fed tapering, has sent Treasury yields upwards, with the 10-year hitting 2.871% today, the highest for just over two years.

That leaves only one constant buyer of U.S. Government debt…
@Pawelmorski: Why the taper actually *does* matter. nobody but the Fed buying Treasuries. (Chart via BAML)


Even the Bridgewater All Weather Portfolio was caught off guard by the volatility in interest rates…

As the bond market plunged in late June, Ray Dalio convened the clients of Bridgewater Associates LP, the world’s largest hedge-fund manager, to tell them that a fund designed to withstand a broad range of market scenarios was too vulnerable to changes in interest rates. Bridgewater, citing months of study, said it had underestimated the interest-rate sensitivity of various assets in its All Weather fund and was taking steps to mitigate the risk, according to clients who listened to or read a transcript of the June 24 call. By the end of the month, the Westport, Connecticut-based firm had sold off enough Treasuries and inflation-linked bonds to help reduce the fund’s most rate-sensitive assets by $37 billion, according to fund documents and data provided by investors. The move, disclosed to investors five days after the Federal Reserve said it’s prepared to phase out its unprecedented bond purchases, was unusual for the fund. As its name suggests, All Weather is designed to produce returns in most economic environments and avoid altering asset allocations when the outlook changes. All Weather incurred a second-quarter loss of 8.4 percent that was primarily tied to its $56 billion portfolio of inflation-linked debt, said the clients, who asked not to be named because the fund is private.

When your asset class is underperforming, it is always better to hope for rain on everyone’s parade…


But while Bonds live through their selloff, the equity markets are still saying “RISKON”. 

Examples of what doesn’t occur during a selloff:

  • Junk Bonds OUTPERFORMING Treasuries
  • Cyclicals OUTPERFORMING Consumer
  • Small Cap NOT underperforming Large Cap
  • Industrials, Materials, & Technology sectors among the best performers

Pullbacks are healthy and can be profitable for traders and long term allocators. While in the short term we like to see 2 standard deviation pullbacks to the major moving averages, I think that it would be easier to get paid in a trade higher if the bond market were to stabilize, defensive dividend payers bottom, and Financials resumed their leadership position. Until then, it is August, so we watch, wait, and get sand in between our toes.

Will Monday break the streak?
@RyanDetrick: $DJIA down 3 straight days. Hasn’t dropped 4 in a row this yr. 158 days and counting to start the yr. Previous record 143 to start ’54. $DIA

The pullback to the 50 day moving average…



The 2 standard deviation pullback on the 20day has been a good recovery space…
@NorthmanTrader: Chart time. $SPY daily. Breakdown into ST oversold territory. Does not mean bottom, but makes bounce probable.


Only one other instance when the Junk v. Treasury spread increased while the market pulled back. And it was a good bounce point…


Also rare for the market to underperform when Cyclicals are outperforming Consumer stocks…


Financials have lost some of their leadership in the last month. This could fix itself if the banks could just stay off the front page for the next month…


And about that Hindenburg Signal…You always must be skeptical of an equity market indicator when it is based upon a universe heavily laden with bonds, preferred stocks, and closed end bond funds. So here is the same Hindenburg analysis when conducted on a broad database of 2,700 EQUITIES. If you shorted the market on every signal, your portfolio would have gone down like a Led Zeppelin. 



Some earnings/data tidbits from the week:

  • Wal-Mart: “The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending. Net sales in the first six months were below our expectations, so we are updating our forecast for net sales to grow between 2 and 3 percent for the full year versus our previous range of 5 to 6 percent. This revision reflects our view of current global business trends, and significant ongoing headwinds from anticipated currency exchange rate fluctuations. Our guidance takes into account the challenging sales and operating environment. As we’ve seen in the past, discrete tax items have had a meaningful impact on our effective tax rate and reported results in the back half of our fiscal years.”
  • Cisco: “Our emerging markets business was up 8%, however we saw mixed results in our top five emerging countries, with India and Mexico up in double digits, Brazil and Russia approximately flat and China down 6%. The changes in macroeconomic conditions in the emerging markets both positive and negative are driving more inconsistent growth than in the past.”
  • Comments from the Chairman and CEO of United Technologies, the Hartford, Connecticut-based maker of Pratt & Whitney engines and Otis elevators, appeared in a Bloomberg piece on Thursday. Orders in the U.S. are improving going into the second half, said Louis Chenevert, CEO of United Technologies. “The housing market, for example, for us has been robust this year,” Chenevert said at an August 13 conference. “When you sell furnaces in June, July, it’s a good sign. That means there is new construction.” In addition, “Europe looks like it’s maybe bottomed out. China continues to be robust for us. India offers us some nice opportunity,” along with South America and Russia, he said. (FusionMarketSite)
  • Chinese home prices see strong gains – July home prices rose 7.5% Y/Y, the largest increase since data started being kept in ’11. Home prices rose month-on-month in 62 of 70 cities monitored by the NBS in July, down from 63 in June (Reuters)

For the week, the YTD zombies came back to life: Gold, the Miners, China, & Apple…

16 17


Speaking of teamwork, Carl Icahn has decided to help Apple shareholders…



And Twitter had a field day with the comments:

  • @zerohedge: After AAPL who’s left – Icahn will have to go activist on the Fed
  • @ivanhoff: At the Apple store, waiting on a 2-hour line for the iCahn
  • @mark_dow: I’m guessing @Carl_C_Icahn is gonna like this twitter thing #pavlov
  • @ericjackson: When Icahn tweets, people listen

I have several weekly readers who are Pension Plan fiduciaries. This just released letter from Warren Buffett to Katherine Graham is not only a must read for you, but also a great read for any advisor with long term fiduciary duties…
The 1975 Buffett memo that saved WaPo’s pension… (Fortune)

A shout out for more ‘big, ambitious, groundbreaking projects’ like the Hyperloop…
Silicon Valley product launches are a dime a dozen. But Monday’s announcement was something rather special. Elon Musk, founder of PayPal, Tesla, and SpaceX, had promised the world he would publish the design for the Hyperloop, a revolutionary new form of transport – and it is hard not to love it. It’s fast. It’s solar-powered. And it’s a bargain: according to Mr. Musk, it would cost 10 times less to build than the high-speed railways now beloved of the American and British governments. No wonder the world’s geeks and dreamers have been poring over the space-age sketches. But there is a darker side to the hype. The excitement is an indicator of just how rare big, ambitious, groundbreaking projects are. We hunger for schemes, such as the Hyperloop, because we live in an age where businesses and governments seem gripped by a lack of ambition and a wilful blindness to the future.

Peak Car has passed in the United States. Thank you Jeff Bezos…



Finally, this was easily the best Picture of the Week…


Four months ago, on April 15, the Richard family of Dorchester, Mass., stood on Boylston Street watching the Boston Marathon before two bombs exploded near the finish line. Martin Richard, 8, was one of three people killed in the terrorist attack. Martin’s mother, Denise, was gravely injured in the attack and his sister, Jane, 7, lost a leg. After months spent in hospitals and hundreds of hours of physical therapy for Jane, who has learned to walk with a prosthetic, the Richard family is adjusting to life back home.


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 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.

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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