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
November 5, 2013
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA

First off, a Note of Thanks…

Our @361Capital Twitter account passed 1,000 followers last week and this Weekly Research Briefing is now being sent out to over 10,000 readers each Monday afternoon. When Tom asked me 2 years ago if I could write a weekly piece for the Financial Advisors like I used to write for the Research Team at Janus, I thought ‘why not’ since I was already reading and taking notes on everything for my own brain and interests. One of my former Portfolio Managers used to tell me that an analyst only needs to come up with one great idea each year for him (knowing that if each analyst could do the same that he could easily create a top quartile portfolio). So hopefully this Weekly Research Briefing can save you a bit of time during the week and get a few good ideas in front of you each year. And as long as “Thanks” > “Complaints”, I will keep on writing.

(LeNabis)

If you saw or felt a bit of Deja vu last week, you weren’t alone…

I noticed it also. Given the Government shutdown hit to the economy and with Yellen firmly in place, I had expected Treasury yields to glide lower into year end. But with the FOMC including the hint of a sharpened talon followed by a VERY strong Chicago PMI, Treasuries sold off hard and I was beginning to see a repeat of the early summer’s financial markets: Weak Bonds, Volatile Currencies, Very Weak Emerging Markets & a Selloff in U.S. Equities. So you can say that the antennae have lifted.

Here is a chart of the 10 year bond yield, which we will be watching VERY CLOSELY…

We have seen a bit of the follow thru in RISKOFF via the selloff in Emerging Markets versus the S&P500…

Most interesting to many has been the RISKOFF move in Small Caps versus Large Caps, while most indexes continue to go to new highs…

(@stockchartscom)

And of course, we always look to take the temperature of the Financials which are signaling RISKOFF…

But it has become tough to distinguish how much is due to the market’s appetite for their core business or how much of the psychology is being impacted by the Government’s hatred of currency traders, mortgage employees, hedge fund managers, and Jaime Dimon.

Meanwhile, one big RISKON signal in the market is the continued success of the IPO markets…

Investors are stampeding into initial public offerings at the fastest clip since the financial crisis, fueling a frenzy in the shares of newly listed companies that echoes the technology-stock craze of the late 1990s. October was the busiest month for U.S.-listed IPOs since 2007, with 33 companies raising more than $12 billion.

(WSJ)

Giving all investors something to think about was the surprising strength in the Chicago PMI and Global ISMs…

The week ended with upbeat economic reports, starting with Thursday’s Chicago PMI. The 65.9 reading, a two-year high, easily topped expectations and rose substantially from the 55.7 print in September. Global PMI readings from Thursday and Friday were generally strong, as reported here earlier today. The ISM Manufacturing Index closed out the week’s economic reports, coming in at 56.4 versus a 56.2 reading in September. In the face of the government shutdown and all the uncertainty this created, the report was impressive, particularly considering the new orders component of the report was strong. This report echoes the Chicago PMI, suggesting manufacturing is strengthening. Since the FOMC announcement, the yield on the 10-year UST has increased from 2.48% to 2.62%, possibly reflective of the strong Chicago PMI report that was followed by the impressive list of global PMI reports.

(FusionMarketSite)

Chicago PMI showed no evidence of the Government shutdown hitting the economy. New Orders hit 74.3?!?

(BespokeInvest)

And on a global basis, most countries are hitting > 50 (expansion)…

(FT/DeutscheBank)

It is a very big deal when Boeing raises production rates given the supply chain moves necessary. So last week’s news is a big deal…

Boeing announced today that production on the 737 program will increase to 47 airplanes per month in 2017, the highest rate ever for the best-selling airliner in history. Once implemented, the 737 program will build more than 560 airplanes per year, and will have increased output by nearly 50 percent since 2010.

Boeing currently produces 38 airplanes per month from its Renton, Wash., factory and will increase the rate to 42 per month in the first half of 2014. First delivery of the 737 MAX is on track for third quarter of 2017.

(Boeing)

If you want to know when the Fed will lift interest rates, stay focused on the economy’s job creation…

@PsychTrader: Key topics in Yellen’s speeches. Jobs #1

Inflation remains non-existent according to the price movement of the CRB…

In looking at the make up of the Index shows few with any positive price momentum.

Back to looking at High Yield Bonds shows their spread to Treasuries at recent highs which is adding much support to equities…

I would worry if this corrected lower.

For the week, Equity investors moved into a RISKOFF position in rewarding Staples and Healthcare at the expense of Materials and Financials…

More broadly, the U.S. outperformed as the Dollar strengthened while some of the last earnings reports made for some big individual stock moves…

So how to position into year end???

The 2013 scores-on-the-doors: global stocks are up 20%, bond returns are flat and commodities are down 3%. The asset allocation trade of the year has been long developed market equities (20%) and short Gold (-20%). So what’s the trade into year-end? The contrarian would clearly buy Gold & Treasuries. But the historian would stay long stocks. There have been 34 years since 1928 in which the S&P500 gained more than 10 percent in the first 10 months of the year. Subsequent Nov/Dec returns were positive in 28 years (by a hefty average of 6 percent) and modestly negative in only 6 years.

(BoA Merrill Lynch strategist Michael Harnett/FinancialTimes)

Thru Friday, the S&P500 gained 4.7% in the Q4. So it may be helpful to look at the range of returns for the seasonally strong Q4…

(RenMac)

The other large weight in the markets has been Washington, D.C…

You know that your back is against the wall when even your friends in the press are criticizing you.‏

(@NewYorker)

(@BW)

The joke here is obvious: Can’t President Obama just ask the NSA guys to run the Obamacare web site? After all, the ones who are no longer spying on foreign leaders will need something to do. But the more serious question is whether both of these visions of the government can be right at the same time. Is it possible that the U.S. government can contain both the terrifying technological competence implied by the NSA stories and the unnerving technological incompetence displayed in the Obamacare stories?
(Ezra Klein, The Washington Post)

@tylercowen: “You didn’t build that” now has an entirely new meaning…

But seriously, enough about the jokes and magazine covers. Obamacare must get operating ASAP or the entire program will become a financial catastrophe as adverse selection hits the numbers. Someone needs to get the website turned on so that healthy, low risk participants can enroll and pay the premiums to support the higher risks that will be expensing the system. If the system is not flying to enroll everyone that wants to sign up by year end then Congress will be ripping through several new debt ceilings in 2014.

(Blaine Rollins)

As discussed last week, if Obamacare is not up and running soon, NO incumbents will need to worry about their future in Washington…

@GeraldFSeib: The graphic that ought to make all incumbents squirm, at least a little:

“People are anxious,” said Senator Richard J. Durbin of Illinois, the No. 2 Democrat. “I don’t think there’s confidence by anyone in the room,” said Senator Jeff Merkley, an Oregon Democrat up for re-election next year, as he emerged from the closed-door meeting in the Capitol. “This is more a show-me moment. We were all confident that the system was going to be up and operating on Oct 1. And now we’re not confident until it’s real.” The anxious include not only senators and House members facing hotly contested races but those whose seats are considered safe, as well as lawmakers in states with Republican governors who have done nothing to promote the health care law and in states with Democratic governors who have created state-run websites and made every effort to sign up the uninsured. “It’s not working well,” said Senator Benjamin L. Cardin, Democrat of Maryland, whose state was hailed by Mr. Obama as a model for the Affordable Care Act.

(NYTimes)

Back to making money, the PE firms built the single family rental business from scratch in the U.S. and now they are doing it in Spain…

Blackstone Group LP (BX), builder of the biggest single-family rental home business in the U.S., is using its experience to replicate the model in Spain, where property prices have dropped 40 percent. The world’s largest private-equity firm, which has spent $7.5 billion buying 40,000 homes in the U.S., agreed in July to purchase 18 apartment blocks from the city of Madrid for 125.5 million euros ($173 million). The firm is bidding against investors including Goldman Sachs Group Inc. for another 1,458 housing units being sold by Madrid’s regional government, according to three people with knowledge of the auction, who asked not to be identified because the information is private. “Building a business from scratch without a single employee and buying something like $150 million in homes per week requires a learning process,” Anthony Myers, senior managing director of real estate at Blackstone, said at a conference in Barcelona last week. “When we looked at the situation in Spain, we thought we could see something similar, where we could replicate a lot of the systems and technology that we created in the U.S.”
(Bloomberg)

A great week for Modern Art aficionados, but not sure what the added supply will do to existing values…

About 1,500 modernist masterpieces – thought to have been looted by the Nazis – have been confiscated from the flat of an 80-year-old man from Munich, in what is being described as the biggest artistic find of the postwar era. The artworks, which could be worth as much as €1bn (£860m), are said to include pieces by Pablo Picasso, Henri Matisse, Marc Chagall, Paul Klee, Max Beckmann and Emil Nolde. They had been considered lost until now, according to a report in the German news weekly Focus.
(TheGuardian)

A really, great week for air travelers…

(WSJ)

Advertisement of the Week…

@BestOfAds: Witty advertisement for a new café at the Van Gogh Museum

One more coffee shot to remind you that Christmas and the Holidays are almost here…

@Starbucks: It’s never too early for a little joy. #redcups #sharejoy

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.