361 Capital Research Weekly 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
December 9, 2013

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA



Wall Street’s favorite Superhero returned on Friday…
“Goldilocks”
(Julia Kovalchuk)

Goldilocks brought with her a set of Jobs data to rescue the Financial Markets and demoralize the Bears into year-end…
Friday’s announcement that U.S. payrolls rose by 203,000 during November with the unemployment rate falling to 7% (the lowest level in five years) topped a week of encouraging economic news. Stocks rose strongly on that report, which suggests that good news is finally being recognized as good news. Recently, it seemed like every sign of economic strength raised concerns that it increased the odds for earlier Fed “tapering” of its monthly bond purchases which would push bond yields higher. Bond yields did jump initially on Friday before ending unchanged on the day. It should be remembered, however, that bond yield had already gained twelve basis points during the week. The fact that bond yields weakened yesterday afternoon no doubt encouraged stock bulls. There seems little doubt that bond yields will climb higher next year. The good news, however, is that they’ll be climbing for the right reasons — stronger economic growth with little or no inflation. Friday’s rally appears to have ended the recent pullback.
(JohnMurphy)

The rest of the week’s Economic digits were not that bad either…
The economic data points were plentiful, starting with Monday’s manufacturing ISM print. Manufacturing in the U.S. accelerated in November, rising to 57.3% from 56.4% and reaching the highest level since April 2011. Wednesday brought the latest so-called Beige Book report from the Fed, which showed plenty of positive news with scarcely any negative developments. Initial jobless claims decreased 23,000 to 298,000 in the week ended November 30, the lowest level in more than two months. Friday not only brought the BLS report of 203,000 new jobs in November, with the U3 unemployment rate dropping to 7.0%, but also the Thomson Reuters/University of Michigan preliminary December consumer sentiment index, which rose to 82.5 (the strongest since July, from 75.1 in November).
(FusionMarketSite)

@GluskinSheffInc: Household survey shows that full-time jobs soared 612k in Nov to stand at 116.928 million – the highest level since Dec 08

Added thoughts on the Friday Job numbers from Mr. El-Erian…
This morning’s U.S. employment report is an unusually good one — in terms of the headline numbers and virtually all of the key components. Net monthly job creation came in at 203,000, above consensus expectations of 180,000. Importantly, the job additions were broad-based, with virtually all sectors benefiting. The widely followed unemployment rate fell to 7.0%, its lowest level since November 2008. For once, this decline was not due in part to lower labor force participation. Instead, both the labor participation rate and employment-population rate went up. On the income side, average earnings grew on account of both hourly wages and hours worked. And all this was accompanied by improvements in structural components of the labor market (with the notable exception of long-term unemployment which remained at 4.1 million, or 37% of the total).
(USAToday)

And if you need one seasonal indicator to tell you that all of these job gains are making progress…
ISI’s Christmas tree sales survey for the first week of Dec was +16% y/y, the strongest ever by a very wide margin.
(ISI Group)

Even the UoM Consumer Sentiment is finding a new leg higher now that our blocker just pancaked the U.S. Government…
“UofM”

Government dysfunction is still sighted as the leading risk factor for markets. But since when hasn’t it been? My favorite quote this week comes from POLITICO’s Ben White and Darren Samuelsohn: “Washington has tried very hard this year to crush the economy with debt ceiling fights, clumsy budget cuts, a government shutdown and complete legislative gridlock. It does not appear to be working…” 2014 will be a good year if this becomes a market meme.
(DynamicHedge)

One more 500lb. thermometer of Global Consumer Sentiment = General Motors…
“GM”
(Stockcharts.com)

Somewhat related… The Merrill Lynch quant team put out their Top 10 list for 2014. Here are my 2 favorites from the list…
“Table2”
(TheReformedBroker/MerrillLynch)

It was a flat week for the Indexes with RISKOFF signaling (Cyclicals, Financials, SmallCaps, and International all underperforming). But given our new rescue by Goldilocks, let’s see what the market has in the tank for the last 3 weeks of the year…
“Sectors”

“MarketMovers”

If history is any guide, then this Seasonal chart suggests the Bulls will have a solid 3 weeks…
“SP500Seasonal”
(SeasonalCharts)

One of the last standing bears, Hugh Hendry of Eclectica, throws in the towel. He is good. Give his year end letter a read…
I know what you are thinking. You are thinking that the last bear is capitulating. It isn’t a good sign. Maybe it is that simple. But I think it is a little more complicated. We, and I accept we aren’t the first here, sense that U.S. monetary officials may now be willing to subordinate the demands of their own economy to the perils confronting emerging market economies. If that is the case, the great peril is not that the Fed finally tightens monetary policy and U.S. stock prices suddenly tumble from what are very obviously overpriced levels. Would that it were – our curmudgeonly portfolio structure (think dynamic volatility targeting and stop losses) works well with big stock market reversals. Instead the greater peril is that the current backdrop will turn out to mark a rapid acceleration in the ongoing move to the upside. A hint that this might be the case comes from looking back through the 113 years of price data for the Dow Jones Industrial Average. We have done this (so you don’t have to), searching along the way for the comparable periods that fit most tightly to the last 500 trading days. What is clear is that periods of trading similar to the one we have seen over the last two years don’t often seem to end quietly: they boom big time or they crash. Which is it to be this time? Looking at the markets of 1928, 1982 or even 1998, all of which have scarily similar looking historical charts to today’s, we wonder if it won’t be both. Starting with the boom bit.
(ZeroHedge)

Junk Bonds have outperformed Treasuries by 700+bps since the start of summer. A great signal of risk appetite, but has outperformance run its course?
While everyone talks about the “great rotation” from bonds to equities, we’ve had a different type of rotation taking place within the U.S. fixed income universe – the rotation from treasuries into credit. Here is a simple comparison of total returns between high yield and treasury bonds over the past few months. Corporate credit outperformance has been remarkable.
(SoberLook)

“TotalReturn”

Interesting to note the moves of the largest Pension and Insurance Portfolios. Since the financial crisis, they continue to remove assets from Equities and Alternatives to buy Bonds. If Bonds continue to lose value, will this trend continue?
“Pension”

Investors in Mutual Funds however are rotating from Bonds to Stocks. The last 3 weeks shows that Equity flows are now annualizing at a $300B rate.
“MF”
(HoranCapitalAdvisors)

Purchase of the week = a Tesla Model S paid for at $1127/Bitcoin…
Bitcoin, the virtual money former Federal Reserve Chairman Alan Greenspan called “a bubble,” was accepted as payment in the purchase of a Tesla Motors Inc. (TSLA) Model S electric car at a California Lamborghini dealership. Lamborghini Newport Beach sold the car for about $103,000, or 91.4 Bitcoins, in a transaction handled by payment processor BitPay, said Cedric Davy, marketing director for the Costa Mesa, California-based dealership. The sale cleared yesterday and the Model S will be delivered to its Florida-based buyer, who asked not to be identified, Davy said by telephone.
(Bloomberg)

But why trade Bitcoin when you can be long air filters in China?
Prices at Carrefours and Lotus Mart are doubling every other day and shortages are imminent. This photo from a friend in Shanghai on the 3rd air filter change of the week at their home … and in respect of the furry bits you can see – no, they do not have a pet. Some questions truly are best left unanswered … today’s PM2.5 = 427. (from a WRB reader with business interests in China)
“BeforeandAfter”

And yes, there is an app to monitor that…
@Stone_SkyNews: Staggering pollution across China today. Here’s a map of regional air quality index levels now. Safe level is 25.
“AirQuality”

If you have not seen a picture… that is not fog…
@YaxueCao: This photo of Shanghai is the scariest…
“ThatsNotFog”

Average Medical School Degree costs $200k (Public), $275k (Private). How soon until the ROI for a General Practitioner goes negative?
California offers one of the lowest government reimbursement rates in the country — 30 percent lower than federal Medicare payments. And reimbursement rates for some procedures are even lower. In other states, Medicare pays doctors $76 for return-office visits. But in California, Medi-Cal’s reimbursement is $24, according to Dr. Theodore M. Mazer, a San Diego ear, nose and throat doctor. In other states, doctors receive between $500 to $700 to perform a tonsillectomy. In California, they get $160, Mazer added.
(WashingtonExaminer)

Business Card of the Week…
@EliLanger: Worst possible name for an Apple employee
“AppleBusCard”

Microsoft must have done something right with their new Surface tablet because 5 of them have been bought for personal use in my geek-rich office in the last 3 weeks…
The value proposition of the base Surface 2 seems about right. For around the price of an iPad, you get a tablet that’s great for watching movies, checking email, browsing the web and using most of the basic apps you’ll need. The selection of apps still is not what you’ll find for Android or Apple devices, but basic apps like Facebook, Twitter, Flipboard, and Slacker are there, as are many games, including popular Xbox titles… The Surface is a bargain machine that packs a tremendous amount of value for the price. The software sparkles with thoughtful and innovative touches that will most likely find their way to competing platforms.
(NYTimes)
“Surface”

Easy way to improve the world today… Go put this App on every kid’s iPad/iPhone that you run into over the holidays…
Thanks to the Public School technology teacher who made my boy and his class an addict of the game. It teaches the most basic programming and gets kids thinking about writing programs and learning how to plan out their code. This game came out last month. I would guess that more will be hitting the market and available across all platforms. How long until Coding game scores are listed alongside GPA and SAT/ACT test scores?
“CodingApp”
(iTunes)

And finally, for the Batman-Golfing fanatic in your life there could be no more perfect holiday gift…
“Batcart”
(Sploid)

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.

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