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
January 6, 2014
Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

(Which One/Hossein Zare)

Welcome to 2014. Time to pick your ladder…
2013 finished off with new highs for most indexes and now we get to place our bets for 2014. Many indexes started lower with 1% discounts in the U.S. and 2-3% discounts overseas. With most portfolio managers on holiday or stuck in the cold weather, a truer picture of investor sentiment will be taken this week when everyone returns to the office. In looking thru the various markets, this weekend, most risk appetite measures remain in place for further interest in stocks. For my algorithms’ sake, I would prefer to see an increase in chop and volatility, but would guess that all pullbacks will remain short lived. We will start the Q4 earnings period this week and as usual, stock volatility will increase as companies beat and miss their expectations. This will be an interesting quarter to watch given that the S&P500 is +8% while earnings revisions have mostly been revised lower. So either analysts’ estimates are too pessimistic or companies are going to be missing earnings. We shall see. In the meantime, below are some interesting observations that hopefully will give you some added perspectives.

If you haven’t already, read Josh Brown’s weekend piece which includes many insightful thoughts going into 2014…
A new year has just begun, let’s get our bearings… This isn’t a post full of table-pounding predictions or forecasts, this is just me thinking out loud. In the first part, I’ll sum up the current environment as I see it. In the second part, I’ll talk about some possible scenarios for the coming year that, to me, would seem to be the most likely. In Part III I’ll bottom line it for you.
(TheReformedBroker)
With 2013 in the record books, it’s time to look at the annual trends in Asset Class returns…

(JPMorgan/BusinessInsider)
Also interesting, after 7 years of performance, U.S. Stocks, U.S. Treasuries, and U.S. Corporates have all returned the same +50%…
As explained in the item below, I’ve been thinking in seven-year periods lately, so I thought at the turn of the year I’d go back that far and see from where we have come. The three lines represent long Treasuries (TLT), corporate bonds (LQD), and stocks (SPY). I was going to use one of the big junk bond ETFs to show lower grade credit risks, but neither HYG or JNK was in existence at the end of 2006. (Think about that.) It is amazing that these three very different vehicles ended up on top of each other after seven years. Within 1.27%, to be exact. Seven years, three ways to get to the same place.
(ResearchPuzzler)

I continue to watch Treasury yields closely. Equities can absorb the slow glide higher, but a rocket move like May/June will again give stocks a pause…

The move higher in rates will be dictated by the rate of bond fund outflows…
and it would appear that outflows will continue as I hear few PMs/Strategists make the call to BUY longer duration fixed income.

(RenMac)
A continued area of support for Equities is the ongoing appetite for Junk Bonds (which have continued even with the category’s outflows)…

Another big risk measure for the markets is the performance of Small v. Large Cap…
Typically Larger Caps have an edge in the Q4 and then Small Caps get it back in January and the Q1.

On the valuation side, average multiples are no longer cheap. So it will be up to earnings to help stocks deliver in 2014…

(GoldmanSachs)

(Storm Rider/Reg Faulkner)
If you need a big barometer for the U.S. economy, look no further than Railroad Shipments which are on fire…
Weekly Rail Traffic finished 2013 on a high note. Looking at total 2013 Traffic, rail shipments grew +1.8% y/y which confirms a solid recovery. But if you exclude Coal (which is being substituted for Natural Gas), rail shipments grew +3.6% y/y which really is something to take notice of.

(PragmaticCapitalism)

(AAR)

Investors are also waiting for the Capex Spending cycle to ramp. David Rosenberg thinks that it is on track to accelerate…
Finally, capital spending, which has been the most profound missing link, is now on track to accelerate since productivity growth is vanishing and Corporate America is realizing it had better do something about it. The age of the private-capital stock is the oldest it has been in nearly six decades, so the incentive is there to embark on a vigorous capex cycle. The ability is also there, given the record amount of cash sitting on business balance sheets (which, until recently, was being directed towards share buybacks and divided payouts rather than capital upgrades). The willingness is apparently there too, based on the outstanding November durables goods figures. Durable orders jumped 3.5% in November, almost double the average estimate, and durable shipments increased 1.8%. Core non-defence capital goods orders skyrocketed to 4.5% and many other data releases of late had upward revisions to October.
(FinancialPost)

As for Cyclical stocks themselves, they continue to lead the markets higher…

Banks are a subset of the cyclical sector and they continue to have the wind at their backs with the steepening yield curve…
Remember that banks borrow short (deposits) and lend long (loans). So if the economy continues to ramp and cyclical spending picks up, companies will borrow and bank balance sheets will shift from low rate securities to high rate lendings.

Higher rates have hurt Housing stocks, until December…
Investors must be making a bet on housing demand accelerating in 2014 because a stronger economy will outweigh higher mortgage rates.

Are the big holders of Gold finished selling yet?
Gold is starting off 2014 with a bang. The metal is now -30% from its highs 24 months ago. If you think now is the time, look at Gold Miners (GDX) and watch all of their capital moves. If companies start selling/closing mines to buy back stock, the names could get interesting.

Another big trade potential will be the bounce in Emerging Markets…
Investors were continuing to sell into year-end, but at some point a rising U.S./Europe/Japan should benefit all countries’ economies.

Surprising to see that REITs are now so highly correlated with equities…
This makes it more difficult to get liquid diversification in Real Estate, but maybe better for investors if Equities gain while Bond Yields move higher.

(Morningstar)

And for those readers who invest in Residential Real Estate, here is Zillow’s 2014 ‘BUY’ list…

To determine which markets will be the hottest in 2014, we combined data on unemployment rates, population growth and the Zillow® Home Value Forecast. Markets determined to be ‘hot’ are characterized by lower than average unemployment, population growth of greater than 2 percent during the past two years and are forecasted to have home value growth of more than 2 percent during the next 12 months. The list is intended to give an early view into housing markets that are likely to experience heavy demand for homes, as well as increasing home values.
(Zillow)

The #1 priority of Microsoft’s CEO-to-be…
By NPD’s tallies, Chromebooks accounted for 21% of all U.S. commercial notebook sales in 2013 through November, and 10% of all computers and tablets. Both shares were up massively from 2012; last year, Chromebooks accounted for an almost-invisible two-tenths of one percent of all computer and tablet sales.
(ParisLemon)
One of the more amazing charts that I saw over the break…

(WSJ)

(WashingtonPost)

Peter Thiel, Mark Cuban, Georgia Tech, Stanford, Coursera and many others are thinking big about how to bridge the gap between the costs and benefits of higher education…
We may eventually see the rise of “hoteling” for college students whose courses are done primarily online. Build a nice campus—or buy one, from a defunct traditional school—put in a lot of amenities, but don’t bother hiring faculty: Just bring in your courses online, with engineering from Georgia Tech, arts and literature from Yale, business from Stanford and so on. Hire some unemployed Ph.D.s as tutors (there will be plenty around, available at bargain-basement rates) and offer an unbundled experience. It’s a business model that just might work, especially in geographic locations students favor. Grand Cayman is awfully nice this time of year.
(WSJ)

This Yale Bulldog/Nobel Laureate is not sitting idly either…
Nobel laureate Robert Shiller is getting a global classroom—and signing up tens of thousands of students around the world. The Yale economics professor’s “Financial Markets,” to be taught through the online education forum Coursera, is the most popular among hundreds of offerings for 2014, according to a Coursera representative. Professor Shiller, who has taught at Yale since 1982, has signed up 67,582 students for his online lectures, which will be webcast starting in February.
(WSJ)
Home Depot gets innovative and no, you can’t buy this on Amazon…
Home Depot’s new Big Gripper all-purpose bucket is a handy improvement on the old school, five-gallon contractor pail. An ergonomic handle and patent pending “pocket grip” on the underside sets the product apart on the shelf, but more importantly, the design is a showpiece for a new approach to big box merchandising. Brick-and-mortar retailers have learned a lesson from Apple and are following their vertically integrated approach by developing high-quality, and exclusive, products to remain competitive in the age of Amazon. And they’re learning from another Apple trademark: revisiting product categories filled with bad offerings, and completely rethinking them.
(Wired)

Finally, it’s brutally cold out there. Follow Jimi’s lead and do anything to stay warm and be safe…

@HistoryInPics: Jimi Hendrix burns his guitar at the Monterey International Pop Festival, 1967

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

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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.