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 13, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

There is always one person in the crowd who sees something where others don’t…

@ThatsEarth: A train passenger decided to take a photo of the family behind him. This was the result.
What are the odds that the photographer flashed this baby a few charts on Equity Market breadth?
The cap weighted indexes have done little in 2014, but look at this positive expansion in breadth at the NYSE. While the NYSE has many interest sensitive issues included in the index, I view healthy action in Small/Mid Cap breadth plus an improvement in the prices of bonds, preferred stocks and bond proxies as a VERY good sign for the markets. Year to date, money flows are coming out of Apple, Microsoft, General Electric, Berkshire Hathaway, Chevron, Coca Cola, AT&T & Philip Morris all of which have underperformed the S&P 500 by 250-500 basis points. If I were witness to the opposite with flows leaving interest rate sensitive issues and crowding into high quality mega caps, I would be very concerned. The big wild card will be earnings, which start streaming into our news flow this week followed by a fire hydrant of earnings data for the rest of January.

The team at Leuthold Group also sees the improvement in breadth keeping this market away from the ledge…
Remember that NYSE breadth is one of their 7 Early Warning Signals.

And a further improvement in Bonds and Fixed Income proxies could carry their Utility Warning Signal back into safe territory…

So where are Institutions placing their 2014 chips?
I ran a screen over the weekend looking for high trading volume and above average market performance which could indicate the footprints of large asset portfolio managers buying names for the new year. The clip of >$20b market caps is shown here. If you want the full market cap run, click on the link below.

(Link to full spreadsheet)
The year has started off well for bond investors, in part because of Friday’s weaker than expected jobs data. Given that a violent move upward in rates is one of my top fears for owning equities in 2014, the pull back in rates in this chart makes me feel better about being LONG RISK.

Friday’s rapid move lower in yields does not correlate with the continued improvement in U.S. Economic data though…
The difficult weather likely slowed December/January economic activity for now, but we will need a few dates with Goldilocks this year to keep the bond markets happy.

Over at Barron’s this weekend, the team put together a list and rank of their favorite yield plays for 2014…
They did a good job ranking the categories last year. This year they choose High Dividend stocks as the best yield oriented investment and U.S. Treasuries as the worst.

Showing the theory of persistency, the Leuthold Group has found that an optimal asset allocation strategy is to own the 2nd best performing asset class for the following year…
Since 1973, the optimal approach has been to buy last year’s second-best performer (the “Bridesmaid”) and hold it in expectation of some momentum follow-through over the next 12 months. This single-asset rotation strategy has beaten the S&P 500 by 5.5% annually over the last 41 years, albeit with portfolio concentration risk (and career risk) that some might find unacceptably high. Last year’s Bridesmaid holding—EAFE—fell well short of the S&P 500’s +32.4% total return. We guarantee such underperformance won’t occur in 2014: The Bridesmaid pick for this year IS the S&P 500.

Back to last Friday’s jobs data; the results were a big surprise. The market’s reaction should not have been a surprise…

It looks like much of the blame is being placed on the FRIGID weather…
The extraordinarily weak payrolls increase of just 74,000 in December was a real head-scratcher. One reason for the slow hiring may be storms in early December that kept many workers at home. The Labor Department says 273,000 workers couldn’t get to their jobs because of weather. That number is higher than the average of 179,000 for the past 10 Decembers and the highest December number of stayed-at-homes since 1977. Some of those workers are still considered employed, but others won’t be and thus hold down the payroll number.

But for some reason the ADP surveys must be weighted towards Hawaii, Florida and Southern California? I’d expect the lines to cross again in the future.
There was a large divergence between various measures of payroll changes during the week. The ADP employment survey indicated a payroll gain of 238k during the month of December, while the establishment Non-farm Payroll change was only 87k. Adding more confusion was the ADP survey, which indicated the largest increase in construction employment since February ’06, while the Non-farm Payroll report indicated a decline of 16k construction jobs during the month. Analysts cited inclement weather as reason for the dichotomy between the two employment surveys.

The head scratcher is all those leaving the labor force by choice…
I know that retirement demographics is having an impact, but what percentage of the 86.4 million are bored out of their minds?

Back to Equities, Dow Theory full steam and exhaust ahead…
Transports are not only confirming the strength in the broader market, but they are moving to new all-time highs helped by traffic demand across rails, trucks and planes combined with falling fuel prices.

For the Year to Date, the Health Care sector is the place to be invested. And with falling oil & natural gas prices, Energy has been the sector to avoid…

Looking more broadly, Biotechs, Metals, and Fixed Income are at the top of the list. Energy and Emerging Markets fill the bottom.

Interesting that a recent Gallup survey suggests that individuals’ equity investments continue to decline…
The average household has even less interest in investing in equities after the decline of 2008.

On the flipside, individuals are very excited to buy a home…
Homebuying expectations at 36 year highs… basically since the start of the series – bounces back to September 2013 level – there is a risk that pent up demand for homes will outweigh backing up of mortgage rates. Plans to buy new homes at highest level since 2002, second highest on record.

Adding to household formation interest could be the very tight apartment market…
@DavidSchawel: BarCap: the decade low apartment vacancy rate will continue to put upward pressure on rents/OER inflation in 14

Quote of the Week…
“We are creating an option that is so inexpensive that it can often replace mass transit.” Uber Chief Executive Travis Kalanick
Tweet/Instagram of the Week…
@jacknicklaus: On this day 52 years ago, rookie Jack Nicklaus made his first check as a professional at the Los Angeles Open when he was part of a three-way tie for 50th place, winning $33.33. “All through the years,” Jack explained, “people have said, ‘You won WHAT the first time?! $33.33?!’ ” The Golden Bear then jokes, “Yes and I wonder whatever happened to that extra penny.” #goldenbear #nicklaus #golf #history

And finally, please be sure to look for our new Monthly Alternatives Briefing e-newsletter in your email inbox on Friday morning…
In the spirit of this newsletter, Tom Florence, CEO, and Jeremy Frank, Director of Quantitative Analysis and Portfolio Manager at 361 Capital, will summarize all that’s happening in the world of Alternatives over the past month. This quick read newsletter will highlight asset flows into the category, new Fund launches, changes being predicted for the category, and so much more.

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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