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 27, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

The Butterfly Effect

Chaos theory suggests that a butterfly fluttering on one side of the planet can cause a hurricane on the other. While there are always financial butterflies moving around the globe, last week a few of them added up to cause some chaos this week in the markets. Argentine Peso devaluation, Turkish banking problems, Kiev rioting toward revolution, slowing Chinese economic data, a new debt ceiling fight, a DOJ attack on the U.S. Banking sector, new bombings in Egypt, drought in California and frigid weather in the Midwest/East are just some of the stink bugs that flew around the markets last week. Good earnings reports were largely ignored: JPMorgan calculated that of the 122 S&P 500 firms which have posted Q4 figures, 73% beat on EPS and 67% beat on revenues. And there was little in the way of economic data outside of the PMIs to influence the markets.

So, was the market just lined up for the Thursday/Friday pullback? Investors were still long the Santa Claus rally into January and it was the unanimous opinion that Stocks would outperform Bonds in 2014 so all investors seem to be tanning on the same side of the ship. If the markets were looking for a reason to pullback, it was the perfect time for a cloud of butterflies to push it over. The question now is whether or not the Argentine situation is another Cyprus or maybe a bigger blow to Emerging Market psychology. The world is awash in capital to fix problems right now (see how quickly monies found their way to Greece, Spain, Italy, even Puerto Rico). Argentina has great resources and assets, but their leaders just need to take a few math and economics classes on Coursera. If the country wants to fix their mess, investors will be ready to help… if they think that the risk/reward is lined up in their favor.

The action in the markets wasn’t troubling until Friday. There was some weakness in the usual sectors and geographies on Thursday, but on Friday even the strongest sectors and names got pounded, like the Transports, Small Caps, HealthCare, Industrials, MSCI EAFE, Junk Bonds and the Financials. Even I was surprised by the breadth of the shellacking. So now we have a good test for the market. Will the butterflies encourage more profit taking or will good earnings and continued flows into equities provide another discounted buying point? Grab your net and be ready for the next move. It will be a big week.

One important area of strength for the markets has been the improvement in the Bond Market…

Surging yields were a top worry at year end, but now it looks as if Fixed Income investors have backed away from the ledge. I would be looking for my hard hat right now if Bonds also cratered on Thursday and Friday.

Since we are nearing the last week of January, it is important to note Stock v. Bond performances…

With the S&P500 underperforming bonds by 400-850 basis points this month, there will need to be some repositioning moves by asset allocation funds from stocks into bonds. This could help buoy stocks this week.

Taken one step further into Equities, will the January sell off in Emerging Markets pull capital away from Developed Markets…

Or will global equity investors wait for even more upside targets before stepping in to buy?

But not all believe that the Emerging Markets are Buys just yet…

The currency and equity rout across emerging markets over recent days is in danger of escalating as the U.S. Federal Reserve turns off the spigot of global dollar liquidity, the International Monetary Fund has warned. Christine Lagarde, the IMF’s managing director, said spill-over effects from Fed bond tapering could destabilize vulnerable countries that have failed to rein in imbalances. “It is clearly a new risk on the horizon and has to be watched,” she told the World Economic Forum in Davos. The warning came after Argentina’s peso crisis last week set off contagion across the globe, with major knock-on effects in Turkey, South Africa, Brazil, Russia, and India. Even the Australian dollar fell to a three-year low, damaged by commodity links to China and other Asian economies.

“In some of the emerging markets we’re seeing a lot of stress,” said BlackRock chief Larry Fink in Davos. “People have large positions in emerging markets and now you are seeing an unwinding.” Mr. Fink added that Fed tapering was merely a catalyst for deeper problems. “Some have not done structural reforms and they are over-dependent on China,” he said.

(Telegraph)

RenMac highlights that even the safer EM currency, Mexican Peso, has had a difficult time…

With the next Fed meeting this week, it will be interesting to see if the Board takes EM weakness into their thoughts or if they push full steam ahead on the Taper.

(RenaissanceMacro)

What is with the Dow Industrials? Too much EM exposure possibly?

I know, it is only 30 stocks so not a true statistical subset of the market. But unfortunately it is the one that 95% of the public hears quoted on TV and in the Newspapers. Here John Murphy lines up the current support levels.

(StockCharts)

If you are looking for reasons to be cautious, the quick pullback in Junk Bonds is something to pay attention to…

Also, Financials are a critical component of the economy and a key bellwether for the market. This item Friday didn’t help the XLF…

Atty. Gen. Eric H. Holder Jr., warning that no bank is “too big to indict,” said the Justice Department will be bringing more cases involving “significant financial institutions” as it continues to investigate Wall Street misconduct. “I think people just need to be a little patient,” Holder said Friday in a television interview. “I know it’s been a while. But we have other things that are in the pipeline.”

(Los Angeles Times)

Industrials have also been an important subsector of Cyclicals which has led the markets higher…

For the week, it was the more Cyclical sectors which led the market lower…

Materials/XLB is most correlated with the move in Emerging Markets. Keep an eye on Financials/XLF and Industrials/XLI this week to see where the markets’ next move might go.

One asset class that did hold up last week and now has 5 winning weeks in a row is Gold…

Girl Scout cookies hit the market this week. Prices will be up, but have no fear as this blogger shows that prices have closely tracked inflation…

I mined Google News Timeline for all available newspaper articles stating the price of cookies in a given year between 1922 and 2011. My findings are summarized below, and incorporate historical inflation data from the Bureau of Labor Statistics. As it turns out, increases in Girl Scout cookie prices strongly reflect the inflation rate as opposed to arbitrary price increases.

(OnTheFeed)

Map of the Week…

@Amazing_Maps: Google autocomplete results: “Why is [state] so…”

Score another win for Twitter… In Australia, sharks now tweet when they approach the beach

Surf Life Saving Western Australia is attaching trackers to local sharks, which send out a warning tweet whenever they come into close proximity with the beach.

(Springwise)

Finally… Stay warm this week and avoid the barbs in the markets…

@MeredithFrost: Cool shot of a beautifully frosted fence in Oregon

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.