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
February 10, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA


(The Shining, 1980)

‘Frozen’. Not just a top grossing Disney movie…

Three subzero mornings here in Denver last week and I am wondering if my friends in Minneapolis and Montreal have even printed a low temp above zero in 2014? Snows once again last week closed schools, canceled flights and snarled roads across most of the U.S. The rest of the Northern Hemisphere also got hit by record snows in Japan & Iran and the terrible weather broke 250 year records in the United Kingdom. With a 60% increase in the polar ice cap, I am waiting to see a white bear walk past my window. A few companies and industries love this winter: Amazon, Dominos, Netflix, Auto Parts & Body Shops, Uggs. But for much of the U.S. and World, it has been a pain for manufacturing, transportation and many services. I usually laugh at companies using weather as an excuse, but for the 1st quarter of 2014, I say feel free to blame it up. (Full Disclosure: The investment results of 361 Capital were in NO way impacted by the weather.)

Okay then, has the coldest winter in 25 years affected GDP? BofA/Merrill Lynch says ‘Yes’…

According to our calculation, this January was the coldest in the U.S. since 1988. February is set to also be colder than usual. Consumer spending appears more sensitive to the weather in Q1 than Q4. The correlation between Q1 U.S. GDP growth and average Q1 temperature was 48% over the past decade.


(Frozen City/Vlad Eftenie)

Of course the most watched economic data had a weather thread running through it…

The headline non-farm payrolls figure widely missed expectations and the December figure was revised higher by a mere 1K, making for the weakest two-month period of job growth in three years. However, investors are looking past this to find some pretty good news in the numbers. First of all, the numbers were clearly held back by terrible weather, and the unemployment rate fell again, to 6.6%. More significantly, the labor force participation rate edged up to 63% and employment measured by the household survey increased by 616K, complemented by a huge decline in part-time employment.


…but in looking through the details, Private sector job growth did well and continued the recovery trend.

Private payrolls actually outperformed at 142k, suggesting that the biggest drag on jobs growth was government in January where -29k positions were shed. Most of the weakness in government was at the state and local government level, which strikes us as odd as they are in a better position to hire given a better overall financial position. As well education and health care industries have shown an abnormally low level of hiring over the past few months, well below the 26k average of the past 12-months.

(Renaissance Macro)

For the markets, it was a most interesting and volatile week…

We started significantly lower with a big volume day on Monday led by the continued worries in the Emerging Markets. But once the EM currencies, debt and equities set a floor on Wednesday, any selling shifted to buying and the markets were off to the races with a 3.4% up move in the S&P 500 from its lows.

The Volatility index begged you on Monday to have your BUY list ready as the EM panic set it…


PIMCO’s newest Deputy CIO had a timely midday Tweet on Wednesday…

@PIMCO: Mather: indiscriminate selling in EM bonds & panic buying of developed world is subsiding. Time for value investors to consider stepping in.

The currency rates of Turkey, Brazil and India showed improvement during the week which helped Equities…


For anyone who believes that a down January implies a down year, show them this chart…

(JP Morgan)

I have to agree with Tommy Lackey here…

@gtlackey: A bit hard for me to expect a major top when Biotech, Home Builders & Internet are leading these RS Rankings… $IBB $ITB $FDN

Further, the market typically acts well 1-2 months out whenever Portfolio Manager sentiment corrects so meaningfully to the downside…


While the Great Rotation shifted into reverse most recently, Credit Suisse notes that there is still PLENTY of available capital looking at Equities…

Since 2008, there has been around $100bn of net outflows from global equity funds, compared with $1.1tn of inflows into global bond funds. Institutional investors’ equity weightings are still clearly low. The corporate sector has firepower to buy $2.3trn (via releveraging), while private equity funds have around $1.1trn of unallocated funds.

(Credit Suisse)

For the week, RISKON Cyclicals, Materials and Financials led…

More broadly, Earnings movers still led gainers along with Europe while Asia lagged…

Small Caps will need to be watched given their underperformance…

The Japanese Nikkei is also under the microscope given its break of the 200 day moving average…

One troubled market component, which improved meaningfully, last week, was Apple. So now we know when the market no longer likes Apple’s earnings, there will be a standing buyer lurking in the machines…

Apple disclosed that it has repurchased $14B in common stock over the last two weeks, amounting to 3.1% of its market cap. Over the last 12 months, the company said it has bought back $40B in stock, an all-time record for Apple or any company. CEO Cook said that the company had been surprised by the 8% decline on Jan 28th that came after reporting quarterly results. He also pledged to return $100B to shareholders by the end of 2015.


A good chart from Goldman Sachs showing the calendar seasonality of stock buybacks…

Companies are typically out of the market until after their earnings reports (just like Apple was until Jan. 28th). So likely other companies who had stock sell offs in January with authorizations in place are soaking up the loose shares in the market today which of course would help this oversold bounce.

Speaking of big stock repurchases, Berkshire Hathaway might be getting close…

Berkshire’s 2013 annual report will be released on February 28, 2014 and shareholders will have access to the book value figure as of December 31, 2013. Presumably at that point, Berkshire will revise its repurchase limit to reflect December 31, 2013 book value. While Berkshire’s book value is difficult to estimate due to the variability of earnings and the unpredictable marking of the derivatives portfolio, it is possible to make a ballpark estimate based on changes in the stock prices of Berkshire’s disclosed marketable securities holdings as well as an estimate of operating earnings based on recent trends. Based on these factors, we would estimate Berkshire’s book value per A share to be in the vicinity of $132,000 as of December 31, 2013 which would put the new 120% repurchase limit at $158,400. Berkshire would have to decline by only another 4 percent to reach that threshold.


One area of the economy that seems to be surprisingly less affected by the weather in 2014 has been housing. The ISI Group homebuilder survey has been on fire and this piece in the WSJ shows that the lack of inventory at the high end has caused big home sales to surpass their 2005-2007 peaks.

California’s $2 million-and-up home market is sailing past its prebubble highs, even as the rest of the market continues to play catch up. In other words, while the state’s housing market is still on the road to recovery, the number of $2 million-and-up home sales is back to normal. Just over 4,500 California homes were sold for between $2 million and $3 million last year, according to DataQuick. Assuming there wasn’t some rush of $2 million and up home purchases before the data start in 1988, that was an all-time high and about 400 more than the previous high set in 2005.


And I bet the lack of high end inventory is a nationwide occurrence. The smaller builders who focus on the high end likely had a difficult time making it through the 2008 crisis and banks are still scarred from lending to them. As a result, if you Zillow the most expensive zip codes in the U.S., you won’t find much on the market which will cause prices to rip higher in 2014. This is now the case in our hometown…

Continued low inventory among metro Denver luxury homes drove prices higher and average days on the market lower, according to report Friday from Kentwood Real Estate. There were 26 homes with a price tag over $1 million sold in January, down 16 percent from the 31 sold last year. But average prices jumped 14 percent year over year and days on the market plunged almost 50 percent, from 209 days in January 2013 to 108 days last month.

(Denver Business Journal)

If you know a Financial Advisor looking for a new opportunity, have them look into Wyoming, South Dakota or Vermont…

Interesting website that shows the availability of all professions by state. Of course there is a shortage of everything in the Dakotas.


Quote of the week…

“Cigarettes have no place in an environment where health care is being delivered,” said Mr. Merlo, a 58-year-old former pharmacist who became CEO of CVS Caremark in 2011. “This is the right decision at the right time as we evolve from a drugstore into a health-care company.”


(Smoking Kills Daddy/Murtada Faisal)

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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