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 17, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA



Bad weather continued to hit the Northern Hemisphere…

@jyarow: Flatiron building in the snow.

…but bad weather only slammed the shorts last week in the equity markets. Most indexes bounced to their end of 2013 levels while others started to launch into positive returns for 2014. Take note of the last chart of the $WLSH/Wilshire Index which shows you just how broad based this bounce has been.

Weather continued to impact the U.S., European and Japanese economy at the macro and even micro level…

@ramit: Can you imagine this guy’s face when he sees his car

@barrabest: Plane gets damaged at @ShannonAirport as wind gusts up to 99mph/159kmph. Photo by Brendan Begley #stormireland

Don’t lose sight on the potential upside from this winter’s wrath…

@ElliotTurn: If my situation is any indication, this weather drag on GDP will soon turn into stimulus. Gotta repair the damn ice dam and preempt another.

Meanwhile, winter Storm Janet was 85 degrees of sunshine for RISKON investors…

Another positive, of course, was the Humphrey Hawkins testimony Fed Chair Janet Yellen gave Tuesday. The key word was “continuity.” Yellen reiterated that it will likely be appropriate to maintain the current funds rate well past the time when the unemployment rate declines below 6.5%, especially if inflation continues to run below 2%. A Federal Reserve continuing an accommodative monetary policy, with a quiescent bond market (the 10-year UST closed with a paltry 2.74% yield last week), is typically a good recipe for continued strength in the stock market.

(FusionMarketSite)

Sizing up the markets from this Bounce point, the JPMorgan desk thinks the trade is higher…

Where to from here? The “pain” direction may still be higher (maybe to ~1850) although not to the same degree as was the case before and the most likely near-term (i.e. the next several weeks) path for stocks may be frustrating sideways action (similar to what we saw for most of Jan.). However, what has been most notable about 2014 is how similar things look to 2013 (especially late 2013). Obviously changes occur at the margin and investors need to be vigilant in light of negative developments and cognizant of positioning but so far this year feels as boring as the last one (and “macro boredom” is the ideal scenario for equities to continue experiencing gradual multiple expansion). If the macro environment remains calm, investors will return to the “multiple argument” – how high can multiples expand given the benign macro backdrop and decent corporate earnings? The 2014 SPX EPS estimate remains in the ~$118-120 range, putting the SPX at ~15.5x. By the late summer people will start looking at ’15 numbers and on those (~$128-130) the multiple is 14.3x.

(JPMorgan)

One of the biggest recent moves has been in the outperformance of companies with the fastest Revenue Growth. You have seen this in the performance of Internets, Biotechs, Smaller Caps and Technology growers. And as you would guess, the interest in Revenue growers is finding its way to bottom line Earnings grower as the chart on the right shows.

(Goldman Sachs)

Another interesting chart that is on the move this week is the U.K. employment picture…

…and this data series is flowing through to the U.K. ETF in the form of higher local stock prices and a stronger Pound…

One of the biggest trades in the world is still being LONG Japanese Equities. This is favored by many large hedge funds and value long only portfolio managers. It was a great trade in 2013 and no doubt helped Soros Fund Management put up the largest gains of the year. While the economic data points are moving in the right direction with the great aid of Abenomics, the Nikkei in 2014 has been a dog with fleas. Will the next move follow the bounce in U.S./Europe equities? Probably. There is still too much money in the world looking for that next great investment.

(PrimeExecutions)

And if you are a healthy cash flowing Japanese corporation, where do you invest?

“Everything depends on your point of view,” explained the Tokyo trader. “What’s your alternative?” he asked. “Suntory’s Jim Beam purchase might seem rich, but what’s their alternative?” You see, when 10yr gov’t bonds yield 0.60% the alternatives aren’t good. “So they lock in Yen-denominated funding, then buy dollar-based recession proof assets in a faster growing economy.” Which contains an embedded bet on a weaker Yen. “And the next thing that happens is Japanese start buying foreign property again.”

(WkndNotes)

Okay, back to Earnings. Not only did Revenue and Earnings gains beat estimates by the widest margin in 3 years, but the Stocks also paid after Earnings for the best gains in 5 years…

(BespokeInvest)

Now for something completely different, have you seen the YTD move in Gold, Silver and the Miners? These names dashed through their 200day moving averages making them again investible assets for many disciplined investors.

And then there is this monthly chart of Biotech stocks which continues to show no signs of slowing…

Credit Suisse out with their large annual book on the Global Markets reminding us why we want to be overweight Equities for the long term…

Capital market returns for World (in USD): Figure 1 shows that, over the last 114 years, the real value of equities, with income reinvested, grew by a factor of 313.5 as compared to 7.6 for bonds and 2.7 for bills. Figure 2 displays the long-term real index levels as annualized returns, with equities giving 5.2%, bonds 1.8%, and bills 0.9%.

(Credit Suisse)

And then there is the irrationality by some of using an 85 year old chart to predict the future…

Jeff makes the point well…

“You can ‘scale’ any chart to do just about anything you want it to imply! In this case, the scale makes the comparison to 1929 with the present stock market chart pattern appear eerie. However, if you index that same chart so that you are comparing apples to apples, the correlation to 1929 disappears. Moreover, I have been around long enough to have seen this “act” before. The time period was the 1980s – 1990s when ‘they’ were trying to scale Japan’s Nikkei Index to that of the Dow Jones Industrial Average. All these kinds of chart shenanigans prove is that, ‘Where you stand is a function of where you sit, or that you can make numbers do anything!’”

(Jeffrey Saut, Raymond James in WSJ)

If you have a client (or God forbid an advisor or portfolio manager!) bring up the 1929 parallel, just show them a picture of the percentage scaled chart and have them take a deep breath.

(BusinessInsider)

Just like the Hindenburg Omen, the 1929 chart will be out of mind soon enough…

‏@IvanTheK: I don’t see today’s price action on my 1929 chart. Maybe I’ve got it upside down.

As for last week, it was a good one across the board as all U.S. Equity sectors bounced solidly…

More broadly, the Metals, Biotechs and Europe helped to the upside while Bonds took a rest after a fast 2014 start…

A most interesting chart here from JPMorgan showing the acceleration in U.S. Household wealth driven by the gains in Equities and Real Estate…

We have written in the past about the $13 trillion increase in U.S. household net worth in the past two years. This works out to about a 7,500bp increase in household equity/GDP ratio (Figure 10). What most investors may not be aware of is that the increase in the U.S. household equity/GDP ratio is the largest increase for any developed nation. There is likely to be positive consumer spending effects in the coming periods from U.S. household net worth being meaningfully higher than that in any other country today.

(JPMorgan)

If nothing else, a reminder as to why you own some Spanish assets in your diversified portfolio…

(@Amazing_Maps)

I visited with thousands of companies during my time at Janus. One fact that I learned in Atlanta is one that I will never forget. And I know that it has saved me time in the car and carbon on earth…

Minimizing the daily grind’s bite is part of the commuter’s battle – and one that UPS fights on its front lines every day. More traffic means more time consumed. More time consumed means packages are delivered later. Years ago, this led UPS engineers to devise route-optimization plans to increase efficiency, reduce fuel consumption and get drivers back to their centers earlier. They came up with a simple rule. Minimize – or sometimes, eliminate – left-hand turns. It’s simple but effective…

“What we found: A significant cause of idling time resulted from drivers making left turns, essentially going against the flow of traffic. From there we explored routes where these turns were cut out entirely, and then compared data.” Even if this meant traveling a greater distance, results showed that more packages could be delivered in less time with reduced emissions by driving in a series of right-hand loops. It helped the bottom line, met consumer demands and increased safety.

(UPS)

Finally, the coolest patent in your kid’s life…

@HistoryInPics: Patent for the modern Lego brick, 1958.

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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