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 24, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

(chargingbull.com)

Look under that layer of Weather and you will find a Raging Bull…

The Ukraine revolt, Weak China economic data, Wal-Mart missing numbers… this Bull Market doesn’t care one bit. Do these charts look like Equities are about to roll over into a sustainable downturn? Google, Biotechs, Tesla and Semis have only one direction in mind and it isn’t down.

If you really want to scare the Bears, flash them this chart…

While most of the indexes are close to retaking their highs, the number of advancing stocks on this bounce was much broader than the number of declining stocks in the January pullback. Healthy markets see pullbacks met with an even stronger recovery and patterns of sharp declines followed by grinding days of gains to establish new highs. This recent 5% pullback was perfect in that it kept investors on edge, shook out the weak longs, and allowed many of us to add to our 2014 performance. The algorithms and strategies at 361 Capital are looking forward to taking advantage of any future changes in volatility.

Another issue to scare a Bear back into hibernation is to look at the performance of the top Acquirers in 2014…

Typically an acquiring company sees a decline in stock price due to the increased diworsification risk or cost of cash/stock transferred. But year to date, each of the top 7 acquirer stock prices is trading at post deal highs. So the market is currently giving a BIG green light to all deals which of course means that we should expect to see more deals. (note: CMCSA + TWC is the largest deal of the year and is not included here because it has several issues and hurdles to clear before it can be determined to be a done deal.)

And of course any evaluation of Equity Market health cannot ignore the action in Junque Bonds…

And the strength in this chart is understated because of the monthly $0.45 interest income payout. Strength in High Yield debt will also aid the previous point as more companies use the capital markets to make acquisitions.

Keeping downward pressure on Equities and giving the Bears something to chat about can be found in the following charts. For the Raging Bull to start kicking, snorting and jumping into the grandstands, Financials and the Nikkei need to start making investors $$$ in 2014. And rising energy prices can’t hurt the global economy.

Among the major bellwethers, there are still some regretful charts…

GE and GS are acting like Financials. WMT is hurt by weather and economic uncertainty at the lower income levels. KO is being hurt by a systemic long term decline in soft drink volumes.

@DontTalkStocks: “I always believe that prices move first and fundamentals come second.” – Paul Tudor Jones
The majority of stocks in the U.S. and the World are gaining suggesting that the data points will improve and move past the Jan./Feb. weakness. You should be looking to take advantage of weather impacted stock prices to add to your portfolios. Good places to hunt include:

– Retailers & Restaurants who have a secular growth story and will make it past 2 months of affected sales

– Housing builders and equipment companies who have only seen sales delayed creating a larger pig in the python for the spring

– Auto & Parts manufacturers who will likely see a pickup in demand once buyers can make it to a lot to replace their frozen & damaged vehicle

– Transportation companies like Airlines & Shippers who are hit by rising energy prices and equipment dislocation costs

– Insurance stocks have also been weak as investors have worried about storm losses. While loss costs hurt in the short term, prices will be quick to respond if capital and reserve levels are affected.

The polar vortex gets another week to play in North America, but Jack Frost is one week closer to leaving…

@uberphotographs: Tiger napping in the snow.

(AccuWeather)

Wal-Mart’s comments on the quarter this week echoed what we have all felt in the Q1…

“Comp sales were down in the first two weeks of February due to continued severe winter storms… At the height of the storm, we had more than 200 stores closed. We’re optimistic about the balance of the quarter and believe we will have a positive sales comp for the rest of the period.”

Running with the Freezing temps, Barron’s grabs a real Weatherman for this week’s issue:

What is the economic impact of all this weather?

An early estimate from Planalytics [a research and analytics firm specializing in the weather’s influence on business] is $5 billion in lost productivity, with small and medium-sized and regional businesses hit the hardest. Natural-gas prices have skyrocketed, which means people have to spend more to heat their homes, which could dampen spending. Market and economic research firm IHS Global estimates a 0.1% to 0.2% impact on the GDP, but they—and most economists—would say that is a temporary hit. Economic activity often gets moved around, so the impact on jobs and many retailers is transitory.

So we can expect a rebound in economic activity?

Some companies won’t get the business back—like fast-food and casual-dining restaurants—but retailers should see a rebound.

(Barron’s)

Rule #1: Don’t mess with Frank Underwood in House of Cards.

Rule #2: Don’t mess with Frank Underwood in Real Life.

A few weeks before Season 2 of House of Cards debuted online, the show’s production company sent Maryland Gov. Martin O’Malley a letter with this warning: Give us millions more dollars in tax credits, or we will “break down our stage, sets and offices and set up in another state.” A similar letter went to the speaker of the House of Delegates, Michael E. Busch (D-Anne Arundel), whose wife, Cynthia, briefly appeared in an episode of the Netflix series about an unscrupulous politician — played by Kevin Spacey — who manipulates, threatens and kills to achieve revenge and power… Both seasons of House of Cards were filmed in Maryland, mostly in Baltimore and Harford County, although the House chamber in Annapolis was used as a set. In addition to bringing a burst of buzz and excitement, the show created nearly 6,000 jobs and pumped more than $250 million into the state economy, economic development officials say.

(Washington Post)

Google is about to give a boost to the GDP of 9 American cities…

Google Fiber is ready to expand, as Google has identified nine metro areas scattered around the country as possible sites of deployment, the company said. “We’ve invited 34 cities in nine metro areas across the U.S. to work with us to explore what it would take to build a new fiber-optic network in their community,” Google said in an announcement today. “Many of these cities asked for Google Fiber in 2010 and have since continued to try to bring better Internet access to their residents.”

(ARSTechnica)

Finally, a higher percentage of kids in Google Fiber cities will understand this display…

(@MeredithFrost)

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.