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
March 10, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

(SimonJenkins/London-CanaryWharf)

And just like that, Bank Stocks contribute to the all-time highs in U.S. Equity indexes. As we have written in the past, the weakness in Financial stocks has been a thorn in the 2014 Bull Market. Financials and Bank Stocks are an important read for the markets given that their earnings are significantly impacted by credit quality and their earnings growth is directly affected by loan growth. Credit quality has recovered from the 2008 financial crisis so any future stock price upside will be dictated by Bank assets shifting from low spread investments to higher margin lending. Loan growth has picked up and by many signs of project/capex demand and M&A activity, lending will accelerate. Given that stocks typically lead business activity, we can only hope that the recent buying of banks is a good omen for the overall economy.

Along with Banks/Financial stocks, the important Industrial sector also moved to new highs to help take the S&P 500 to new levels…

As the Cyclical Financials and Industrials were bought up by investors, the strongest sector of Growth Stocks was redeemed. There was little on the fundamental side to justify the aggressive selling so we can only chalk it up to portfolio reallocation right now. Biotechs have tripled in 2.5 years so if a firm thought that the U.S. economy was going to accelerate, it might make sense to reallocate some profits into sectors that will see improving revenue growth and accelerating incremental margins… like the Cyclicals.

Adding fuel to the economic engine was better than expected February jobs data. Even with the bad weather, the numbers were solid…

The jobs market showed resilience in February as hiring picked up despite harsh winter weather, bolstering hopes the U.S. economy will break out of its recent slump as the spring arrives. Nonfarm payrolls grew by a seasonally adjusted 175,000 in February, the Labor Department said Friday, following a two-month stretch of weaker growth. The unemployment rate ticked up to 6.7%, in part because more people joined the workforce… For the first time in 46 months, more unemployed people found a job than dropped out of the workforce. A broad measure of unemployment that includes people working part time who want a full-time job and others marginally attached to the workforce fell to 12.6%, its lowest level since November 2008. Average hourly earnings rose 2.2% in the past year, a possible sign of less slack in the labor market that could help many newly unemployed get back to work faster.

(WSJ)

Meanwhile, the Private Sector returned its employment levels back to the Pre-2008 financial crisis peak…

@Mark_J_Perry: CHART: The private sector has regained almost all jobs lost during Great Recession, public sector is down -537k jobs

If you need another leading indicator of the U.S. Economy, look no further than the price of Berkshire Hathaway which took out its all-time high on Friday. Warren & Charlie’s portfolio includes a very large basket of non-tech, non-biotech companies. Financial, Industrials, Housing, & Transportation dominate so when this stock is on the move, we pay attention.

If you are looking for more upside in Financials, take note that PIMCO was oversubscribed in a new fund to buy distressed bank assets…

Pacific Investment Management Co. gathered $5.5 billion to buy distressed assets from U.S. and European banks, according to a person familiar with the matter. Bravo II Fund, short for Bank Recapitalization and Value Opportunities, finished raising money last month and will focus on residential and commercial real estate-related assets, said the person, who asked not to be identified because the details are private. Pimco had expected to raise more than $4 billion for Bravo II, after amassing $2.35 billion for predecessor Bravo I, two people with knowledge of the capital raising said in October.

(Bloomberg)

For the week, it is easy to note the buying in Banks and selling in biotechs. And for Dow Theory watchers, note the all-time highs hit in the Transportation stocks. A RISKON analysis would also note the retreat in Utility stocks.

Something that you may have missed last week… The “I” in BRICs broke out. The “B”, “R” & “C” are not even close.

(ISI Group)

How have the BRICs performed since the post-2008 low in U.S. Equities 5 years ago?

(BespokeInvest)

More importantly, where are the valuations for Emerging Markets sitting today?

@ukarlewitz: EEM has been a relative loser. It’s hated, cheap, good growth and trading over its 50-d. Perfect? Hell no. Early? Yes. Like it? Yes

Another financial asset which has taken flight is the Agricultural Commodities. DBA Longs can thank Putin, the drought in California and the weather in Brazil. Keep an eye on how the rising commodity impacts will ripple through your stock holdings.

Speaking of Alternative Assets, the Yale Endowment now has 78% of their assets parked there…

(YaleEndowment)

Most agreed upon Tweet of the Week…

@rupertmurdoch: Looking to punish Putin? Easy! Freeze or impound all cash and assets of oligarchs in US, UK, and reachable tax havens.

The Ukraine: In the end, it will all come down to Economics…

Putin is playing for the long haul, cleverly exploiting every opening he sees. So must we, practicing strategic patience if he is to be stopped. Moscow is not immune from pressure. This is not 1968, and Russia is not the Soviet Union. The Russians need foreign investment; oligarchs like traveling to Paris and London, and there are plenty of ill-gotten gains stored in bank accounts abroad; the syndicate that runs Russia cannot tolerate lower oil prices; neither can the Kremlin’s budget, which sustains subsidies toward constituencies that support Putin. Soon, North America’s bounty of oil and gas will swamp Moscow’s capacity. Authorizing the Keystone XL pipeline and championing natural gas exports would signal that we intend to do precisely that. And Europe should finally diversify its energy supply and develop pipelines that do not run through Russia.

Many of Russia’s most productive people, particularly its well-educated youth, are alienated from the Kremlin. They know that their country should not be only an extractive industries giant. They want political and economic freedoms and the ability to innovate and create in today’s knowledge-based economy. We should reach out to Russian youth, especially students and young professionals, many of whom are studying in U.S. universities and working in Western firms. Democratic forces in Russia need to hear American support for their ambitions. They, not Putin, are Russia’s future.

(CondoleezzaRice/WashingtonPost)

Interesting feedback for owners of social media stocks…

“All the popular pictures on Instagram are clothes or food,” she said. Ms. Hames says Instagram extends her store’s retail footprint and draws in customers during inclement weather or on weekdays, when most people are at the office or at other day jobs. “On the most miserable days this winter, when it was snowing and slurry, 90 percent of our sales came from Instagram,” she said.

(NYTimes)

Dear Amazon, please buy Spritz because I would like to start reading everything at 500 words per minute…

Reading is inherently time consuming because your eyes have to move from word to word and line to line. Traditional reading also consumes huge amounts of physical space on a page or screen, which limits reading effectiveness on small displays. Scrolling, pinching, and resizing a reading area doesn’t fix the problem and only frustrates people. Now, with compact text streaming from Spritz, content can be streamed one word at a time, without forcing your eyes to spend time moving around the page. Spritz makes streaming your content easy and more comfortable, especially on small displays. Our “Redicle” technology enhances readability even more by using horizontal lines and hash marks to direct your eyes to the red letter in each word, so you can focus on the content that interests you. Best of all, Spritz’s patent-pending technology can integrate into photos, maps, videos, and websites to promote more effective communication.

(Spritz)

Grain and Meat prices will not be the only food prices hitting new highs in 2014…

(MotherJones)

Decision time for California: Do you want to save the Fish or the Farmers?

West-side growers have already taken tens of thousands of acres out of production. This year they plan to leave fallow half a million more acres, a drastic move spurred by a depletion of aquifers and suspension of state water deliveries. Harris Farms alone is taking 9,000 acres that would have grown melons, tomatoes, bell peppers, broccoli, cabbage and lettuce out of production. One result of farmers scaling back is that 72 million heads of lettuce won’t be produced in California and likely will be imported instead from Mexico.

Mr. Watte explains that west-side farmers in the Central Valley are idling all their crops except for high-value nut trees, which the farmers are paying a premium to keep on the drip. An acre-foot of water (enough to submerge an acre of land in one foot of water) can cost up to $1,300 compared with about $40 a few years ago. Meanwhile, some farmers are drilling deeper wells at a cost of $1 million per hole. These wells may last only five years, and the groundwater is often too salty to irrigate crops.

(WSJ)

My Grandfather was a California Nut Tree Farmer. I could not imagine buying non-California almonds or having a Spring without this image…

(AlmondBlossoms/MikeRonnebeck)

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.