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 24, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

(CropCircles/AaronJGroen)

If the market rotations have you feeling dizzy, you had better take a seat because this might last a while…

2013 was easy. Most sectors gained on a weekly or monthly basis with most of the movement positively correlated. 2014 is different. Each week or month a different sector is trying to show off at the detriment of others. One week it is Health Care crushing Cyclicals, then Utilities beating up on Technology, followed by Materials smacking Utilities. Well, last week it was the Financials turn to shine brightly at the expense of Health Care and Utilities. For long term investors, it is a good time to catch up on your reading and finally binge watch Game of Thrones while your long term forecasts and projections work. For anyone with a shorter time frame, now is a great time to hunt in the markets.

Janet Yellen’s 1st press conference didn’t go exactly as planned, as her loose wording gave the market its most violent move lower in 31 months. The markets rebounded as investors were able to further digest the full FOMC statements, but Bonds and Stocks enjoyed a quick trip on Mr. Toad’s Wild Ride. Some follow up notes:

1) Federal Reserve Chairwoman Janet Yellen caused a stir last week when she suggested the central bank might start raising short-term interest rates a little sooner than investors were expecting. In focusing on that, Wall Street might have glossed over news of greater consequence. The Fed, in its official policy statement, said it planned to keep short-term rates below what it sees as appropriate for a normal economy even after the unemployment rate and inflation revert to typical levels.

In 2016, for example, the Fed projects the jobless rate will reach 5.4%, economic output will be growing at a rate near 3% and inflation will be just below 2%. That level of unemployment would be lower than the average over the past 50 years. Yet officials see the Fed’s target short-term interest rate at just over 2% at the end of 2016, well below the 4% they consider appropriate for an economy running on all cylinders.

(WSJ)

2) The Fed decision and press conf caused a bit of controversy this Wed thanks to some upward movement in the “dots” and Yellen’s “6 month” remark but actually stocks overall were absolutely fine with the message (this won’t be like Bernanke’s “next few meetings” comment from May ‘13). Despite accusations of hawkishness, the Fed remains very dovish and even when Fed Fund hikes commence (whether it occurs in Apr, May, June, Jul, or Aug doesn’t matter all that much) it will be a long time before policy becomes restrictive.

(JPMorgan)

3) @morningmoneyben: Calling Janet Yellen a “hawk” for slight hint that rates won’t stay below zero for all eternity is flat out crazy.

One thing that we did like to see last week was the pop in 2 year yields. This movement suggests that an increase in the economy is causing a rise in rates as banks and other financials are finally seeing an uptick in loan demand…

And we like to see a gradual increase in shorter term rates as it suggests that the economy is picking up steam. This graph from Goldman Sachs shows the longer term correlation with the 5 year yield and Equities. Of course, we would prefer if the rate rise was gradual because as you will note in early 2013, a quick upward move in rates can be unsettling to Equities…

As the demand in lending increases and new loans are put on the books at higher yields, portfolio managers cannot afford to be underweight Financial stocks. Maybe those underweight PMs were the big buyers last week…

Meanwhile, if portfolio managers were looking for a source of cash last week, Congress gave it to them in the Biotech space. The government decided to throw up a yellow flag on the pricing of the best-selling biotech drug on the horizon even before its first $ of sales. Now we know why the stocks have been so aggressively sold for the past 4 weeks…

A new drug to treat hepatitis C that costs $1,000 a pill has caused rising concern among insurers and state Medicaid programs. It has now also spurred interest from Democratic congressmen whose queries about the drug prompted a sell-off in biotechnology stocks on Friday. Three Democratic members of the House Energy and Commerce Committee have demanded that Gilead Sciences, the developer, justify the price of its drug, which is called Sovaldi. “Our concern is that a treatment will not cure patients if they cannot afford it,” the congressmen said in their letter, which was sent on Thursday. It was signed by Henry A. Waxman of California, the ranking Democrat on the committee, and Frank Pallone Jr. of New Jersey and Diana DeGette of Colorado.

(NYTimes)

Biotechs have outperformed the S&P for 6.5 years and have also put on a very nice parabolic move for the last 2 years. Will drug companies now have to travel to Washington DC to price every one of their future blockbusters or will Gilead be able to nip the Sovaldi pricing issue ASAP? Without a quick resolution or a slew of new drug approvals and M&A activity, the Biotech sector is likely to pause before it regains new buyers to take it to new highs…

The pressure on Biotechs has hit the Nasdaq100 since Health Care is 14% of QQQ weighting and Biotechs make up 1/2 of the Health Care piece…

(StockCharts.com)

Don’t forget about Russia. It is still a wandering and dangerous bear. Maybe their allowance of monitors into the Ukraine will give investors comfort…

Russia agreed to international monitors arriving in Ukraine amid more turmoil in the region and as Western nations expressed growing concern over the Kremlin massing troops on the border with its neighbor. While talks about the monitors with Russia were “difficult,” their presence may help avoid escalation of the conflict, German Foreign Minister Frank-Walter Steinmeier told reporters in Kiev yesterday.

(Bloomberg)

But the team at Cumberland is likely representative of many other managers who have one hand hovering over the sell button if tanks roll any farther past Crimea…

Right now Cumberland remains fully invested. Our view has been that Crimea will be ceded to Russia and that major cross-border military operations will not broadly occur. Our view is based on Putin’s operating purely in his own self-interest, based on how we assess that he perceives the Russian sphere of influence. We do not rely, for one second, on anything he says. Only the movements of Russian feet count.

We will change this outlook at once if troops and tanks move across borders. We may also change it if it appears that the risk of cross-border movement is rising to a point where portfolio action is required as a precaution. Right now there is no way to know what the training exercise with a large mass of troops on the Russian side of the border with Eastern Ukraine will lead to. The risk of action in eastern Ukraine is high and rising. The question we ponder is if it will be limited.

(CumberlandAdvisors)

Meanwhile, I couldn’t agree with this thought more. Well put Erik…

“Bull mkts don’t end on bad news,” said Yoda, high in the Rockies, preferring the thrill of growling bears to the grind of grazing bulls. “They discount a better future,” he continued. “This bull has discounted much better growth, better earnings, a better world.” We see some but not all of that in today’s news, but all sorts of scary creatures still lurk in the shadows. “This doesn’t end with a little dip on bad news, it ends with a 350k payroll number – and the S&P rallies 25pts, pauses, then pukes 75pts in an hour.”

(WeekendNotes/ErikPeters)

Looking more broadly across the ETF spectrum, Latin America joined Banks/Financials in significantly outperforming last week. And on the downside, the Metals and Miners joined Biotech in the shellacking to the downside…

Here is a good chart to keep close at hand for when the market gets volatile and clients want to know why they own Stocks…

(@ReformedBroker)

Nate Silver caused much commotion this weekend by giving the GOP the edge in taking the Senate for the midterm elections in November. (Note to me and others in tight Senate race states: Cancel land line phone and cable service until November 5th.)

Our new forecast goes a half-step further: We think the Republicans are now slight favorites to win at least six seats and capture the chamber. The Democrats’ position has deteriorated somewhat since last summer, with President Obama’s approval ratings down to 42 or 43 percent from an average of about 45 percent before. Furthermore, as compared with 2010 or 2012, the GOP has done a better job of recruiting credible candidates, with some exceptions.

(FiveThirtyEight)

The expensive grocery store used to be coined “Whole Paycheck”. “Kroger Paycheck” just doesn’t have the same ring to it…

@jmcduling: WholeFoods is cheaper than Kroger and only slightly more expensive than Sprout Farmer’s

Quicken Loans Billion Dollar Bracket Challenge tweets of the week:

@ReillyRick: I’m happy Mercer won. It’s about time Warren Buffett got a break in life.

@darrenrovell: As of yesterday, Forbes had Warren Buffett’s worth at $64 billion. That doesn’t happen by accident.

Car review of the week: WSJ’s Dan Neil on the Fiat 500L…

…the 500L (front-drive, five-door lift back) corners like the world’s smallest ’65 Pontiac Bonneville. At engine speeds below 2,250 rpm, there is no one home torque-wise. You hit the gas and time stands still, a la “The Matrix.” And the six-speed manual gearbox is the vaguest, wobbliest such mechanism I’ve encountered since I was winning dance contests in my three-piece suit. This thing isn’t a transmission. It is an intermission.

(WSJ)

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.