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

April 7, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

(The General./Get Some Air Photography)

And then the Nasdaq hit the fan…

Look at this list below of Russell 1000 stocks that are DOWN 15%+ since the closing high in the Nasdaq100 on March 5th. It is a sizable list that includes plenty of larger cap names that were even much larger 1 month ago. Look closely at the names. There are many high quality business models with big moats and great new products on the horizon. In the short term, the stock market doesn’t give a hoot about long term fundamentals. Many of these names have been 2, 5 and 10+ baggers for their shareholders so a 15-30% pullback means nothing for the long term investor. But for those investors and portfolio managers who get judged on a daily, monthly, and quarterly basis, owning the high flying Nasdaq winners during a market rotation will test their patience. The longer the names underperform, the more investors will bail out for better performing market sectors and industries.

I actually thought these names would rally after seeing Friday’s weak jobs data and the immediate rally in U.S. Treasuries. But the Nasdaq lost its chance when the gap up rally in Biotech and Internet stocks lasted only 5-10 minutes after the opening bell. Sellers got aggressive and sold the QQQ -2.66% to its worst close in 2 years, also pushing the index below its 100 day moving average. So now it looks as if the momentum names will now go sit in the penalty box while investors watch this rotation play out. Earnings start this week so some stocks will be able to escape the box with a blowout report or better than expected guidance. But the fingers of many recent buyers of high growth, high beta companies just made contact with a spinning metal fan blade. It may be awhile before these investors return to buy their former high flyers.

As Josh Brown notes, the biotech and tech diners can’t eat another bite. Not even a wafer thin dinner mint…

Even before this coming week, the ducks have been exceptionally well-fed this year. The sixty-plus IPOs of Q1 2014 represented a 100 percent jump over what we saw in the first quarter of last year. Total dollars raised for new issues also jumped by 40 percent to $10.6 billion. Half of the IPOs that came since the year began have been healthcare, with a record twenty six biotechs in the mix and eleven new technology stocks (mostly software as a service play) hitting the market. 70 percent of this quarter’s new issues were highly speculative companies losing money over the prior year. Eight of the biotech offerings traded up 50 percent from their offering price while two of them doubled.

(ReformedBroker)

(RenaissanceCapital)

Look at the variances on this 1 month Mutual Fund style box chart…

For Portfolio Managers, the last month has shown a dramatic shift into Large Cap Value stocks and out of anything in the Growth camp. There is a 565 basis point performance difference between the top and bottom style boxes.

(MorningstarDirect)

So as High Growth Momentum stocks are being sold off, where are investors putting their Equity money domestically?

Industrials and Energy have gained with increased interest in cyclical value stocks. Staples and Utilities have outperformed due to their defensive qualities.

A closer look at the U.S. stocks benefiting from the rotation…

Here are the $10b+ names in the Russell 1000 that have gained since the Nasdaq100 peaked.

As ISI Group notes, the interest in Cyclicals is growing as the vast majority of Global PMIs show expansion (>50)…

(ISI Group)

Meanwhile, money is also flowing Overseas to Europe, Asia and the Emerging Markets…

Why is Europe still outperforming the U.S.? JPMorgan has a good explanation…

The virtues of Europe: The EuroStoxx50 finished Friday in the green (+0.74%) and is now up close to 4% YTD (+3.9%). The broader EuroStoxx600 is lagging a bit behind (+3.33% YTD). While U.S. equities appear to have stalled (for now), Europe continues to (quietly) grind to fresh highs and investors point to the following factors for this bifurcation: 1) valuation – assuming ~$120 for ’14 earnings, the SPX is trading a bit north of 15.5x (and some estimates are ~$118-119, so the multiple may be even higher). The EuroStoxx50 though ended the week at ~13.9x, a ~1.5 turn discount; 2) growth improving – the U.S. is outgrowing Europe by a decent clip (~3% vs. ~1.5% for ’14 GDP) but the latter region (arguably) has a bigger “healing” process (both on the economic and corporate earnings fronts) ahead of it; 3) monetary policy – at the least the ECB will be maintaining its ZIRP policy into ’16 and very well could become more accommodative before then. The U.S. meanwhile is (hopefully!) on pace to conclude purchases by the end of this year and begin hiking rates by the middle of next.

(JPMorgan)

It was a big week for economic data capped off by Friday’s weaker than expected Jobs report. But remember, Goldilocks sightings are a good thing for keeping a lid on inflation and bond yields, while stoking stock prices. But again, I was surprised that Growth stocks ignored the report entirely — told me that the sellers really wanted out.

These readings suggest the economy is not taking off:

• Increases in payroll employment in 1Q averaged +178k per month, roughly what they’ve averaged over the past 49 months.
• Average hourly earnings in March were unchanged m/m and slowed to just +2.1% y/y.
• Unemployment claims last week continued to suggest growth is trending around +2.5%.

(ISI Group)

For the week, it was a good one for most all equity sectors…

More broadly, it was a great week for the International ETFs…

Junk Bonds continue to move higher and add much needed support to the overall risk environment…

Another measure of risk appetite can be seen in Euro peripheral bond yields which continue to fall to amazing levels…

Spain’s five-year note yields fell below their American equivalents for the first time since 2007 this week as euro-area bonds surged on bets the European Central Bank will add more stimulus to the economy. Yields across the region’s peripheral countries fell to records after ECB President Mario Draghi said on April 3 policy makers were considering measures including bond purchases, or quantitative easing. The yield premium investors demand to hold Italy’s securities instead of Germany’s slid yesterday the most since January. Greek 10-year yields dropped to the least in four years as officials said the nation plans to follow Ireland and Portugal in returning to capital markets. “There’s been a massive spread compression regardless of fundamentals driven by QE expectations,” Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London, said yesterday. “Being long liquid peripheral bonds versus bunds looks a win-win strategy.” A long position is a bet a bond’s price will rise.

(Bloomberg)

Important to watch for the Real Estate markets, Friday’s jobs data shows that Construction employment is still 1.7m jobs away from its 2007 peak. Builders remain very cautious to hire and believe in this upturn…

…which is translating into large price gains for existing Real Estate. Even vacation homes are legging up…

Sales of vacation homes are surging again, the result of rising wealth in higher-income households and renewed confidence in the housing market. The number of second homes acquired for part-time personal use jumped 30% last year to 717,000 homes, according to an annual survey by the National Association of Realtors. The gain was the largest since the association started tracking second-home sales in 2003. Although the number of second homes sold last year is well short of the high point of nearly 1.1 million in 2006, last year’s jump signals a rapidly changing sentiment about the value of residential real estate, which just a few years ago was considered a poor investment amid the broad market bust.

(WSJ)

For the Equity Traders: Our desk had an article on Overreaction and the Markets printed last week…

The efficient market hypothesis has lulled people into believing that financial markets are completely efficient and that investors do not overreact to events in a predictable and exploitable manner. The statistics tell a different story. From the beginning of 2000 to the end of 2013, the S&P 500 was up 53.21% of its trading days. However, it was up 61.94% of trading days immediately following a day where the index was down by at least twice the standard deviation of its returns over the previous 20 days. Statistics suggest that there is only a 2.14% chance of randomly observing an up-day percentage as high as 61.94% over a 14-year period. Thus, these two-deviation-down days are likely instances of short-term overreactions that are quickly corrected by the market, and they present high-accuracy trading opportunities.

(ThinkAdvisor)

How long until NYC Taxi Cab medallion pricing feels the impact of Uber, Lyft and other ride sharing services?

@Mark_J_Perry: CHART: 10-year History of NYC Taxi Medallions (+336%) v. S&P500 Index (+60%). That’s why taxi cartels hate Uber, Lyft

A smart Viking on and off the field. If you have pro athlete clients, tell them about Andrew Sendejo…

@Asendejo: Spent $1,428 on @Uber rides in 2013

Average DUI = $10,000 = Roundtrip Uber from home to work EVERY DAY for 4 months

Quote of the week:

“There are only two lasting bequests we can hope to give our children. One of these is roots, the other, wings.”

(Rev. Henry Ward Beecher)

Have a good week and be careful in the markets. The road ahead looks good, but if traveling at high speeds you might need a bit more visibility around the corner ahead…

(tunnel/AlexHoronica)

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.