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 21, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

@HistoryInPics: Painters on the cables of the Brooklyn Bridge, 1914

Many financial market professionals would have easily traded for a cable painting job this month…

As we have noted in prior Weekly Research Briefings, this has been a gut-wrencher of a rotation for the top performing portfolio managers. Everything that has worked so well for the past 2-3 years has been stopped dead in its tracks. I have read several investor letters and talked to many professionals running money and they have confirmed the brutal halt. Most funds are taking risk off the books, while some are even returning capital to investors and looking to shrink operations in aggressive growth investing. But a few are looking at the 20% retreat in momentum growth prices as an opportunity to double down. While I am certain that there will still be many great momentum growth names to make multiple-baggers on, I have a difficult time wanting to double down now on a broad basket of the names. I would guess that the momentum indexes will challenge their YTD highs, but there is just not enough firepower in the game to make them breakout to higher levels. The leveraged hedge funds have reduced risk and are now spreading the assets into other sectors and asset classes. So for Portfolio Managers that want to make their bonuses in 2014, the big question is “Where to invest next?”

Speaking of Hedge Funds, have a look at the bottom of this Risk Adjusted Return chart which shows the failure of the category for 2014…

(Goldman Sachs)

Another good illustration of why High Multiple Stocks will ride the pine for the next few innings…

If the U.S. & Global economies are going to continue to improve, it is time for the Lower Multiple Cyclicals to take over the market leadership.

Economic Growth to Unlock Value

There are plenty of attractively valued stocks to be found at the other end of the spectrum. Many boast high profit margins that we believe are sustainable. In some cases, sales growth is well below the long-term trend and can be expected to improve. In others, improved cost structures and more benign competitive environments support future profits. These underpriced companies are generally more sensitive to economic growth, so their value could be unlocked when the economic waters become clearer.

But these stocks have another important characteristic. Since the Fed has made clear that interest rates will rise when the U.S. economy’s growth prospects improve, we’re likely to see economically sensitive stocks appreciate just as bond values are falling, providing much needed diversification to balanced portfolios. Those rushing into defensive stocks as shelter from the carnage in the dream stocks may find themselves trading one risk for another as the defensives are likely to underperform when interest rates rise.

(AllianceBernstein)

And while everyone has been glued to the daily volatility, what about the recent economic data?

The macro fundamental narrative never changed these last several weeks and if anything has gotten better. U.S. growth has clearly rebounded from the soft Jan./Feb. pace. China growth is showing evidence of troughing (although there won’t be a sharp acceleration). Europe growth continues to make progress. Corporate earnings are healthy and mgmt. commentary is more sanguine than was the case in Jan. (although we are still early in the season). Central banks globally remain accommodative w/some thinking of doing more (ECB), some doing less (ECB), and others not thinking about tightening until next year (the Fed).

(JPMorgan)

Meanwhile, 1/3 of the S&P500 reports next week. Watch the reactions closely. The bars for High Growth stocks have likely been raised even though the stocks are down into earnings. But even more important will be the upside stock reactions to those companies who post in-line or even earnings misses. An UP stock on a missed earnings report tells me that buyers were waiting in line to buy as soon as the company avoided a major miss. It is these names and sectors could be where the market will move to next.

(BespokeInvest)

This chart shows there is plenty of gas in the tank of this market, if you are willing to look beyond High Growth/High Multiple stocks…

(stockcharts.com)

So now let’s look at some of the larger ETF’s which hit New All-Time Highs last week and are likely benefiting from Momentum Stock outflows…

Here are the charts of the $25b+ Market Caps also hitting New All-Time Highs last week…

Like the ETF charts above; you will note the themes of Defensive, High Dividend Yields, Strong Balance Sheets & Energy beneficiaries.

Speaking of Energy, there is still a Russian Bear in the Ukraine tent…

(courtesy of a WRB reader)

(TheEconomist)

Combine a World looking to reduce its dependence on Russian energy + Expanding global growth and you have an explanation for all the strength in Energy valuations…

(ISI Group)

And from a Geo-Political perspective, this chart has got to make many in Washington D.C. happy…

(ISI Group)

While most investment strategies seemed to flip their returns in 2014 versus 2013, the ‘Dogs of the Dow’ strategy is beating the indexes in both years…

(DisciplinedInvesting)

Most unbelievable investment fact of the week…

@GoogleFacts: Indian housewives hold 11% of the World’s gold. That is more than the reserves of USA, IMF, Switzerland and Germany put together.

Answer: Never.

Question: When does one change the 30 year rate of return assumption based on a better than expected last 12 month return?

The city gained flexibility, in part, by agreeing to assume a higher rate of investment return by the funds themselves. Projecting a rate of return is an essential part of fiscal policy, but experts often debate what is both realistic and sustainable for public pensions, and the federal bankruptcy judge in the case will be the ultimate arbiter. The city initially factored in rates of 6.25 percent and 6.5 percent for the two funds, but eventually agreed that the funds could be presumed to do better — 6.75 percent — because of an improved outlook based on the funds’ 2013 performance as compared with 2012.

(NewYorkTimes)

What you already know: The Manhattan residential real estate market is smoking hot…

(MillerSamuel)

And because so many of our readers are Road Warriors, here is a time saving read…

The best time to fly is between 6 and 7 in the morning. Flights scheduled to depart in that window arrived just 8.6 minutes late on average. Flights leaving before 6, or between 7 and 8, are nearly as good. But delay times build from there. Through the rest of the morning and the afternoon, for every hour later you depart you can expect an extra minute of delay. Delay times peak at 20.7 minutes — more than twice as long as for early-morning flights — in the block between 6 and 7 p.m. They remain at 20-plus minutes through the 9 p.m. hour.

(FiveThirtyEight)

Best part of the Amazon Annual Report: The Mayday Button

Nothing gives us more pleasure at Amazon than “reinventing normal” – creating inventions that customers love and resetting their expectations for what normal should be. Mayday reimagines and revolutionizes the idea of on-device tech support. Tap the Mayday button, and an Amazon expert will appear on your Fire HDX and can co-pilot you through any feature by drawing on your screen, walking you through how to do something yourself, or doing it for you – whatever works best. Mayday is available 24×7, 365 days a year, and our response time goal is 15 seconds or less. We beat that goal – with an average response time of only 9 seconds on our busiest day, Christmas.

A few of the Maydays have been amusing. Mayday Tech Advisors have received 35 marriage proposals from customers. 475 customers have asked to talk to Amy, our Mayday television personality. 109 Maydays have been customers asking for assistance with ordering a pizza. By a slim margin, Pizza Hut wins customer preference over Domino’s. There are 44 instances where the Mayday Tech Advisor has sung Happy Birthday to the customer. Mayday Tech Advisors have been serenaded by customers 648 times. And 3 customers have asked for a bedtime story. Pretty cool.

(Amazon)

Tweet of the Week…

@ConanOBrien: Babies are being named after “Game of Thrones” characters? What parents would name a baby after a sword wielding, mythological character?

The spice friendly palates of 361 Capital predict a landslide win by Neel Kashkari if he puts Sriracha at the top of his platform…

@neelkashkari: RT if you’re tired of gov’t regulations killing jobs. I stand with Sriracha against big gov’t.

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.