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

May 5, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA


Something you don’t see every day…

@Interior: Something you don’t see every day. Double rainbow over Great Sand Dunes National Park, CO.

Something else you don’t see every day… Stocks and Bonds both moving toward highs…

Russia is still a thorn in the world which benefits Bond prices, but remove the Ukraine and there remains a disconnect…

With U.S. stocks near record highs and Treasury bond yields near multi-month lows, the disconnect between equity and debt investors has rarely been as stark. Over the coming months, the economy is likely to show one of the groups has bet wrong. The S&P 500 sits less than one percent below an all-time high. After a wintry first quarter, stock investors are betting that economic growth is picking up, as evidenced by stronger spending figures and business demand. That’s boosted the cyclical stocks which react to rising demand, particularly energy shares… Bond investors are reacting to a different story. Yields on the 10-year note hit a five-month low on Friday and the 30-year note’s yield fell to its lowest since June after the April jobs report, which showed strong growth in payrolls but no growth in earnings and a decline in the labor force. That data points to the conclusion that overall economic demand will remain tepid and that inflation won’t materialize as the Federal Reserve continues to pull back on monetary stimulus, analysts said.


Transportation stocks moving back to highs favor the strengthening economy…

ISI Group’s Weekly Economic Surveys also told you that the data points would be moving higher…

ISI’s company surveys and bank loans both correctly suggested the recent run of strong monthly U.S. data, e.g., employment and consumer spending. They now suggest another run of strong data. Improvements in the U.S. and Europe are driving a global reacceleration (e.g., global IP), and lifting earnings for S&P companies (over the past three weeks, 1Q estimates have surged from -1% to +5%, and further increases are likely). Around the world, money is pouring into everything — deals, real estate, equities, corporate bonds, Spanish bonds, and U.S. bonds. Cumulatively, Fed and BoJ balance sheets have surged +495b dollars ytd.

(ISI Group)

And the improved economy combined with very low financing rates are keeping the Corporate wedding bells ringing…

The fastest start on record for corporate takeovers is providing fuel for a stock market stuck in low gear. U.S.-based companies this year have proposed or agreed to $637.95 billion worth of mergers or acquisitions—either as the buyer or the target—the most at this point since Dealogic started tracking these figures in 1995… Shares of the companies getting snapped up have jumped an average of 18% the day after the deal news, according to Dealogic. And contrary to conventional wisdom, shares of the buyers in proposed deals have risen. Buyers’ shares are up an average of 4.6% the day after a deal’s announcement. That is the highest post deal share jump on record, according to Dealogic. In contrast, from 1996 through 2011, the acquirer’s shares fell 1.4% the day after a takeover was announced.


But some excellent discussion on the state of the Financing and M&A markets from the Carlyle Group conference call last week…

…“given recent geopolitical and macroeconomic events we are surprised at how well credit markets have been in 2014. The world continues to be awash in liquidity and investors are chasing yield seemingly regardless of risk. Leverage levels in the United States are increasing and rose by almost a full third over the past year while spreads between IG and HY are ~250 basis points below the 20 year average. Thus, the market is not assigning a significant premium to riskier assets. We continually ask whether the fundamentals in the global credit markets are healthy and sustainable. Frankly, we don’t think so. What does this mean for global investments? On the positive side we are locking in low interest rates for new investments and continuing to refinance existing debt. At the same time historically low interest rates and a high appetite for risk are pushing up leverage levels and contributing to rising asset prices. This is good news if you are a seller, but bad news if you are a buyer. Given these dynamics good deal judgment is paramount”.

While Treasury Prices move to highs, Junk Bond prices have stopped gaining. This should be a bit worrisome for RISK investors. The ramp in supply from the above mentioned M&A does not help.

And still worrisome to RISK investors is the under performance in Small Cap versus Large Cap equities…

But working in RISK investors favor is the continued buying in the Emerging Markets. In Brazil the Real currency is helping. And as Barron’s noted over the weekend, political changes in India are helping those Equities…



But for Portfolio Managers, 2014 has been BRUTAL…

Calendar year 2014 is now 1/3 behind us and for many equity portfolio managers the calendar is turning into an annus horribilis to use the phrase immortalized by Queen Elizabeth II. Nearly 90% of large-cap growth mutual funds, 90% of value funds, and 2/3 of core funds are trailing their style return benchmarks YTD (1%, 4%, and 2%, respectively).

Stock-picking has been extraordinarily challenging this year. The typical hedge fund had a YTD return slightly below zero as of April 30. Dispersion of S&P 500 stock returns for the last three months ranks at the 1st percentile compared with the past 30 years. Within Consumer Discretionary, where hedge funds have nearly 25% of their net exposure, the return dispersion also ranks in the 1st percentile. Simply put, 2/3 of consumer stocks usually have a three-month return within a 29 percentage point span. However, the range is currently just 16 percentage points which makes both long and short security selection extremely difficult compared with prior periods.

(Goldman Sachs)

For the week, there was a bounce in RISK as Technology outperformed and Utilities underperformed…

More broadly, International Equities were also snapped up across Emerging and Developed markets…

On April 30, GE and Alstom announced that GE has submitted a binding offer to acquire the Thermal, Renewables and Grid businesses of Alstom. This slide shows how they look at the future of power and thus why they are increasing their exposure to generation.

Note to all those visiting Omaha over the weekend, Berkshire Hathaway is a believer as BRK continues to buy the assets to transport the fuel going into the power generator or the power coming out of the generator. Is it only a matter of time before Buffett and Immelt strike a deal over Coke and See’s Candies?


I have never agreed with Steve Rattner more. Kill the U.S. Corporate Income Tax…

A more ambitious, and therefore more politically difficult idea, would be to scrap our unworkable corporate tax system altogether and instead tax shareholders, first by eliminating low tax rates on capital gains and dividends. That would offset only a small portion of the loss of corporate tax revenue (a projected $350 billion in 2015), so we should raise the balance by eliminating loopholes enjoyed by wealthy Americans, increasing rates on their earned income and potentially introducing new concepts, such as taxing gains on investments as stock prices rise rather than when they are sold. The wealthy need not fear; eliminating corporate taxes would lead to a jump in business earnings and, consequently, stock prices. That would encourage similar actions by other countries. Otherwise, their companies might move here to enjoy a zero corporate tax rate. Higher stock prices would also help pension funds, foundations and other tax-exempt institutions focused on social betterment. While eliminating corporate taxation would be branded a giveaway, properly engineered reforms would provide a huge uplift to ordinary Americans.


How would the U.S. benefit from a full Elimination of the Corporate Income Tax?

– $1 Trillion+ in Corporate offshore cash could be returned home to invest in U.S. Capex and Jobs.

– New ROI hurdle rates would fall for U.S. investment projects causing another spike in economic activity.

– A rise in stock prices would not only help the consumer confidence of those that own U.S. equities but more importantly, the beneficiaries of underfunded pension plans who are now leveraged to equity stock prices.

– Improvement in the financial strength and stability of U.S. corporations as balance sheet leverage shrinks since there is no longer a tax shield benefit.

– Reward consumers with a reduction in the prices for all goods and services and an increase in wages as CIT savings flow to other parts of the income statement. (Best example is to take away the CIT from a Regulated Utility and watch the prices fall for all of its customers.)

– A reallocation of the top minds in Corporate Tax & Finance and Washington D.C. lobbying away from unproductive roles towards productive ones.

So if you are in Congress and sit on the Ways & Means Committee, give me a call and I’ll show you how all the numbers work.

Even Marketing majors can never take enough math and statistics…

@liz_buckley: Um. Guys. It’s 50% longer, not a third. Don’t go running a bank or anything.

Marketing classes could also invite Batman to campus as a guest lecturer…

Ben Affleck wasn’t counting on this. Hard Rock Las Vegas officials aren’t bluffing as they have banned the forthcoming “Batman” star for life from playing blackjack at the casino after he was caught counting cards, a source close to Affleck told the Daily News. “You are too good,” a security guard told the Oscar-winning star Monday night at the casino’s high-rollers’ blackjack table, the source said. Translation: no more blackjack for Affleck. However, he’s welcome to try his hand at other games at the Hard Rock.


Truth of the Week…

There’s no bad day stand-up paddle boarding can’t fix.

(Some truths I’ve discovered, By Rick Reilly, ESPN.com)

(Paddle Bliss/Mike)

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.

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