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 19, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA


If you are still asking “Why do Treasury yields keep falling?” then maybe you should have paid up for that Bernanke dinner last week…

In a series of quarter-million-dollar dinners with wealthy private investors, Ben Bernanke has been clearer than he ever was as chairman of the Federal Reserve on his expectations that easy-money policies and below-normal interest rates are here for a long time to come, according to some of those in attendance. Bernanke, who retired from the U.S. central bank in January, has predicted the Fed will only very slowly move to raise rates, and probably do so later than many forecast because the labor market still has a lot more room to recover from the financial crisis and recession. The accounts of the discussions come from attendees as well as those who heard second-hand what was said at the dinners, where hedge fund managers and others willing to foot the roughly $250,000 bill for each event asked the former Fed chairman questions in a free-flowing round-table fashion over recent weeks… At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed’s main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke’s lifetime, one source who had spoken to the guest said.


Also, on a relative basis, U.S. Bonds are bloody cheap compared to their Euro counterparts…

If the “reasons” had to be ranked, it really does seem like Europe is driving markets (not Treasuries) – a combination of falling nominal growth assumptions (this is occurring even as real estimates tick higher) but more importantly ECB anticipation has driven yields lower throughout the Eurozone, opening up an arbitrage opportunity in the process (10yr yields are now 1.3% in Germany, 2.95% in Spain, 3% in Italy, 3.7% in Portugal, 2.6% in Ireland, 2.5% in the UK, etc – these numbers make U.S. 10yr yields seem relatively cheap in comparison).

(JP Morgan)

Just look at this list of Countries with 10 year yields less than the U.S…

I can’t listen to a talking head, bond manager, strategist or seemingly anyone without hearing about how “Rates can only go higher from here”. When in reality THEY CAN go lower! In fact, when you look around the world, on a relative basis, THEY SHOULD! Look at that list and tell me the United States should pay more on their debt then all those countries. France is borrowing at 1.77% people, FRANCE! You have Japan borrowing at a rate 76% lower than the U.S. with more than twice the debt. Now all this doesn’t mean the United States SHOULD trade lower, but it’s either that or others SHOULD trade higher because on a relative basis, much is out-of-whack. And those calling for much higher rates in the U.S. should realize that basket cases like Italy and Spain are trading at 3.1%!


The other chart that the world is fixated on is Small Cap stocks. Bounce here or Bear Market for the Russell 2000?


Across the broader market, it is the Emerging Markets which are posting the largest gains while the Financial Stocks go negative for 2014…

The youth of India have voted and they elected Growth…

The vote amounted to a surprisingly broad repudiation of Congress’s welfare-focused approach to policy-making and an endorsement of Mr. Modi’s call for more effective governance and business-friendly measures to create jobs and drive growth. “I didn’t get a chance to sacrifice my life in India’s freedom struggle, but I have the chance to dedicate myself to good governance,” Mr. Modi said to cheers in a victory speech in his home state of Gujarat on Friday night. “I will develop this country. I will take it to new heights.” Mr. Modi tapped into the frustrations of a generation of Indians who climbed out of poverty in the past decade, but who have been prevented from joining the middle classes by slowing growth and a lack of employment. It is a generation that aspires to better work opportunities, a higher standard of living and world-class infrastructure. “Modi will change the country 100%,” said Vijay Thakur, a 31-year-old cabdriver in Gujarat. “He will bring rapid development, he will bring foreign companies to India, everyone will have jobs.”


India will see a massive growth in their working age population over the next 10 years so no better time to shift political gears away from what wasn’t working…

The elections also underpin the point we have made often over the past few months – Indian youth’s rising aspirations, desire for growth and development, and strong leadership are driving the political debate in the country. This increases the probability that the new government will focus on development and governance as its prime agenda. It sets the stage for India’s structural story to unfold in the coming years as we have highlighted in our recent note “The Next India”. We have assumed a greater chance of a reform agenda even though clarity on this will emerge in the ensuing weeks.


The risk markets also voted on India and they chose Growth…


Tech giant Cisco reported last week and the stock surged higher helped by this comment…

“The momentum in U.S. enterprise and commercial remains very strong”. John Chambers, CEO Cisco Systems

For those record keeping the previous Bull Market data points, this is a good chart to study…

@awealthofcs: Nice chart from JP Morgan on the conditions seen in prior stock market peaks that is reminiscent of the game Twister

A further study of history will show you that the equity markets should have plenty of runway…

Below is a chart we update from time to time showing the rolling 10-year price change for the S&P 500 going back to the start of the index in 1928. As shown, over the last ten years, the S&P 500 is up 64.8%. This might seem like a lot, but compared to past runs for the index, it barely shows up. Since 1937, the average rolling 10-year return for the S&P has been 103%, so the current 10-year gain of 64.8% is only two-thirds of the average.


With the Anaheim park running full, Disneyland is choosing to raise ticket prices. (Obviously no Blackfish issues at the Magic Kingdom.)

Disneyland announced big increases to its ticket prices Sunday night, the latest evidence the massive upgrades made to the parks during the recession are paying off. The price of the popular “One Day Parkhopper” tickets, which allow visitors to enter both Disneyland and Disney California Adventure parks in California, rose 9.5% to $150, says Disneyland blog MiceChat.com. Meanwhile, the price to visit just one park rose 4.3% to $96. Disneyland’s Suzi Brown confirmed the price increase to USA TODAY.


A special Congratulations to all the 2014 College Graduates…


2014 Graduation Tweet of the Week…

@ReformedBroker: Congrats, college grads! Today is the first day of the rest of your move back to Mom & Dad’s.

This is just wrong and it will continue to crimp keeping the U.S. economy from reaching its full growth potential…

In 2012, the most recent year for which data are available, workers with just a bachelor’s degree were making a median salary of $46,900 a year while the average student loan balance for people under 30 years old was $21,400. Those numbers aren’t directly comparable, but it does seem that most young people can pay back their debts. The problem developing is that earnings and debt aren’t moving in the same direction. From 2005 to 2012, average student loan debt has jumped 35%, adjusting for inflation, while the median salary has actually dropped by 2.2%. If that continues debt burdens could start to become more unwieldy.


Kids are already cutting back and delaying home and auto debt (and thus purchases)…


…which is causing apartments to become the housing start of choice for the class of 2014…

@MarketWatch: Apartments as percent of housing starts reached a 40-year high in April


Speaking of auto sales, unknown to General Motors is the fact that no fan of Nirvana would ever be caught dead driving a GM vehicle…


Hedge Fund quote of the week…

@jfahmy: “You guys are the 1%. But I’m not sure if that refers to your income bracket or your rate of returns.” — Kevin Spacey at #SALT2014

And finally, it is the early bird that gets the worms and the early horse that collects the Crowns…

‏@BH_CNovak: #KYDerby, #Preakness winner California Chrome the morning after his second victory at Pimlico

“He has no clue where he was born,” Coburn said. “All he knows is he loves to run, and that’s all it takes is a heart of a horse that loves to run. He’s got a tremendous heart; we’ve seen it, because he never gives up. He keeps trying and trying and trying, and he keeps winning and winning and winning by more and more and more.”


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.

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