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 26, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA

@MeredithFrost: Incredible shot of a F/A-18C Hornet breaking the sound barrier over USS Carl Vinson

While many investors have been worried about the weakness in Small Cap stocks and the strength in Bonds, the largest index in the world decided to break through its own all time high barrier on Friday…

While it was a very slow week for trading, it was an even slower one if you were long option premiums as the VIX traded to 2014 lows. The lack of interest in buying equity protection further propelled the indexes higher…

Again recall that a pullback in Small Caps does not increase the certainty of an underperformance in Large Caps…

(@stockchartscom)

Always interesting to look at the names hitting 52 week highs as the total market is also setting records…

Look at the themes in Large Caps: Big Tech, Railroads/Airlines, Health Care, Canadian Banks, Basic Chemicals. Good to see not any one sector in total domination.

This run to New Highs would be healthier if there was an even broader participation of names… Financials, Bueller, Financials?

@allstarcharts: Here’s your S&P500 $SPY closing at new 52-week highs with fewer and fewer NYSE stocks participating

The absolute leadership in this market seems to have either a GE jet engine or locomotive attached to it…

It’s not quite blood-red seas and locusts, but the bears are starting to get downright apocalyptic as they trot out their warnings of an imminent breakdown in the financial markets: tumbling Treasury yields; staggering small-company stocks; incinerated Internet shares; and blown-up biotechs. There’s just one problem: Transportation stocks should be crashing if the end were truly nigh. Instead, they’ve sailed through the carnage virtually unscathed.

Remember, transports are one of the most economically sensitive segments of the market. When the U.S. economy is growing, trains are full of cars and coal to deliver, trucks have computers and toys to carry, and airlines have more passengers to fly to their destinations. If the economy was really heading for a major fall, transports like Union Pacific (UNP), Knight Transportation (KNX), and Delta Air Lines (DAL) should have tumbled — just like high-flying biotech stocks Biogen Idec (BIIB), high-priced internet stocks like Twitter (TWTR), and small-company stocks like Lumber Liquidators (LL), which have all dropped more than 10% during the last three months.

Instead, the Dow Jones Transportation Average has gained 9.3% over the past three months, on its way to an all-time high of 7986.58 on Friday — its 14th record close this year.

(Barron’s)

And while you were worried about your social media stocks, the XL Technology ETF just broke out to 14 year highs…

(@stockchartscom)

But among the largest stick in the eye for growth investors has been the Biotech sector. Although the volumes were low last week, a break above the 50 day moving average still counts as a win…

A clear RISK ON week for equity investors with High Beta stocks up and Bonds/Utes down…

The week looks similar to the 1 month performance stats: RISK ON!

Barron’s puts out a potential takeover target list and writes why the M&A train will continue in 2014…

The rise in M&A is likely to continue, for several reasons. First, companies sit on plenty of financial firepower. In the U.S., non-financial companies in the Standard & Poor’s 500 index hold a record $1.4 trillion in cash. Meanwhile, borrowing is cheap. Among S&P 500 companies, 88% of those with credit ratings are investment-grade, and bond yields of 2% to 4% are common.

Second, growth has gotten scarce. During the first quarter, S&P 500 companies increased their revenue by just 2.7%, based on reported results for 490 companies and estimates for the rest, compiled by FactSet. Earnings rose even less: 2.1%. Second-quarter guidance has been mostly weak. That makes now a tempting time for companies to pursue outside avenues for growth, including acquisitions.

Third, alternative uses of cash are looking less attractive. Debt repayment adds limited value with yields so low. Companies have rightly poured more cash into dividends; payments for S&P 500 companies have increased nearly 50% over three years. There’s room for continued dividend growth, because companies are paying out less than one-third of their profits as dividends.

(Barron’s)

Speaking of M&A, what is Apple waiting for. Just take Katie’s list and get busy! Your stock price move post the Beats leak is screaming for you to put capital to work…

@Katie_Roof: Apple has $150.6 billion cash; it could buy:

BEATS

Netflix

Tesla

Twitter

Dropbox

Pandora

Uber

Pinterest

Spotify

Airbnb

and have $31B left.

Always good to read Stephanie Pomboy’s thoughts on the economy. Include these data points in your investment thought process…

One chart that really summarizes my entire view compares net worth with consumer spending. Of the $25 trillion expansion in household net worth since March 2009, $21 trillion was financial assets, and $3 trillion was real estate. So the $21 trillion helps a very small segment of the population, while the $3 trillion has a much broader impact. But it is a massively disproportionate benefit for the high end. Even though people in that group are the marginal drivers of the economy because they spend a lot more, overall consumer-spending growth has continued to slow. In the past 50 years, we have never seen household net worth increase this much without spending growth accelerating materially as well. This time, though, spending growth has decelerated, and each year it takes another step down. With asset prices still not girding spending, we need income gains. And unfortunately, employment isn’t ready to take the handoff. While the latest employment figures have fueled the hope that things are returning to normal, the numbers are skewed by people holding more than one job. Jobs have increased, but hours have not. This is reflected in the gap between the household survey—where they ask if you are employed—versus the payroll survey, which adds up each payroll.

The increase in spending—punk as it is—is almost entirely due to higher prices—not higher demand or unit sales. Fully 90% of the increase in discretionary spending from the pre-crisis level is explained by inflation. In other words, people aren’t spending more because they want to. They are spending more because the price of all the stuff they buy has gone up—hardly a sign of consumer strength.

(Barron’s)

Interesting explosion in thought this weekend surrounding the twist of data in Thomas Piketty’s book Capital in the 21st Century:

Wonder if Marc Andreessen will be asking for a refund?

@pmarca: Reproducibility in science is like fact-checking in journalism. Both are clearly required, yet either happening is extremely rare.

@pmarca: Perhaps a hippocratic oath for economists and social scientists is needed: Hold off on the sweeping theories until analyses are verified.

Maybe more realistically for those heading to the pool with a Kindle in tow…

@GSElevator: Now people have an excuse to not finish Piketty’s book.

You can never tip enough when service is excellent, but I fail to see the incentive in this ‘Suggested Gratuity’ formula…

@vedderkj: New @BWWings in Times Sq opened yesterday. Suggests 18% tip for “poor service.” Nice.

If you have a high school tech geek under your roof, prepare to allocate the majority of your time on the West Coast applications and college tours…

(Wired)

And a chart to show your high schooler when they attempt to devalue the importance of studying…

“A one-unit increase in your GPA has a very sizable impact on your education and earnings,” says Michael T. French, director of the health economics research group at the University of Miami. Indeed, for a one-point increase in a person’s high school GPA, average annual earnings in adulthood increased by about 12 percent for men and about 14 percent for women, the report found.

(WashingtonPost)

Last, but certainly not least, thanks to all of those who have served and their families who supported them…

(MemorialDay-NewYorkCity/KevinFleming)

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.