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
June 2, 2014
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA
Sell in May and go away didn’t work last month unless you only invested in Utility stocks…
More broadly, it was only the Commodities that had a difficult time in May. Bonds & Equities did quite well across the board…
But summer is now here and as Jeff Miller notes, the market also has other things on its mind and can’t seem to pick a unified consensus thought. Time to get to the beach and wait it out?
What is the “message” of the market? Will it be clarified this week? Here are three perspectives, from three different markets:
– Stocks are at new highs. Historically, stocks have been a leading indicator for the economy, reflecting expectations about future earnings.
– Bonds are rallying. Many view this as a sign of economic weakness. Those who are bearish on the economy like to insist that the bond market is “smarter” than that for stocks.
– The VIX (the volatility index) is making fresh lows. Most pundits argue that this demonstrates unwarranted complacency. It is a warning to equity investors.
The market message is confused and inconsistent!
If you are looking for reasons to be long for a summer melt up, BofA/Merrill Lynch has you covered…
Ed Yardeni also notes how Dow Theory is Bullish for the broader markets…
The strength of the S&P 500 Transportation index also confirms my secular bull market thesis. This index is now 66% above its previous record high on June 5, 2008. As I noted last week, the S&P 500 is 23% above its previous record high on October 9, 2007. This is a bullish development according to Dow Theory, which posits that as the DJIT goes, so go the economy and the DJIA. The former is up 9.5% ytd, while the latter is up 0.8%. Industry analysts recently have been raising their 2014 and 2015 earnings estimates for the S&P 500 Transportation Composite. Its forward earnings rose to a record high last week, up 16.4% y/y. Its forward P/E is up to 16.3 from a recent low of 12.0 during September 29, 2011. That’s not frothy, but it isn’t cheap either. In any event, the fundamentals remain bullish.
Leon Cooperman gave a presentation to the Columbia Business School on why Equities is the place to be. My favorite of his charts shows plenty of firepower for Capex, Acquisitions, Dividends & Share Repo…
Stifel also notes the advantage of Equity yields over the Bond yields…
– 419 names in the S&P currently pay a dividend
– 142 or ~1/3 of them are now yielding more than the 10yr
– S&P yielding 2.03% (estimated for 2014)
– 38 bps to 10yr is one of the lowest levels we have seen this year
– Last time we ticked at the levels was Feb 3rd
– SPX rallied in ~3% in the next 4 sessions and nearly 6% in the next month
Back to volatility, it has been a while since we had a 3% correction, but this is not unusual…
It’s been a long time now since the S&P 500 had a big change in a single day. You have to go back to November of 2011 to find the last day that the S&P 500 rose or fell by 3% in one day. Since 1950 there have been 200 trading days out of 16,202 in which the S&P changed by 3% or more, which implies that we get one 3% day for every 81 days.
Looking for the catalyst to the next leg higher? Look to the financial stocks which are more out of favor than Donald Sterling…
— howardlindzon (@howardlindzon) May 31, 2014
Barron’s even wrote about banks’ undervaluation this weekend. But what will be the catalyst?
The big banks have been hit by massive litigation expenses that just keep coming—$7 billion in the first quarter alone; by new rules and regulations that force them to carry more cash at the expense of profitability and returns; and by lackluster trading, which forced Citigroup, for one, to forecast a drop in trading revenue of as much as 25% last week. If anything, the sector should come with its own parental warning. The issues have been compounded by the sudden and unexpected drop in bond yields this year… Bank stocks are still cheap this year, even as the S&P 500 has hit a record high—that 12.1 times is well below the S&P 500’s 16.1 times. That low valuation also provides a margin of safety if bond yields start to rise that other, pricier sectors lack, notes Deutsche Bank strategist David Bianco. The banks are the place to be “for anyone looking for a part of the equity market that is not dependent on interest rates staying low for a long time,” Bianco says. There are more-fundamental reasons why banks could regain their luster. Start with the U.S. economy. Last week, we learned that gross domestic product dropped 1% during the first three months of 2014, but no one expects it to remain that weak. Signs of a stronger economy are everywhere—from another decline in jobless claims to a service sector growing at its fastest pace since March 2012. And for the first time since the financial crisis, loans are growing at the same pace as the economy, Bianco says—and that bodes well for both revenue and earnings growth in the quarters ahead.
Another potential catalyst for the market could be China. Have expectations and sentiment hit bottom yet? The weekend numbers weren’t as bad as the market expected…
China’s Manufacturing PMI report improved for the third consecutive month, helping to alleviate some fears that the economy was in danger of decelerating at a faster rate. The improvement in manufacturing activity may be a factor of piecemeal stimulus measures implemented by the Chinese government over the past few months. A cut to the reserve requirement for lenders involved in agricultural and small business was the most recent move made by the government to smooth out recent economic weakness.
Housing could also be a catalyst for the markets, but right now it is only the largest economic growth areas which are putting up the big numbers. Speaking of one, look at Houston versus all of California…
CHART: California vs. Texas in One Chart – More Housing Starts in Houston from 2011-2014 than the Entire State of CA pic.twitter.com/GDv88hxR3y
— Mark J. Perry (@Mark_J_Perry) May 27, 2014
As for Google’s driverless cars, all I can say is…I can’t wait.
Driverless Google car has no steering wheel or brakes, just one big button that says “I’m feeling lucky.” http://t.co/4Fpbd3BUmx
— Jeremy Olshan (@jolshan) May 29, 2014
Here are Jared Dillian’s Google car thoughts. So much structural and financial changes to think through…
– You can get there faster. People have slow reflexes, which forces them to drive more slowly and further behind other cars. The stop-and-go type of traffic would come to an end. All the cars would go at the same speed!
– You can get there safer. Driverless cars have already driven 700,000 miles with no accidents. No human error. Some people estimate that traffic fatalities will go down 90%. And we’re talking about 30,000 people saved a year.
– You won’t need to widen roads. You can fit more cars on them!
– You won’t need auto insurance, or at least, the mandatory kind.
– Law enforcement budgets are going to get destroyed. I saw a stat recently that the average police officer generates $300,000 in traffic ticket revenue annually. Seems high, but you get the point.
– It will change health care. A lot of emergency room traffic is from auto accidents.
– It will change the legal profession. Think of all the ambulance-chasing attorneys out there. Gone.
– It goes without saying, but you can read or play games or goof off in your car.
– It will save a lot of gas. Cars will be way more efficient. They can drive inches away from another car, drafting, like the NASCAR drivers do.
– Willets Point will just cease to exist.
– Cars that don’t wreck will last longer.
Would Manhattanites like to cut their Taxi costs by 87.5%?
The researchers found that Manhattan’s 13,000 taxis made 470,000 trips a day. Their average speed was 10 to 11 m.p.h., carrying an average of 1.4 passengers per trip with an average wait time of five minutes. In comparison, the report said, it is possible for a futuristic robot fleet of 9,000 shared automated vehicles hailed by smartphone to match that capacity with a wait time of less than one minute. Assuming a 15 percent profit, the current cost of taxi service would be about $4 per trip mile, while in contrast, it was estimated, a Manhattan-based driverless vehicle fleet would cost about 50 cents per mile.
Elsewhere in transportation, creative destruction is creating tens of thousands of jobs…
Drivers around the world are seizing Uber’s economic opportunity by building small businesses for community needs long forgotten by the taxi industry: high quality, safe, reliable and affordable transportation options. At its current rate, the Uber platform is generating 20,000 new driver jobs every month. UberX driver partners are small business entrepreneurs demonstrating across the country that being a driver is sustainable and profitable. For example, the median income on uberX is more than $90,000/year/driver in New York and more than $74,000/year/driver in San Francisco.
At the Code Conference last week, Mary Meeker gave her annual Internet presentation. Here are my 2 favorite charts. So many ways to invest in the growth of mobile broadband…
And speaking of ginormous wealth creation in Silicon Valley…
Gabi Holzwarth, a onetime street-busker violinist who is now a regular performer at Silicon Valley tech parties, played her interpretation of Travie McCoy’s hit “Billionaire” for the crowd at the Code Conference in Rancho Palos Verdes, Calif., today… Holzwarth said she chose the song for her conference performance as a wink to the immense wealth creation — and ambition — she has seen in the tech world. “It feels like literally everyone is becoming a billionaire. And they’re great, awesome people, but it’s like, wow, what is going on?” Holzwarth said in an interview before the performance. “I’ve played my violin on a private jet twice. Now it’s kind of a joke — you always need a private violinist on a jet.”
And let the iconic jokes begin…
New Clippers mascot? pic.twitter.com/4AEgmyoCr2
— Ryan Lizza (@RyanLizza) May 29, 2014
Besides violins on private jets, Geeks are finding other ways to spend their extra loot…
Wealthy retiree spends 10% of his net worth on a fun lifestyle business. The world concludes he’s a fool. Strange.
— Michael Santoli (@michaelsantoli) May 30, 2014
Steve knows that he can’t take it all with him in the end…
Steve Ballmer’s $2-billion offer for the Los Angeles Clippers — nearly four times the record sale for an NBA team — has experts puzzling over how the former Microsoft chief plans to make any money on the deal. But Ballmer, with a net worth estimated at about $20 billion, may have little need for profit. The eye-popping bid from the world’s 34th richest man underscores the explosion in tech wealth and the nonchalance with which billionaires chase trophy brands. “This reflects an enormously wealthy person buying a toy,” said Lawrence Mishel, president of the Economic Policy Institute, a Washington think tank. “It’s not a financial investment.”
So how many Geeks now own teams?
Scariest quote that I read all week…
“Owning a sports franchise in today’s world is a very secure investment. They always appreciate in value.”
Joe Maloof (former owner of the Rockets and the Kings)
Last week we reviewed where to send your kids to school if they wanted to work for the king of tech. Now here is your College shopping list if they want to get to Wall Street…
In the event that you missed a past Research Briefing, here is the 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.