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

June 16, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA


To start this week’s Briefing, I’m very happy to highlight our new strategic partnership with Lovell Minnick Partners…

I have known Jeff Lovell for almost 20 years now and couldn’t be more excited to have his firm as a strategic investor and also to have Jeff join the 361 Capital Board. This relationship will allow our firm to accelerate our own growth within the Liquid Alternatives space as the category itself continues to expand its small slice within the total asset management industry pie.

(361 Capital)

(Lovell Minnick)

Now on to the markets, this one chart tells you everything that you need to know about last week…

Energy stocks UP and every other U.S. group lower can only mean one thing… turmoil in the Middle East.

It has been 28 years since the Iraqi National Team played in their only World Cup. The men on the right are clearly Biathlon and Dodge-Rocket fans, so it may be another 28 years before they qualify again…


Looking more broadly, equity strength was also seen in the Metals/Miners and BRICs/Emerging Markets. On the downside, sectors most impacted by spiking Oil prices did the worst…

Even the brightest of investors are having a difficult time making positive returns in 2014…

Some of the biggest investors on Wall Street are losing money with wrong-way bets in markets around the globe, a surprising black eye amid a rise in stock and bond prices. Hedge-fund managers including Paul Tudor Jones, Louis Bacon and Alan Howard are among those who have misread broad economic and financial trends. Some have lost money as Japanese stocks fell, while others have been upended by the surprising resilience of U.S. bonds. An unusual period of calm has exacerbated problems for many trading strategies dependent on volatile markets.

The losses by these so-called macro investors are contributing to a trading slowdown hurting the largest investment banks. The flagship fund at $15 billion Moore Capital Management LP, led by star investor Mr. Bacon, was down 5% this year through the end of May, the firm has told clients. Mr. Jones’s flagship fund at $13 billion Tudor Investment Corp. is down 4.4% this year, according to a person familiar with the firm. By comparison, the S&P 500 index is up 5.4% this year, including price gains and dividends, and the Barclays U.S. Aggregate bond index, a standard measure for debt investments, is up 3.4%.


For underperforming trend followers, they are about to get an assist from the Global Equity market’s rising breadth…


Nicholas Colas, chief market strategist at ConvergEx Group, also points out that correlations continue to fall which is a far better backdrop for active equity investors…

– The average correlation of the 10 industries in the S&P 500 to the index itself was just 70.6% last month. That’s the second lowest reading since October 2009 and far better than the +95% levels of mid-2011.

– Industry sector correlations to the S&P 500 dropped last month to 70.6%, down from 79.3% in the prior month and 85.4% three months ago. Old timers who happen to be reading this will recall when 50% correlations were the norm in the 1980s and 1990s. We aren’t there yet, but we are more than half way down the road.


Even the smallest of businesses are now feeling strong enough to contribute to overall economic expansion…

Small-business owners have recovered all of the optimism lost during the Great Recession, according to a report released Tuesday. The higher level of confidence is feeding into price increases. The National Federation of Independent Business’s small-business optimism index increased again to 96.6. last month, from 95.2 in April. The May reading is the highest since September, 2007, before the last recession.


When Howard Marks has a difficult time finding investments, take a mental note…

Oaktree Capital Group LLC, the world’s biggest distressed-debt investor, cut the $3 billion goal on its next control investing fund by about 40 percent as it struggles to find deals amid an economic recovery, according to three people with knowledge of the matter. Oaktree told prospective clients it reduced the target to about $1.8 billion, said the people, who asked not to be identified because the information is private. The Los Angeles-based firm plans to shorten its investment period on Oaktree Principal Fund VI LP to three years from five, the people said. Given the lack of traditional distressed opportunities, Oaktree is spending more time on European nonperforming loans, shipping, commercial real estate and energy, said Ronald Beck, a managing director at the firm, on a panel at the SuperReturn U.S. conference in Boston this week. He pointed to anemic default rates and high-yield bonds trading above par. “You have to be very sector-specific,” Beck said.


One great investor is even going so far as to short a portfolio of stocks that he thinks will ‘Never’ have an interest in returning capital to investors…

Whitebox Advisors LLC is looking for the “Never, Nevers” to bet against in the stock market. The $3.8 billion investment firm founded by Andy Redleaf said in a May letter to investors that it’s shorting 18 stocks, including Facebook Inc. (FB), LinkedIn Corp. (LNKD), Athenahealth Inc. (ATHN) and Under Armour Inc. (UA), that it believes will never make profitability their top priority or return cash to shareholders. The firm, based in Minneapolis, christened “Never, Never” as an homage to legendary value investor Benjamin Graham that reverses his concept of “Net, Nets.” Graham’s nickname referred to companies that are good buys because their assets minus liabilities and accounts such as overvalued inventory are valued higher than their stocks’ market capitalizations. “A Never, Never is a public firm that will never, ever make profitability its first priority and will never, ever willingly deliver a penny of cash back to shareholders,” Whitebox wrote in the letter. “If the value of a stock is the appropriately discounted value of all future dividends, we believe the correct valuation of a Never, Never approaches zero.”


If you are about to auction a prized asset, you might consider the process the Hillshire bankers used to maximize the prize paid on their sale…

The auction was a three-tiered event with the potential for pressure to mount along the way. Each side was to submit a first-round bid by Sunday at 4 p.m., according to people familiar with the matter. If one bid bested the other by $2.50 per share, that bid would win, the people said. But if the bids came in within that amount, each company would have the chance to participate in a new round of bidding, said the people. If bids in the second round came within $1.25 per share of each other, there would be another, final round of bids where Hillshire would go to the highest bidder, the people said.

In the first round, Pilgrim’s Pride, represented by Lazard, didn’t raise its offer from $55 per share, said the people. Tyson, in an effort not to take any chances at missing out, according to one person familiar with the matter, submitted a $63 per share offer. Had Tyson, advised by Morgan Stanley and J.P. Morgan Chase & Co., submitted an offer of around $57.50 per share, it would have won the auction, the people said.


Bill Gates has a fascinating book recommendation…

Making the Modern World: Materials and Dematerialization, by my favorite author, the historian Vaclav Smil… He argues that the most important man-made material is concrete, both in terms of the amount we produce each year and the total mass we’ve laid down. Concrete is the foundation (literally) for the massive expansion of urban areas of the past several decades, which has been a big factor in cutting the rate of extreme poverty in half since 1990. In 1950, the world made roughly as much steel as cement (a key ingredient in concrete); by 2010, steel production had grown by a factor of 8, but cement had gone up by a factor of 25.


Top World Cup + Infrastructure Tweet of the Week…

Top Innovation Quote of the Week…

“You want to be innovating so fast [that] you invalidate your prior patents.” Elon Musk, CEO of Tesla, on his decision to open the Tesla patent book to all competitors.


Top Political Quote of the Week for Virginia voters…

“We need to take free markets seriously. That means we have to put an end to all these tax credits and tax deductions and loopholes. [Michigan Rep.] Dave Camp had a good bill which simplified the tax code and had a Reagan-esque 10 and 25 percent rate. That made sense and it was going to be pro-growth.” Dave Brat, who upset House Majority Leader Eric Cantor this week in the Virginia election.

No doubt Dave Brat is a fan of Freakonomics…

@freakonomics: “If there is one mantra a Freak lives by, it is this: people respond to incentives.” #ThinkFreak

The World Cup started off with a bang and some amazing games. If you didn’t catch them live, Twitter kept you up to date with the action…

– @World: Every single game has been amazing this year. #WorldCup

– @Pawelmorski: Spanish Inquisition begins: “What the F*** was THAT?”

– @zerohedge: Well at least Spain can sell bonds at a 2.6% yield…


Be creative in everything that you do…

@meganeellison: “I have fun with ideas; I play with them.” -Ray Bradbury

Now could someone put Iraq back in the bottle so that we can return to our calm June?


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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