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 23, 2014

Timely perspectives from the 361 Capital research & portfolio management team

Written by Blaine Rollins, CFA



@finansakrobat: Volatility… is low.

Volatility in the financial markets continues to collapse. Last week’s Fed comments gave everyone another reason to throw away their hedges…

In essence, Yellen endorsed the view espoused by hedge fund mogul David Tepper a couple of years ago, that the course of monetary policy “depends” on the economy. If growth is sluggish, policy will remain accommodative, which is bullish for risk assets. Interest-rate hikes won’t come until there is strong growth, which also is bullish. And as long as the monetary authorities have their back, investors have little reason to worry. So, volatility premiums collapsed in the options market; if the Fed is offering free insurance, why pay for it with hedges?


While ongoing funeral services are being held for Volatility, there is a Rave going on across the street for the Equity Markets as the % of stocks trading above their 20, 50 & 200 day moving averages is showing extreme strength…

And the number of new highs in the S&P500 returns to the 100+ level…

S&P 500 breadth measures confirm that the strength is broad and just not limited to the largest market caps…

Looking farther down the Size categories show the Mega, Large and Mid Caps have all returned to make new 2014 highs. Small Caps are the only missing group, but they are knocking on the door…

Corporations had two good pullbacks in January and March to take advantage of their increased stock repurchases, which no doubt helped absorb that extra supply of stock floating around and support stock prices from falling further…

Aggregate share buybacks for the S&P 500 grew 50% in Q1 to $154.2 billion, and amounted to the third largest quarterly total since 2005. The biggest contributor to the Q1 total was Apple’s record $18.6 billion in repurchases, but IBM also had an uncharacteristically active quarter with $8.3 billion in buybacks. In addition, five of the top ten companies by dollar-value buybacks in Q1 are traditionally not big spenders, and each spent more money on buybacks in Q1 than in any quarter in at least ten years. These companies included FedEx, Boeing, Abbott Laboratories, Corning, and eBay.

(Factset )

And not just Public Corporations, but Private Equity Firms are also flush with cash to invest in the depressed prices of any public or private firms which has helped buoy equity prices…

The amount of money raised by private-equity firms, but not yet invested—known as dry powder—hit a record high of $1.073 trillion globally at the end of 2013, according to data provider Preqin, an increase of $130 billion from 2012. The total has continued to grow this year, reaching $1.141 trillion globally as of the start of June…


Michael Cembalest of JPMorgan highlights why investors will continue to allocate assets into Private Equity investments…

(Michael Cembalest, JPMorgan)

For last week, all U.S. sectors advanced led again by Energy…

More broadly, it was the commodity groups which benefited most from the better than expected global economic data and the Fed’s comments…

Now about the June Fed meeting, Janet Yellen’s comments and of course The Dots…

There were few surprises at the June FOMC meeting. As expected, the Fed kept its short-term target rate near zero and continued to reduce the pace of its bond buying program. The Fed’s assessment of the economy was mostly positive, and there was no mention of adverse weather conditions from earlier in the year. According to the Fed, “economic activity rebounded in recent months” and “labor market indicators generally showed further improvement.” Despite the recent trend higher in inflation, the Committee’s assessment of price pressures was unchanged, stating that inflation is still below their “longer-run objective, but longer-term inflation expectations have remained stable.” As was the case at the April meeting, the decision was unanimous.

Watch the “Dot Plot”: In addition to the members’ forecast of when the first hike might take place, the summary of economic projections also includes each member’s target Fed funds rate at the end of each year, as well as their long-run expectation. Expectations for rate hikes over the next 2 years have increased slightly, with the median estimate of the year-end 2015 Fed funds rate at 1.125%, up from 1.0%, and the year-end 2016 estimate at 2.5%, up from 2.25%.


Note: Each shaded circle indicates the value (rounded to the nearest 1/4 percentage point) of an individual participant’s judgment of the appropriate level of the target federal funds rate at the end of the specified calendar year or over the longer run. The median estimate for 2015 is 1.125%. Since member expectations move in 0.25% increments, we have highlighted the dots that represent 2.0% and 2.5%, respectively.

(Source: Federal Reserve Board, June 18, 2014)

It should be no surprise to any that Short Term Yields popped higher last week…

Firing up the inflation/economic recovery picture was a continued rise in the Prices Paid component in the Philadelphia Manufacturing data…


So now take a look at the CRB Index approximate group weightings:

With prices moving to new high levels in the Energy complex combined with a new surge in Industrial and Precious Metals prices, maybe Emerging Market Equities have a solid base of support that will continue to rally those shares. As this chart shows, their equity prices move closely with the CRB Index…

Meanwhile, one of the best Emerging Market investor’s thinks now is the time to be selling one of the cheapest markets in the world, Russia…

Investors are wrong to flee from Russia because of the standoff over Ukraine, according to one of the world’s most experienced emerging-markets fund managers. Mark Mobius, who runs the Templeton Emerging Markets investment trust and is considered one of the greatest ever pickers of shares in young economies, said Russia’s economy needed foreign money to grow and could not afford to scare off Western investors. As a result, the slump in Russian share prices since the crisis began represented a buying opportunity, he said. “We are buying Russian shares because they are cheap – we always look for what’s unloved,” Mr. Mobius added. He is responsible for a group of emerging-market funds beyond the trust and in this capacity has bought shares in Russian natural resources companies and one of its banks. The trust has 2.2pc of its money in Gazprom, the Russian energy giant.


With Junk Bonds at historic low yields, Barron’s goes looking for alternatives in the universe of Dividend paying Stocks this weekend. Not a bad idea if economic sensitive earnings streams grow with GDP while higher rates keep a lid on Junk Bond prices…

We began our search by looking only for those with current yields over 2%, roughly the dividend yield for the Standard & Poor’s 500 Index. But we also looked for estimates of peppy growth in coming years in both profits and dividend payments. For long-term investors, these shares have potential to become high-yielders over time. A 2.5% yield today becomes a 4.9% yield in seven years, assuming a company can increase its payment by 10% a year, and that its share price doesn’t change. Of course, rising dividends can attract buyers, sending share prices gradually higher, resulting in handsome total returns.


Speaking of recoveries, the rebound of the biotech space has been awesome. Credit the low valuations that were hit in March/April which both smart investors and the companies themselves took advantage of…

Uber, Lyft and the others have finally cracked the price of the Public Market taxi medallion owner. The actual value of medallion prices are likely next to fall as the best drivers leave the regulated taxi industry to increase their earnings (significantly)…

In New York, taxi medallions have topped $1 million. In Boston, $700,000. In Philadelphia, $400,000. In Miami, $300,000. Where medallions exist, they have outperformed even the Standard & Poor’s 500-stock index. In Chicago, their value has doubled since 2009. Now, however, a market built on restricted supply is showing cracks with the arrival of start-ups that turn anyone with a car into a driver for hire. In Chicago, those cracks have triggered fears that medallion values are tottering. They have given rise to a high-stakes lawsuit, tentative new regulation and a glimpse of how this same clash between old power and new technology could play out in other cities. Throw open the market — to amateurs, part-timers and the underemployed (and whatever they drive) — and medallions lose their exclusivity. Without which, they lose their value, too.


Now a quote about that bigger financial Bubble in the room…

“It’s inevitable at some point there will be a cap on student loan guarantees. And when that happens you’re going to see a repeat of what we saw in the housing market: when easy credit for buying or flipping a house disappeared we saw a collapse in the price of housing, and we’re going to see that same collapse in the price of student tuition, and that’s going to lead to colleges going out of business.” Mark Cuban


Surprising fact of the week: Your cable box is the #1 or #2 electricity consuming device in your house…

The seemingly innocuous appliances — all 224 million of them across the nation — together consume as much electricity as produced by four giant nuclear reactors, running around the clock. They have become the biggest single energy user in many homes, apart from air conditioning. Cheryl Williamsen, a Los Alamitos architect, has three of the boxes leased from her cable provider in her home, but she had no idea how much power they consumed until recently, when she saw a rating on the back for as much as 500 watts — about the same as a washing machine. The 224 million cable boxes across the nation together consume as much electricity as produced by four giant nuclear reactors, running around the clock. A set-top cable box with a digital recorder can consume as much as 35 watts of power, costing about $8 a month for a typical Southern California consumer. The devices use nearly as much power turned off as they do when they are turned on.


You know that Disney’s Frozen is hitting it out of the park when Pearl Jam covers ‘Let It Go’ at a recent concert, but even more amazing at what the movie is doing in its overseas box office. The U.S. domestic box is up to $400m but the international box is more than twice that. And in Japan, the film is bringing in over half of what it has done in the U.S. So someone call Eddie and tell him to pack up the Van because the Land of the Rising Sun is calling…



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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