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
November 18, 2013
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA

(DavidHodgins)

As the market returns to make new highs, all the talk has turned to bubbles…

You have to be thankful for all the talk about floating objects. For without it, there would certainly be a two-by-four hiding around the next investing corner. But while Barron’s did point out some big values in some high flying stocks, they also did note the many discounts across several other areas of the market. Valuations on a Price-to-Earnings and Price-to-Book Value have returned to their 10 year averages as you can see here…

(GoldmanSachs)

And as the bears have learned repeatedly, strength in equities typically leads to further strength…

Returns for next 1/2/3/4/5 weeks on all instances when S&P 500 gains for 6 weeks in a row (since 1990).

(Paststat)

But the real catalyst to last week’s move in the markets was Janet Yellen…

To summarize her discussion with the Senate last week:

• The strength in the private sector continues
• The Fed will assess the progress at each meeting
• QE cannot continue forever. Benefits of QE exceed the costs. No threats to financial stability.
• Monetary Policy to promote macroeconomic policy goals > financial stability goals.
• A December Taper is less likely.

In other words… “GAME ON!”

As a result, Bonds bounced, RISKON equity sectors moved to new highs, and Emerging Markets bounced hard. So for the week, Cyclicals again led the markets higher while Utility stocks lagged…

Year to date performance also shows most every sector trading at their highs…

Looking more broadly shows the only asset classes on Santa Yellen’s coal list are Metals, Miners, & Cisco…

Bridgewater’s Ray Dalio suggests that equities are the place to be given the Fed’s current positioning…

Dalio said all investors are wrestling with what to do in an environment where the Federal Reserve’s monetary stimulus efforts have helped push all assets to “high levels.” He sees equities returning 4% annually for the next several years–that’s not great, but not bad relative to a bond or, certainly, cash. But as returns are squeezed lower, investors must make choices among those low-returning assets. “I think the most important thing for an investor is to create a proper balance of those investments,” he said. “In other words, I think that going forward, most investors are not going to be able to produce alpha,” a measure of outperformance. “Alpha is a zero sum. We have 1,500 people who work there with computers doing all sorts of work and it’s the pros against that,” Dalio said. “I would say most investors should hold a balanced portfolio against that.”
(Marketwatch)

Note to self…Do NOT fight the Japanese Fed!

The Nikkei, meanwhile, has just completed a classic bottoming pattern following its big run-up earlier in the year: Each rally high during the post-run-up consolidation was in the 15000 area but each successive low was higher than the previous one. The Nikkei closed well above 15000 last night, so the Japanese stock market looks like it has launched a new leg to the upside. Objectives range as high as the 17500 area.

(WalterDeemer)

While you were picking up the fallen leaves this weekend, Boeing was raking up more U.S. GDP with the help of its new plane…

(Boeing777x)

…And Boeing stock is now nearly a 2 bagger for 2013…

Christie’s NY auction also helped add to U.S. GDP as the 0.01% went LONG modern art…

It took seven superrich bidders to propel a 1969 Francis Bacon triptych to $142.4 million at Christie’s on Tuesday night, making it the most expensive work of art ever sold at auction… The sale totaled $691.5 million, far above Christie’s $670.4 million high estimate, becoming the most expensive auction ever. It outstripped the $495 million total set at Christie’s in May. Of the 69 works on offer, only six failed to sell. All told, 10 world record prices were achieved for artists who, besides Bacon, included Christopher Wool, Ad Reinhardt, Donald Judd, and Willem de Kooning.

(NYTimes)

As for the rest of us, retailers are thinking that we will be spending more for the holidays…

@GluskinSheffInc: Challenger just reported retail hiring is running at highest pace in 14 years & up 6.7% YoY, boiling well for jobs mkt & holiday sales.

Interesting signals out of China as their iron ore demand is lifting global prices…

Iron ore is extending a bull market on record sales to China that are spurring forecasters from Morgan Stanley to the World Bank to increase price predictions.

Shipments from Australia’s Port Hedland, the biggest iron-ore export terminal, to China jumped 43 percent to a record last month, port data show. The Asian nation already imported the most ore ever in September, according to customs data. Standard Bank Group Ltd. and the Bureau of Resources and Energy Economics, Australia’s state forecaster, also increased price estimates in the past several weeks. Prices reached a two-month high in China last week after data showed Asia’s largest economy accelerated.

(Bloomberg)

Great Britain is also lifting its employment outlook…

In its quarterly inflation report, the Bank of England pulled forward its expectations for when unemployment could hit the 7% threshold at which point a rate hike would be considered. The central bank now says the jobless rate could fall to 7% by H2 2014 versus previous guidance of mid-2016. The BOE also upgraded its outlook for the U.K. economy, saying 2014 growth should come in around 2.8%.

(WallStreetBreakfast/SeekingAlpha)

Mega Cap trade of the Q3 might have been Berkshire Hathaway’s purchase of Exxon Mobil…

Now we know why it stopped going down.

Another reason that our kids and grandkids will be pushed into leaving the United States of America…

When economists talk of political risk, they usually mean war, terrorism or, at the very least, national elections. And 2014 will be a busy year at the polls, with votes in Brazil, India and Indonesia (among the big emerging markets), plus America’s mid-terms. Countries with a combined population of more than 2 billion will be endorsing or rejecting their current governments. But there is another kind of political risk: the temptation for governments of all political colors to change the rules, whether they relate to tax, the way that companies operate or how markets behave. And that risk has increased significantly since the 2008 crisis…

Many governments are trapped between a desire to please voters (whose incomes have been squeezed by austerity and higher commodity prices) and the danger of offending corporate bosses, who have the ability to move their operations elsewhere. This confusion has been amply demonstrated in France, where François Hollande’s government has proposed and withdrawn a series of taxes, including a levy on the sale of internet devices and an increase in duty on diesel fuel…

Excessive regulation in the EU is hardly a surprise, but there has also been a striking deterioration in the perception of America’s regulatory burden. The country has slipped from 23rd to 80th in the global rankings over the past seven years. What troubles businessfolk and investors most is the random nature of the process. They do not know where the next tax will be levied or regulatory boot descend. When rules are proposed, it can take ages for the details to emerge, making it hard for companies to plan ahead. That is the most insidious—and most underestimated—form of political risk.

(Economist)

Google is now bigger than newspapers and magazines in advertising dollars…

(BusinessInsider)

Evan, hit the $3 billion bid, please:

• …the fact that young people aren’t especially reliable predictors of tech trends shouldn’t come as a surprise. Sure, youth is associated with cultural flexibility, a willingness to try new things that isn’t necessarily present in older folk. But there are other, less salutary hallmarks of youth, including capriciousness, immaturity, and a deference to peer pressure even at the cost of common sense. This is why high school is such fertile ground for fads. And it’s why, in other cultural areas, we don’t put much stock in teens’ choices. No one who’s older than 18, for instance, believes One Direction is the future of music.That brings us back to Snapchat. Is the app just a youthful fad, just another boy band, or is it something more permanent; is it the Beatles? (WSJ)
• @jowyang: Facebook offers Snapchat $3,000,000,000. Snapchat unfriends. Offer goes away in 10 seconds. Parents never knew
• We should be wary of describing anything that gets used 350 million times a day as a fad. But really, Snapchat’s product is the definition of a fad: It holds your attention for 10 seconds, then it’s gone. There is a time in our lives when we enjoy ephemeral pleasures; the older we get, the greater the urge to preserve the past, not kill it. Goofy pictures from our youth are preferable to no pictures from our youth. Snapchat could build a business out of its niche audience of teens and sexters, of course. There will always be a surfeit of both. (That’s presuming you can get teens to hold on to anything for more than a generation; they’re already getting bored with Facebook.) But if you want to build a business that’s four times the value of Instagram, you need to bring more users into the picture, and keep them there. (Mashable)

Geek coach of the week is The Coach Who Never Punts…

(Grantland)

Finally… Ad of the Week. Ad of the Year. Ad of the Decade?

Director Andreas Nilsson shot the spot in one take, after the production team rehearsed for three days, with just a 15-minute window to catch the morning light. The Volvo team assures us, there are no wires and no CG, just Van Damme doing his thing (they do note that “there were some safety precautions/measures involved, however those installments are not visible in the video”). The stunt may have been set up to “demonstrate the stability and precision of Volvo Dynamic Steering,” but it also clearly illustrates the ongoing awesome of JCVD.
(FastCoCreate)

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.