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 25, 2013
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA

It wasn’t just the movie theaters Catching Fire last week. Look at the new highs across the indexes and most major sectors…

So now that the S&P 500 has gained 7 weeks in a row, what’s next?

Don’t forget that market strength typically will lead to further strength. With the positive seasonal trends plus the credit markets continuing to exhibit strength, it would seem that equities have a good wind at their back into year end. Biggest question seems to be how overbought is the market in the short term. But as we have seen, all corrections in 2013 have been quickly snapped up by investors with too much cash or those leaving bonds and commodities.

(@RyanDetrick)

At Schwab, Liz Ann Sonders points out a favorite chart of mine as a reason that equities have plenty of room to run in the long term…

As the chart below shows, the 10-year average of annual market returns is still running below typical long-term performances. “Notice the long-term pattern of this chart,” she says. “Investors don’t spend a lot of time hanging around the median line, but instead the market tends to trend in one direction for multi decades (well-overshooting the mean) before heading back down to well-undershoot the mean. “Being less than five years into the upcycle, history suggests we have more room to run,” she says.

(WSJ)

Helping Liz’s chart is that Bond investors continue to be participants in their own episode of the Hunger Games…

And looking at flows gives you the sense that there will be some further years where Stocks take from Bonds…

(GoldmanSachs)

As for Gold investors, 2013 will be a year to forget…

If you are looking for a catalyst to the New Highs in risk assets, look no further than Financial Stocks…

1) The yield curve has steepened to new highs…

2) the prospect of improving loan growth from the slowly improving economy…

3) combined with a lack of current credit issues…

4) and the recent $billion fines paid now behind them…

=) now makes Bank Stocks a must own group for 2014?

Given the November move in the charts, some very big institutional investors think so.

(TomBowley)

As leading the market to new highs by the leash has been the continued appetite for RISKON exhibited in the junk bond markets…

For the week, it was all about the appetite for Financial stocks plus the good news on drug trials, which popped the Biotech/HealthCare sectors…

Looking more broadly, Biotechs and Financials dominated the asset classes while Commodity and Fixed Income centric investments lagged…

No wonder Hedge Fund only firms are creating long only mutual funds…

The big hedge fund focused firms have done extremely well with their LONG only risk books. Unfortunately, their short books have done equally unwell. Bottom line, it has just been a brutal year to have a hedged book.

(GoldmanSachs)

As the Equity markets have improved, so have Consumer Balance sheets…

And something that we have been waiting to see more of is workers voluntarily quitting their jobs…

One trend pointing to improving labor markets, however, is the mix of job separations: more workers are quitting their old jobs. Fewer are being let go involuntarily. (Another separation category includes retirements, disabilities and death.) A high level of quits suggests more workers are confident that they will have little problem finding a new job.

(WSJ)

Speaking of an improving employment environment, have you ever seen a 0.6% unemployment rate? Or a three-fold increase in average wage?

Total personal income in the nonmetro portion of North Dakota—where the booming mining industry is located—grew at an even faster 26.3 percent pace. Of North Dakota’s 53 counties, six had per capita personal incomes above $80,000, all oil production nonmetro counties. Williams County had the highest 2012 per capita personal income in North Dakota at $116,978. Just five years prior, Williams County recorded per capita personal income of $39,523.

(NDWorkforceIntelligence)

Faster than expected, falling jobless claims have led to a spike in ISI Groups Confidence Model…

Favorite Chart: We have upside risk to consumer confidence numbers which is good news for our fair value P/E model and consumer discretionary shares. (ISI Group)

And if the Consumer decides to spend into the holidays like the Retailers have planned for, Barron’s could be helping you out with this LONG retail idea…

The U.S. economy might be limping along, but many consumers have broken into a sprint. That bodes well for holiday sales, and could spell nice gains for retail shares, particularly some that have lagged behind the group’s powerful rally this year.

(Barron’s)

Michael Cembalest at JPMorgan will tell you to expect to see a pickup in earnings growth…

This is a key input for the equity markets since we shouldn’t rely on further multiple expansion in 2014. If stocks are going to perform next year, we need upside Revenue growth and/or better than expected Margins to push stock prices higher.

One of the negative surprises last week is a positive one for the war on Cancer…

Philip Morris lowered expectations for their international tobacco volume growth due to challenges in Europe, Russia, Japan, & the Philippines.

If you have two 15 minute windows, here are interviews with 2 of the smartest investors that you will find…

• Stanley Druckenmiller Interview: Long Google and Amazon, short IBM. Hedge funds aren’t providing adequate returns. He quit Soros for buying technology stocks; he couldn’t stand to see them go up. (InstitutionalImperative)
• Appaloosa Management’s David Tepper gives his reasons for being LONG equities, SHORT bonds and throws in plenty of humor to boot.
  (Bloomberg)

@barnejek: This reminds me of all the bank bashing going on at the moment.

The banking/finance caste ranks at the bottom of U.S. society right now. For those few finance students going home for the holidays wondering where they went wrong in their major selection, I would say keep your chin up. When I graduated soon after the stock market crash of 1987, I was in a similar position looking forward to no job opportunities in a shrinking industry hated by investors. But you know what, it was the best time ever to enter the business that just went through a massive downsizing of human capital. The industry today is in much better financial shape with fewer graduates competing for jobs. And look at the current stock prices which tell you this industry could be a coiled spring once the global economy gets some more traction. My only suggestion would be to keep adding to your skillset by adding more math, statistics, and some programming courses. The kids behind you will all know how to code so be ready for them.

(Blaine)

Knowing that I have a few Real Estate investors in the reader base, here is a good hunting list for your next property…

(NewGeography)

And while University towns were typically great places to own real estate or small businesses that may no longer be the case…

Growth stock investors are always looking for Volume and Pricing growth. Right now, U.S. colleges have neither.

While schools for two decades were seeing rising enrollments and routine increases of 5% to 8% in net tuition, many now are facing grimmer prospects: a shrinking pool of high-school graduates, depressed family incomes and precarious job prospects after college. The softening demand for four-year degrees is prompting schools to rein in tuition increases while increasing scholarships. Those moves are cutting into net tuition revenue—the amount of money a university collects from tuition, minus school aid.

(WSJ)

Tweet of the Week…

@ReformedBroker: Doing all the Christmas shopping this year with Bitcoin. My family’s getting ecstasy and glocks.

In the event you made the mistake of taking your younger child to see Catching Fire this weekend, try turning up their nighttime heat…

@GoogleFacts: The colder the room you sleep in, the greater the chances are that you’ll have a nightmare

And if your kids take after Wednesday and Pugsley Addams, then George R.R. Martin has some stocking stuffers for you!

The Song of Ice and Fire novels — aka the Game of Thrones books — are some brutal business. If you’re a fan of the HBO adaptation, you’ve surely learned at this point that author George R. R. Martin is not afraid to off even his most beloved characters. But if you haven’t read ahead to learn what the future holds for the denizens of Westeros, I have some unfortunate news: It’s not going to get any better. Don’t believe me? Behold every death in the novels in a photo shared on Twitter by the Dorking branch (yes really) of the British bookstore Waterstones.
(Wired)

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.