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Terrific Weekly Research Briefing from Blaine Rollins at 361 Capital

14 Oct

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

http://www.361capital.com/

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

http://www.361capital.com/


The stage was set and you knew it was coming…

The ominous music began playing months ago when Small Cap Stocks and Junk Bonds continued to underperform. Then the stage darkened when the U.S. Dollar surged, crushing Commodities and the Foreign Markets. While many spent their time looking at the Fed as the laser carrying alien monster, the crowd took its eye off of the little girl carrying a stack of books labeled: ‘Ebola’, ‘Microchip EPS’, ‘German Economy’, ‘How Iraq was Lost’ and of course, “Quantum Physics’.
So now, key damage is being done in the markets and the psychology will shift from ‘Buy the Dip’ to something else. If you want to be a Hero, you can bet on the U.S. Dollar rolling over, the European Economies finding any growth spurt or Q3 Earnings saving the day. But you know what? It has been a ripping good 3 years for risk taking and I bet there will be quite a few investors sitting out this next dip. Look at the internals of the U.S. market; it wants to be Large Cap and Defensive. If you don’t want to make a big call on the market, just keep your chips in safety until it is time to buy risk again.


Probably a good month to revisit ‘Reminiscences of a Stock Operator’…


The silver bullet for Semiconductor stocks and Technology indexes was fired Thursday night by leading semi indicator, Microchip…

“Microchip often sees the turn of the industry ahead of others in the semiconductor industry. First, in contrast to many others in the industry, we report sales from distribution on a sell-through basis worldwide. We built a significant amount of inventory in the distribution channel in the September quarter. If, like many others in the industry, we recognized sales on a sell-in basis to our distributors, our sales would have been significantly higher for the September quarter. Second, Microchip does business with over 80,000 customers worldwide, most of whom are small and nimble and are able to adjust their demand in real time. We believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future.”

“The month of September is usually a strong month for our revenue after the summer holiday period. This time, the September sales did not materialize to our expectations. The revenue miss was led by China where the September quarter is traditionally the strongest.”


During the week, we had several data points out of Europe which told us that things were getting worse, and quickly…


And now it looks like Iraq is slipping away quickly into the hands of ISIS unless there is a major intervention by Global forces…

In Iraq however conditions appear to be worsening – the U.S. air strike strategy continues to be criticized as ineffective while reports suggest Anbar is at risk of “collapsing” and that ISIS is poised to strike at Baghdad (Iraq’s government apparently is making “urgent” pleas to the U.S. for ground troop deployments and on Sunday Gen. Martin Dempsey, chairman of the JCOS, said the US may need to play a bigger role “advising and assisting” Iraq’s military).
(JPMorgan)


If we thought that Q3 earnings could save us this month, let’s hope that Fastenal is not the guinea pig…

Fastenal is mostly flat in early trading following Q3 earnings this morning. EPS rose 13% year-over-year to $0.45 per share while revenue rose 14% year-over-year to $980.8 mln. Both results were roughly in-line with expectations as was the case in Q2.
(Briefing)


So now to look at the Damage…


Equally disturbing is the ramp in Selling Volumes as this decline picks up speed…


The uncertainties in the market have helped the Volatility Index pop its head above 20 again… Is it just a temporary visit?


Looking at the early Tea Leaves and Smoke Signals, Small Caps are accelerating their underperformance versus Large Caps…


And so are Junk Bonds’ underperformance versus Treasuries…


One Tea Leaf on the verge of changing trend is Short Term Risk Free Yields; we like to see yields slowly move higher as a sign of strength in the U.S. Economy. A flip to a lower trend could be very damaging to U.S. risk taking…


If you needed any sign of the Defense taking over the market, Staples and Utilities are now top performing…


Looking at the Sectors that are now in a Bear market (down 20%)…


…and for those Sectors that are now in a Correction (down 10-20%)…


Last week was an unpleasant one unless you were hiding in (or wearing) Diapers and Electricity…


More broadly, the week was a mess in the U.S. and Overseas. Complete RISKOFF across the board…


Many will look for a data point or news item that captured the top of the Stock Market. I will just point this out…


I saw an article over the weekend implying that Hedge Fund underperformance specifically hurts the rich…

Last time I looked, it was my policeman, fireman & school teacher who were 1.5-2.0x levered to Hedge Fund Returns based on the investment allocation of their underfunded pension plans. This chart only confirms that public pensioners are the most leveraged to Hedge Funds.

(@PlanMaestro)


It is disturbing to see one firm own so much of a single issuer when the Wall Street trading desk inventory is so lean…


(ZeroHedge)


…and the highlighted firm is being redeemed at a 5% quarterly rate…

Pacific Investment Management Co., whose co-founder Bill Gross stunningly departed on Sept. 26, said late Friday that the Newport Beach, Calif.-firm had assets under management of $1.876 trillion as of Sept. 30, a 5 percent drop in the third quarter. Pimco had total assets under management of $1.973 trillion as of June 30, 2014 and total assets under management of $1.92 trillion as of Dec. 31, 2013.
(Reuters)


One asset geography that could surprise to the upside would be Brazil, if Presidential candidate Neves pulls off this election…

Opposition candidate Aecio Neves has a clear lead over Brazil President Dilma Rousseff, according to a survey of voter support ahead of the country’s second election round. Neves would have 52.4 percent of votes in the Oct. 26 presidential runoff, compared with 36.7 percent for Rousseff, according to a Sensus poll released yesterday on the website of IstoE magazine.
(Bloomberg)


Question of the Week: Which municipality is issuing more home building permits… California or Houston?

In August, the most recent month for which figures are available from the U.S. Census Bureau, metro Houston (including Sugar Land and the Woodlands) issued more permits for construction of single-family homes than did the entire state of California, which has six times the population. And that was no fluke. Houston and California have been running neck and neck in permit issuance since 2000, with California running just about 3,000 permits ahead in that time.
That’s a remarkable statement about both demand (people really want to live in Houston) and supply (the city is happy to accommodate them). California is a different story. What UCLA’s Anderson School of Management called a “painfully plodding” economic recovery has damped the appetite for home buying, and strict land-use rules aimed at controlling sprawl make permits hard to get. “If you don’t have housing, you can’t do labor,” Chris Thornberg, principal at Beacon Economics, a Los Angeles-based research and consulting firm, told Bloomberg News. “If you can’t do labor, you are missing a major ingredient for economic growth.”
(BusinessWeek)


It was a very, very good week for Geeks…


@jowyang: Now that the Tesla will does 0-60 in three seconds — it will dust some exotic sports cars. In a sedan. Embarrassing for gear heads.


It would now be hard to enumerate all of the applications that make use of blue LEDs, principally because they are joined with their green and red brethren to make the light to which people are most accustomed: white. LED-based lighting is finding its way into more and more global markets as it becomes cheaper; already it is in the flash of cameras and smartphones. But blue light has made its own way as well. Blue diodes lie at the heart of DVD and the aptly named Blu-Ray players. By using the same approach, slightly more energetic ultraviolet light can be made—a boon for sterilising surfaces and drinking water using little energy. Communications and computing seem inexorably headed to a future that makes more use of light’s properties, and blue light’s short wavelength is best for ever-smaller technologies. As the members of the Sweden’s Royal Academy of Science put it during their press conference, this year’s award is more an “invention” prize than a “discovery” prize. But it is an invention, they said, that would have made Alfred Nobel happy.
(Economist)


Amazing how quickly the 3D technology has been put to work…

Surgeons at a New York hospital have credited 3D printing with helping to save the life of a 2-week-old baby who required complicated heart surgery. Using MRI scan data, Morgan Stanley Children’s Hospital in New York City 3D printed a copy of the child’s heart, which was both riddled with holes and structured unusually. Surgery was going to be complicated and dangerous, but this 3D printed heart provided the surgeons the opportunity to study the organ, and develop a detailed surgery strategy.
(IndependentUK)


Wow! A treatment for Type 1 Diabetes is around the corner…

Harvard stem cell researchers announced today that they have made a giant leap forward in the quest to find a truly effective treatment for type 1 diabetes, a disease that affects an estimated 3 million Americans at a cost of about $15 billion annually. With human embryonic stem cells as a starting point, the scientists were for the first time able to produce, in the kind of massive quantities needed for cell transplantation and pharmaceutical purposes, human insulin-producing beta cells equivalent in most every way to normally functioning beta cells. Doug Melton, who led the work, said he hopes to have human transplantation trials using the cells under way within a few years. Twenty-three years ago, when his infant son Sam was diagnosed with type 1 diabetes, Melton dedicated his career to finding a cure for the disease. “We are now just one preclinical step away from the finish line,” said Melton, whose daughter Emma also has type 1 diabetes.
(HarvardGazette)


Keep this chart for that day in the future when the kids come and ask for advice on how much to spend on their wedding day…


(RandalSOlson)


Tweet of the Week…


Holiday Shopping Pro-Tip: If there is a LEGO gift in your December list, BUY IT THIS WEEK…

“Anything Lego Movie is going to be difficult to find. Some of the newer Star Wars sets that had an August release might also be difficult to find,” he said. The advice to shoppers: don’t expect to find any Lego on sale for the rest of this year because it’s simply too popular. “My advice to people whose kids are really into Lego is: If you see it, pick it up,” says Mileos. “Because if it’s on the Christmas list, you might not find it come December.”

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Posted by on October 14, 2014 in Investments

 

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