Archive for August, 2011

After Warren Buffett stole headlines on Thursday announcing a $5 billion investment in Bank of America, on Friday, all attention turned to Jackson Hole, WY, where Fed Chairman Ben Bernanke addressed the state of the economy in a speech at the Kansas City Fed’s annual economic symposium. Though Bernanke did not announce a new round of stimulus as many had hoped, the markets quickly shrugged off the non-action and finished the day up 135 points, or 4.3% for the week – the Dow’s first successful weekly advance in its last five attempts.

At the same Fed conference a year ago, Bernanke proposed a second round of economic stimulus to help bolster the economic recovery, and markets rose earlier in the week as investors believed another type of stimulus action could be announced today, given the market downturn experienced over the past month. To the initial disappointment of investors (the Dow quickly dropped over 200 points shortly after the release of Bernanke’s comments), Bernanke did not offer another immediate round of stimulus, but intimated that the tools and options possessed by the Fed to provide additional monetary stimulus will continue to be considered at the Fed’s September meeting, and that if needed, the Fed is “prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.” After digesting Bernanke’s statements, the market quickly turned green and finished the week on a positive note.

Earlier in the week, positive manufacturing data coming out of China and Germany on Tuesday, combined with a better-than-expected domestic durable goods orders number on Wednesday, helped to boost the Dow 322 and 144 points, respectively. On Thursday, the Dow dropped 171 points on cautiousness related to the Fed’s Friday comments, the resignation of Apple’s CEO Steve Jobs and a sell-off in the German markets related to speculation that the country’s public finances were weakening.

Amidst all the news, our trust preferred portfolios continue to perform well. For example, on Thursday, the Dow was down 1.5% while the trust preferreds in our portfolios were up 2%. The Buffett investment in Bank of America preferred shares was a big boost. Not only are trust preferreds performing better than equities, trust preferreds are besting other fixed income options. Year-to-date through last Friday, the trust preferreds in our portfolios are outpacing BBB corporate bonds by 3% and 10-year Treasury notes by approximately 5.5%.

Looking at the economic calendar next week, August manufacturing data will be reported on Tuesday, but the major focus will be on the August employment report, which will be released on Friday. Expect no major change in the number of jobs and the unemployment rate is likely to remain static.

Ongoing concerns over European and U.S. economic stability again weighed heavily on global indices this week, sending markets both at home and abroad further into correction territory. The Dow, which lost 1.5% last week, dropped another 4% this week after closing down 173 points on Friday. Since the Dow’s yearly high on April 29th, the index is down 15.5% – nearly a bear market (20% decline) by definition.

On Monday, the markets fed off of last Friday’s rally to close up over 200 points; however, momentum was quickly lost as on Tuesday, a slew of disappointing domestic housing data, combined with a less-than-inspiring meeting in Europe between German and French heads of state, brought indices back into the red. Investors had hoped the meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel would help ease tensions surrounding the European markets, in particular through an announcement of the creation and launch of a euro bond – a common bond that would be used to ensure affordable financing for euro zone members struggling with debt. Though the two did lay the groundwork for further European economic integration, no new near-term “bailout” steps were initiated, and no immediate action was taken on the euro bond issue. To add to the European gloom, second quarter German GDP data showed its weakest quarterly growth rate since 2009, expanding only .1% over the previous quarter. This news was particularly disappointing given Germany has the largest economy in the euro zone.

After a flat Wednesday, the market fell drastically on Thursday, with the Dow closing down 420 points. Once again, a spate of poor domestic economic news precipitated the decline, the most notable being the emergence of a slight uptick in inflation, an increase in initial weekly jobless claims, a decline in existing home sales, and a negative reading by the Philadelphia Fed Survey, which tracks new factory orders, shipments and employees. No economic data was released on Friday, and after a session of see-saw trading in which investors mulled over the current economic landscape, the bears eventually won out, sending the Dow 173 points into the red, as previously mentioned.

In this uncertain environment, we continue to see our trust preferred strategy outperform the equity markets. For example, this week, the Dow was down 4% and the S&P 500 down 4.5%, while our composite trust preferred portfolio was virtually flat.

Economic highlights next week include the release of July new home sales data on Tuesday, and revised second quarter GDP and final August consumer confidence numbers on Friday. Look for flat-to-declining new home sales and for consumer confidence to remain low.

Have a good weekend,

James Skjong

After a roller coaster week, the Dow, on the strength of a positive domestic retail sales report and European efforts to support banks and bank stocks, closed Friday up 126 points, finishing the week down 1.5%. The volatility exhibited in the past couple of weeks produced memories of 2008 and early 2009 when the recession hit full swing, and a palpable nervousness reverberated through the markets, both at home and abroad.

Trust preferreds did not escape the volatility as they normally would during non-financially driven stress. Starting Tuesday, the trust preferred market tended to support our analysis that the steep drop in prices Monday and last Friday were a result of heavy trading volumes into a relatively thin market, which forced prices down sharply. As the market rebounded on Tuesday, the yield advantage of trust preferreds became all the more evident and these securities rebounded about 8% whereas the Dow was up about 4%. Trading volumes in trust preferreds during the rest of the week were easily accommodated and looked more normal. Trust preferred prices were slightly down Wednesday and up sharply Thursday and Friday.

We think getting back to a more normal market for trust preferreds will take a couple of weeks at least, but with past patterns as a guide, we would expect trust preferreds to decline substantially less than the market on days the market is down. When the market is up, we expect trust preferreds to meet or exceed the market advance until trust preferreds are closer to par. Naturally, this assumes we don’t have a substantive banking crisis in Europe. We have reviewed all of our European bank investments and are comfortable with capital levels, profitability, and exposure to the weaker countries.

Even in this uncertain market environment, one has to remember that 2008 was the “stress test” for trust preferreds and no bank failed to pay its dividend. In the last two weeks, trust preferreds passed another stress test. Banks have raised capital, paid off losses, increased profits, reduced leverage, and shed businesses that the regulators don’t like. Banks are a lot healthier than in 2008. We have been buying since Tuesday and not selling before that.

The core theme driving the trust preferred strategy is to lock-in high dividend yields, and we continue to expect a majority of these securities to be redeemed at par over the next five years. Current yields are about 8% with the yield to redemption about 10%. Most of the trust preferreds closed the week still below par. We expect the gap between Friday’s closing price and par to narrow before the end of the quarter as prices are driven by high yields.

In comparison to trust preferreds, alternative fixed income yields (corporate bonds, municipal bonds, etc.) have declined in yield. On Tuesday afternoon, the Fed “promised” to keep interest rates unusually low at least until mid-2013, an action which we believe will tend to drive more demand into trust preferreds, as they continue to exhibit the most favorable, non-leveraged yield in the market.

Have a good weekend, and certainly call with questions.

Jim Ulland

Domestic and world markets experienced a sharp correction this week, as fears over continued sluggish European and US economic recovery sent markets into a tailspin. The Dow, which on Thursday alone experienced a drop of 513 points (its biggest one-day decline since December of 2008) ended the week up 61 points on Friday, but down 699 points, or 5.75%, for the week, effectively wiping out all gains experienced to date in 2011.

In roller coaster-like trading on Friday, the Dow Jones initially soared above the 170 level after better-than-expected July employment numbers were released. The data showed that 117,000 jobs were added in July (above the consensus estimate of 84,000), along with a decrease in the unemployment rate from 9.2% to 9.1%. The rally was short-lived, however, as investors digested news that the drop in the unemployment number mainly stemmed from a decrease in the labor force as a number of discouraged workers stopped looking for jobs, and reflected on the realization that the jobless number has now stayed above 8% for 30 months – the longest stretch since the Great Depression. A report that Standard & Poor’s might downgrade US debt after the Friday market close added to the worry. The Dow remained negative until mid-morning, when news out of Europe that the European Central Bank might potentially buy Spanish and Italian bonds in order to reinforce their respective markets brought the index back into positive territory.

Earlier in the week, an agreement in Washington to raise the debt ceiling and achieve a workable budget while staving off default did little to prop up the markets, as continued concerns over the increasing amount of US debt, possible sovereign credit downgrading and stagnant economic/employment growth sent the markets sliding. This uncertainty and stress was reflected in the VIX index (Chicago Board Options Exchange Volatility Index), which earlier in the week rose to its highest level since July of 2010, more than doubling its value in the past month.

Benefitting from the market turmoil was gold, which hit an all-time high during mid-week trading, closing the week at $1,651.80, or up 1.3%. On the other hand, oil fell with the markets, closing the week at $86.88, or down 9.2% for the week, after falling 4.2% the week prior.

As mentioned last week, given the current stress in the market, we feel the safety and yield found within our trust preferred strategy is currently superior to other investment options, especially those featuring equities. Our trust preferred portfolios continue to yield 7-plus percent, while exhibiting much less volatility than that of an S&P-based equity portfolio. For example, for the Monday through Thursday time period of this week, the trust preferred positions in our portfolios were down only .95%, while the S&P 500 was down 7.10%.

Next week, the economic reporting highlight occurs on Thursday, when July retail sales data is released. Look for flat to modestly rising numbers, continuing the cautious consumer spending trend.