Archive for January, 2012

Disappointing corporate earnings reports and US economic data drove the Dow 74 points lower Friday.  For the week, the Dow posted declines in all but one day, finishing down 60 points, or .5%.  It was the Dow’s first weekly decline in 2012, though for the year, the index is still up 3.6%.

Domestically, economic data for the most part discouraged investors.  The Fed’s announcement on Wednesday that interest rates will remain low until 2014 and that further stimulus measures are not out of the question spurred markets for a day, but reports announcing a decline in December home sales, an increase in weekly jobless claims, and a lower-than-expected first estimate of fourth quarter 2011 GDP (the consensus estimate was 3.0% – actual was 2.8%) sent markets lower.  Though the GDP result was the highest growth rate since the second quarter of 2010, it’s worth noting that most of the growth came from inventory rebuilding.

In Europe, negotiations continued between Greece and its creditors, with progress reportedly being made.  Borrowing costs for Italy and Spain fell to levels not seen in months, though the two countries were downgraded by Fitch Ratings, with a mention of the chance of further downgrades in the next two years.

Trust preferreds continue their solid performance in the new year.  Through yesterday, Thursday, January 26^th, our trust preferred portfolios were up over 6.5% year-to-date.

Next week, economic reporting highlights include the release of January manufacturing data on Tuesday and the ever-important January employment numbers on Friday.  Look for manufacturing to remain relatively flat from December, the number of jobs created in January to decline slightly from December, and the unemployment rate to remain at 8.5%.

Ulland Investment Advisors was featured today in a Bloomberg article highlighting Trust Preferred securities, or “TruPS”. The article focuses on the high dividend trust preferreds currently offer, over 7%, which is compelling in today’s low yield environment. Several top fund managers and strategists are also quoted, which we feel confirms our strategy. Feel free to forward this to those searching for better yields.

Here are a few of the key points and quotes from the article.

Jim Ulland, CEO, Ulland Investment Advisors

“ ‘These are the best buy of any fixed-income in the market’… clients are getting an average of 7.75 percent on their trust-preferred portfolios”

“ ‘The most attractive TruPS are those that are trading below or just at par’ ”

“ ‘clients who want to buy TruPS…. (should use) a diversified portfolio of the securities backed by the largest U.S. banks’ ”

Josh Peter, Editor, Morningstar DividendInvestor

“ ‘What was a cheap form of regulatory capital is now just an expensive form of long-term financing. The advantages for big banks to have them are essentially going away’ ”

(and thus trust preferreds will be redeemed at par over the next four years)

Guy LeBas, Chief Fixed Income Strategist, Janney Montgomery Scott

“Even with regulatory changes, not all TruPS will be called immediately. That would require a big outlay of capital”

“ ‘We’re in a yield-starved environment. With 10-Year U.S. Treasuries yielding less than 2 percent. That type of return won’t help investors with their retirement goals.’ ‘’

Phil Jacoby, Chief Investment Officer, Spectrum Asset Management

“ ‘Although TRuPS investors do have to be aware of the risk of banks failing, there’s not likely to be a better income game in town when comparing preferred yields relative to their overall long run historical default characteristics’ ‘’

A link to the entire article can be found here:

http://www.bloomberg.com/news/2012-01-04/bofa-trust-preferreds-tempt-investors-with-high-yields.html

 

 

On the strength of corporate earnings and positive US economic data, the Dow posted gains on all four trading days this week, finishing up 298 points, or 2.4%.  It is the Dow’s third weekly gain in a row and its sixth in the last eight weeks.

In Europe, the focus was on Greece and its ability to negotiate with international lenders.  Greece is trying to cut its debt by 100 billion euros by offering to exchange old Greek bonds with high interest rates with new bonds with lower interest rates.  The sticking point is how low the interest rates on the new bonds will be.  The difference between the new and original interest rate will be the “haircut,” or loss the lenders will have to realize.  Greece wants lower rates on the new bonds, lenders want higher rates.  Negotiations continue, with hopes of a solution before Greece’s next round of bond payments in mid-March.

Oil fell below $100 per barrel, ending the week at $98.33.  The decline was attributed to a contraction in Chinese manufacturing and Greece’s ongoing debt crisis negotiations, as well as a softening of rhetoric from Iran concerning the closure of the Strait of Hormuz should an oil embargo be imposed.

Trust preferreds continue to show solid performance in 2012.  Through yesterday, Thursday, January 19^th, our trust preferred portfolios were up over 5.5% year-to-date.

In the US, though housing starts were down, building permits remained level and housing sales increased in December from the prior month (the third straight monthly gain).  Jobless claims fell 50,000 to 352,000, the fewest since April of 2008, and the core inflation rate, which excludes energy and food prices, came in at 2.2% for 2011, the highest rate since 2007 but still one deemed acceptable by the Federal Reserve.

Next week, attention will be focused on Wednesday’s Federal Open Market Committee meeting during which the Fed will release, for the first time, its own interest rate projections, inflation objectives, and perhaps even an unemployment rate target.  Also up for debate is another round of stimulus, though the recent emergence of better economic data will most likely delay any such action.  December new home sales data on Thursday and the first estimate of Q4 2011 GDP on Friday will round out the weekly data release.  Look for home sales to increase slightly and Q4 GDP to increase to around 3% from 1.8% in Q3.

Have a good weekend,

James Skjong

 

 

On Friday, European concerns put a halt to the new year rally, dropping the Dow 49 points.  For the week, the Dow managed a 62 point gain, or .5%.

Early in the week, news out of Europe was reassuring, as both Italy and Spain experienced successful bond auctions (in both quantity sold and price).  Nervousness, however, resurfaced Friday on news that Standard & Poor’s was set to downgrade multiple European countries, including France and Slovakia.  Downgrades would raise the cost of funding the Eurozone bailout fund, as borrowing costs are dependent upon the credit quality of the countries that back it.  This could cause a negative ripple effect, as in turn the rescue fund would have to pass on its higher borrowing costs to already struggling countries, hindering budget balancing efforts.

In the US, consumer confidence rose, but so did initial jobless claims, though the number again remained below 400,000. Retail sales were up but were less than estimates.

Developments in the Middle East and Strait of Hormuz keep oil in the spotlight.  Oil closed below $100 at $98.11, mainly on news that a European oil embargo will be delayed by up to six months so alternative supply can be found.

Trust preferreds have performed well so far this year.  Through yesterday, Thursday, January 12^th, our trust preferred portfolios are up almost 5% year-to-date.  In case you missed it, last week Ulland Investment Advisors was featured in a Bloomberg article highlighting trust preferred securities. Below is a link to the article:

http://www.bloomberg.com/news/2012-01-04/bofa-trust-preferreds-tempt-investors-with-high-yields.html

If you know of someone who might be interested in our trust preferred strategy, please contact Nat Beebe at nat.beebe@ullandinvestment.com or 612-312-1402, or you can e-mail the article by using the e-mail icon at the bottom of the this article.

Next week, economic reporting highlights include the release of December inflation data on Wednesday and Thursday and December housing data on Thursday and Friday.  Expect inflation to remain a non-issue and housing starts and existing home sales to dip slightly from November.

In observance of the Martin Luther King, Jr. holiday, our offices will be closed on Monday, January 16^th.