Archive for March, 2012

Favorable European news and an uptick in domestic consumer spending and consumer confidence helped carry the Dow to a 66 point gain on Friday, the last trading day of the first quarter of 2012.  For the week, the index was up 1.0% and for the quarter, the Dow finished up 8.1%, its best first quarter since 1998.

Reports that Eurozone finance ministers agreed to raise the ceiling of the region’s rescue program to $1.1 trillion combined with austerity measures announced by Spain to cut spending and raise taxes lent optimism to the end of the trading week.  In the US, consumer confidence reached its highest level in more than a year while consumer spending increased by a level not seen since last July.  On Thursday, a decrease in initial jobless claims helped reverse a slight malaise created by a decline in durable goods orders.  On the whole, US economic data reported in the first quarter was generally positive, though Fed Chairman Ben Bernanke, in comments made this week, expressed caution, stating there is still much room for improvement in job creation and the economy in general.

Oil continues to trade above $100 per barrel as tensions in Iran remain elevated.  Though oil prices have fallen almost 4% in March, the commodity is still up approximately 4.25% year-to-date.

Our trust preferred portfolios had a nice first quarter and continue to outperform the Dow by approximately 3%, on average, returning almost 10% year-to-date through yesterday, Thursday, March 29^th.

Next week, economic releases of note include initial jobless claims on Thursday and the March employment report on Friday.  Expect initial jobless claims to decrease slightly to 355,000 from 359,000 the prior week, and for the number of jobs created in March to increase from February, dropping the unemployment rate from 8.3% to 8.2%.

Have a good weekend,

James Skjong

 

The energy sector helped push the Dow up 35 points on Friday, breaking a three-day losing streak.  For the week, the Dow was down 152 points, or 1.2% – the index’s largest weekly loss of 2012.  For the year, the Dow is now up 7.1%.

Another quiet week in Europe put attention on the US economy, where softer-than-anticipated February housing data contributed to market declines.  Though building permits surprised to the upside, housing starts, existing home sales and new home sales data all came in below expectations.  Outside of Europe and the US, China reported a decrease in manufacturing activity for the fifth month in a row, the longest stretch of decline since the global financial crisis began.  This is important as manufacturing comprises approximately 1/3 of China’s GDP.  Earlier this month, China dropped its annual growth target to 7.5% from the 8% goal it has strived for since 2005.  In light of these numbers, pressure is mounting for China to adopt economic reform, specifically actions to help increase personal consumption, which currently only accounts for 1/3 of GDP (as opposed to 2/3 in the US).

Reports that Iranian oil exports have fallen 14% in March due to Western sanctions helped oil rise above $108 per barrel on Friday in intraday trading.  Expectations of further US sanctions against Iran and reductions in Iranian oil exports have propped up oil prices as the US continues to confront Iran and its nuclear energy program.  For the year, oil is up 8%.

Our trust preferred portfolios continue to perform well, on average returning over 10% year-to-date through yesterday, Thursday, March 22^nd, outperforming the Dow by approximately 3.5%.

Economic reports of interest next week include consumer confidence on Tuesday, initial unemployment claims on Thursday and manufacturing on Friday.  Expect the consumer confidence reading to increase slightly, initial jobless claims to remain around 350,000 and the manufacturing number to continue to indicate expansion in the sector.

Have a good weekend,

James Skjong

 

After seven straight positive trading sessions, the Dow lost momentum on Friday, closing the day down 20 points.  For the week, the Dow gained 310 points, or 2.4%, its best weekly gain since mid-December.  For the year, the Dow is now up 8.3%, the index’s best yearly start since 1998.

It was quiet in Europe as Greece and its lenders continued to digest the effects of the debt restructuring completed last week.  Overall, European stocks posted their biggest weekly gain since early February on the easing of tensions related to the sovereign debt crises and positive comments from the US Federal Reserve that the US economy is gaining strength.  Backing the Fed’s comments was a number of generally positive US economic indicators.  February retail sales were up, initial weekly jobless claims again fell week-over-week, and manufacturing data showed improvement.  The consumer price index ticked up slightly in February due to a 6% increase in gas prices, but remains in check.  Perhaps related to the price data, March consumer sentiment fell slightly from February, worth noting as consumer spending accounts for 2/3rds of the US economy.

Oil closed up $1.95 to $107.06 per barrel on Friday, a day after a report that the US and Britain were poised to cooperate on the release of strategic oil reserves quickly dropped the price $3.  The commodity rebounded when the White House commented that no action is imminent, but the price swing showed the sensitivity of oil markets to a release of reserves.

On the strength of the major US Banks passing the Fed’s stress test examination (announced Tuesday), our trust preferred portfolios performed well this week and continue to outperform the Dow, returning over 10% year-to-date through yesterday, Thursday, March 15^th.  Though the passing of the stress test does not guarantee complete safety from a financial crisis, the news was viewed as a positive, and many banks, in a show of strength, announced share buyback plans and increased dividend payments.

Next week, the state of domestic housing dominates the economic agenda as February housing starts, existing home sales and new home sales data are scheduled to be released on Tuesday, Wednesday and Friday, respectively.  Look for housing starts and existing home sales to increase and new home sales to remain flat.

Have a good weekend,

James Skjong

 

 

Even with the economic indicators turning positive, the fixed-income market, which generally reacts negatively to stronger economic growth, remains at historic highs. For investors seeking yield, that hasn’t been good news, since yields are near historic lows.

Last week the securities markets cheered as Greece exchanged a large portion of its government debt for bonds of substantially less value, thus averting a default. This was the last major part of the European leaders’ plan to stabilize the Greek budget, which plagued financial markets throughout 2011. This capped off an effort last month, during which the European Central Bank poured cheap money into European banks, allowing them to buy European government bonds, which has driven their prices up and yields down.

With the markets beginning to believe that the European banking crisis will be averted, fixed-income investors are left with fewer and fewer havens for their money. The three-month string of solid U.S. jobs reports and an upward revision of fourth-quarter 2011 GDP have further fueled the rally in bond prices.

The dilemma for fixed-income investors in 2012 is that inflation, using the most recent CPI data, is running at an annual 2.9 percent. Almost all traditional fixed-income securities pay less than the inflation rate. At today’s interest rates, investing in corporate bonds, municipal bonds, government bonds, CDs and money markets causes investors to lose purchasing power.

Last year was the year of the municipal bond, as those assets defied the ill-placed predictions of massive municipal defaults. Instead, municipal bonds rallied, helping the SPDR Nuveen Barclays Capital Muni Bond fund to achieve a 13.85 percent return in 2011. Going forward, a St. Paul general obligation bond issued in 2011 and maturing in 2016 now has a yield of 2.74 percent.

Other traditional fixed-income securities such as real estate investment trusts are yielding just 3 to 4 percent, and public utilities about the same.

Yet banks provide a unique security — trust preferreds — that generate yields of 6 percent to 8 percent. These securities combine debt and preferred stock features and are ranked higher than traditional preferred issues but below corporate bonds in the capital markets food chain, which determines the order in which investors are repaid in the event of a corporate bankruptcy.

Trust preferreds have other notable characteristics besides their compelling yields. For instance, none of the largest 50 banks has ever missed a quarterly dividend payment on their trust preferreds, even through the 2008-2009 financial crisis.

Since 1996, banks have issued trust preferred shares to build regulator-required capital. The main difference, from the banks’ view, between trust preferred shares and traditional preferred issues, is that the dividend on trust preferreds is tax deductible whereas the dividend on traditional preferreds is not. More than $100 billion of these publicly traded securities have been issued.

Trust preferred shares offered by Wells Fargo, for example, pay about 6.2 percent and trust preferred shares issued by U.S. Bank have current yields of 6.4 percent. If Wells Fargo or U.S. Bank missed the payment of the quarterly dividend (which has never happened), the unpaid dividend accumulates just like a missed bond interest payment. This cumulative feature is an added layer of protection.

Wells Fargo expects to redeem many of its trust preferreds at their $25 face value in the next one to three years. This anticipated redemption has trust preferred shares looking like high-yielding, investment grade, short-term corporate bonds. By comparison, corporate bonds, such as those of Target and General Mills, have yield-to-maturities of 1.76 percent and 2.01 percent, respectively, for bonds maturing in 2017.

All investments have risks. The risk in trust preferreds is the solvency of the banks. Fortunately, banks continue to get healthier as bad loans diminish, more capital is raised, and earnings return more to normal. But investors need to be mindful of the fact that trust preferreds are only issued by banks, resulting in the risk of overconcentration in the financial services sector.

For corporate bonds, the risk is the health of the corporation. For muni bonds the risk is the solvency of the city or state. But both corporate bonds and municipal bonds can provide more diversification for investors since bonds can be purchased in numerous issues across industries or municipalities. Investors should build a diversified portfolio to manage the risks of concentration and credit quality of a specific issuer.

Still banks, through their trust preferred shares, may provide the best option to overcome inflation and obtain an attractive return in this yield-starved market.

 

Written by Jim Ulland for the Star Tribune as featured in the link below