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Archive for February, 2016

Weekly Market Update – February 12, 2016

The Dow gained 314 points Friday as European markets rebound and crude oil moves higher. For the week the Dow was flat and for the year the index is now down 8.5%.

The pressure on the financial sector so far this year is from the concern that the US and the world are headed into a recession and that the European banks are under a lot of stress. 

On Friday, NY Fed President Dudley stated that softness in some recent economic indicators should be weighed against labor-market strength and the improved ability of the household sector to absorb shocks. Initial jobless claims fell 16,000 to 269,000 during the week ending February 6. Up to this week, more than three quarters of S&P 500 companies have reported earnings, with 50% beating expectations.

Around the world in Q4 GDP, China was up 6.9% annualized, India was at 7.1% and these two comprise 37% of the world population.  In October, the IMF forecasts 2015 as follows: Asia Pacific and Africa as both up 5-6%, Europe is up 1-2%, and Brazil and Russia are the only countries of size that are negative. The 2016 U.S. growth is expected in the 2-2.25% range. 

Interest rates on the 10 Yr. Treasury have fallen to 1.75% after hitting 2.3% when the Fed announced the 25bp increase in December.  This atmosphere should be ideal for fixed income with the exception that Deutsche Bank, the largest in Germany and one of the few not to require aid in 2008, had a loss in 2015 of $7B.  Although the majority of the loss was from regulatory penalties and thus one-time in nature, pressure has continued on Deutsche Bank and on all US and European banks through mid-week.

By Friday, bank common and preferred stock had started to recover on the news of Deutsche Bank’s buyback of over $5 billion in senior debt and JPMorgan CEO Jamie Dimon’s common stock purchase of $26 million. Shares in Germany’s Commerzbank soared more than 18% after the bank said it would pay its first dividend in five years.  We expect all portfolio European and US banks to continue to pay their expected preferred dividends.  Once the markets settles, we feel the price decline in bank preferreds will reverse, as we started to see Friday. The negative short term rates in Europe are added incentives for investors to return to these high paying securities soon. 

Our office will be closed on Monday for President’s Day and will be open on Tuesday (Feb. 16).  Coming up next week is the FOMC minutes on Feb. 17, and the consumer price index on Feb. 19.

Weekly Market Update – February 5, 2016

The Dow fell 211 points Friday on the heels of a solid January jobs report.  For the week the Dow was down 1.6% and for the year the index is now down 6.9%.

The employment report showed a gain of 151,000 jobs in January (versus the estimate of 190,000) while December’s 292,000 gain was downwardly revised to 262,000.  The unemployment rate fell to 4.9% from 5.0%.  Average hourly earnings rose .5% from December. 
The positive wage growth helped counter the softer-than-expected job number and provided ammunition for the Fed to continue to raise interest rates in 2016, an action that was previously in doubt due to the lackluster start to the year for US and global markets.  Markets responded poorly to the report, fearing that additional interest rate increases will cause the dollar to become even stronger, further negatively affecting oil prices and US exports.

The yield on the 10-year Treasury fell 2 basis points (bps) Friday to 1.85%, down 8 bps for the week and now down 42 bps for the year.  Trust preferred shares were down slightly with the broader market but steady.

Earlier this week, Deutsche Bank announced a $7.3 billion loss for 2015.  Of the $7 billion loss, $5 billion was due to regulatory penalties.  Most believe the penalties are one-time in nature.  We are conducting a full review of the other European banks in the portfolios and feel the regulatory uncertainty is limited to Deutsche Bank, as most of the other European banks we use have a larger retail focus and are profitable with high levels of capital.

Oil closed $.83 lower Friday at $30.89, down 8.8% for the week.  Data released Friday showed the number of US drilling rigs in operation declined by 31 in the previous week.  US oil production is expected to show a large decline during 2016.  On Sunday, Venezuelan Oil Minister Eulogio Del Pino and his Saudi Arabian equal are set to discuss the current state of OPEC and the oil market in general.  With Venezuela’s economy in dire straits due to the oil’s collapse, Del Pino will be pushing for OPEC to strike a deal among its members and Russia to curb production.

Next week’s economic calendar highlights include weekly jobless claims on Thursday and January retail sales on Friday.  Expect weekly jobless claims to settle in the 280-290,000 range (from 277,000 this week) and retail sales to be relatively flat compared to December. 

 

Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464