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Archive for June, 2017

Weekly Market Update – June 30, 2017

The Dow finished up on Friday, rising 63 points to close at 21,350. For the week, the Dow fell 0.2% (S&P 500 -0.6%) and year-to-date is now up 8.0% (S&P 500 +8.2%). Once again the market lacked direction, with a Thursday morning Technology-led slide giving way to a late week rally following positive headlines in the Financials sector. The yield on the 10-year Treasury rose 7 bps on Friday to 2.30%, up 16 bps for the week. Globally, central bankers spoke of dialing back stimulus support as economies continue to improve, which should support a pickup in inflation.

US economic data was largely positive this week. Housing data for pending homes was slightly disappointing while durable goods orders were weak; however the rest of the data looked good. Both measures of consumer confidence showed sequential improvement. Personal income and spending for May were slightly ahead of expectations, while the third (and final) Q1 GDP estimate revision surprised to the upside. Q1 GDP expanded at a 1.4% rate versus a 1.2% prior estimate and 0.7% initial (first read) estimate. Recent positive revisions were driven by stronger consumer spending (albeit still subdued) and greater exports. In China, data also upwardly surprised as both manufacturing and non-manufacturing PMI’s showed sequential improvement, along with strong new orders.

The Fed released solid results from the Dodd-Frank stress tests (DFAST) last week and this week they kept the positive Financials vibe going by approving the capital plans of all banks participating in the Comprehensive Capital Analysis and Review (CCAR). Some investors were worried that Wells Fargo might fail the qualitative test, which they passed. J.P. Morgan was one of the clear winners with their capital plan, announcing an intent to repurchase $19.4bn of equity and pay $7.6bn in dividends over the next 12 months, for a total of $27bn returned to shareholders. That represents more than a 50% increase versus the 2016 plan and dramatically outpaced analyst estimates. We own equity (and fixed income) positions in both of these companies, and both equities were up over 5% this week.

The price of crude oil rose 7% this week to $46 a barrel – down 14% YTD. Crude stockpiles showed a smaller-than-expected draw – of 1.3m barrels – but product inventory of gasoline (-0.9m bls) and diesel (-0.2m bls) both fell as well. Oil finished off its seventh straight day of gains Friday with global inventories continuing to draw. While investor sentiment has become very bearish, there are a number of cyclical catalysts that could push prices higher and we see geopolitical risks among oil-producing countries rising as well.

Next week’s economic calendar highlights will include June manufacturing indices on 7/3, June automotive retail sales on 7/3, the release of the June FOMC minutes on 7/5, and the June jobs report on 7/7. Manufacturing activity is expected to improve, auto sales should remain flat, and the jobs report is expected to show sequential improvement (+180k jobs added) from the disappointing May report (+138k).

We’d like to point out that this coming Monday we will be closing for the day at 1 p.m. CT and the office will not reopen until 8 a.m. on Wednesday morning. If you’d like to speak with us next week, please take note.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

 

Weekly Market Update – June 23, 2017

The Dow finished down on Friday, falling 1 point to close at 21,396. For the week, the Dow rose 0.1% (S&P 500 +0.2%) and year-to-date is now up 8.3% (S&P 500 +8.9%). The market struggled for direction this week, while ripples continued through the consumer space driven by Amazon encroachment concerns.  The yield on the 10-year Treasury finished flat on Friday at 2.14%, down 1 bp for the week.

US economic data were mostly neutral this week. Housing data for existing and new homes came in better than expected after housing starts disappointed last week. Initial jobless claims were as expected. Preliminary US manufacturing PMI disappointed at 52.1 versus the 53.0 consensus; this indicator of manufacturing growth has been in decline since January, although new orders were robust.

The flattening yield curve (i.e. short-term rates rising while long-term rates are stable or declining) is somewhat confounding markets. Some interpret this as a signal of weaker growth and higher risks ahead (note: recession risk is still very low though according to a number of prognosticators), at the same time that the Federal Reserve is showing more resolve to continue raising short-term rates. However, some argue that low rates here are a result of low rates everywhere. As global rates remain low, there has been a “reach for yield” movement into investment-grade, high-yield, and emerging-market debt securities. As spreads of these securities have been narrowing over Treasuries (the spread essentially being your return for higher risk), we continue to like the niche we have carved out in the Preferreds market, with its excellent yield and only modest risk.

The Fed released results of the Dodd-Frank stress tests (DFAST) this week and showed that all 34 of the largest US banks met the minimal capital requirements required to absorb losses and support operations during an economic downturn. The “severely adverse” scenario included a 10% unemployment assumption and a 35% drop in the commercial real estate market. As we have pointed out, the large banks are in much, much better positions today than they were before the 2008 credit crisis or during the following recession; hence, we feel comfortable with an overweight position in the group.

The price of crude oil fell 4% this week to $43 a barrel – down 20% YTD. Crude stockpiles showed a larger-than-expected draw – of 2.4m barrels – and product inventory of gasoline fell (-0.5m bls) while diesel rose (+1.1m bls) again. This report was more neutral after negative surprises the past two weeks.

Next week’s economic calendar highlights will include preliminary durable goods and capital goods orders on 6/26, consumer confidence on 6/27, pending home sales on 6/28, another Q1 GDP revision on 6/29, and May personal income and spending on 6/30. Goods orders are expected to tick up versus last month; consumer confidence is expected to tick down along with personal spending and income; while pending home sales should improve and GDP should be unchanged versus the prior reading.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

The Risks of Passive Investing – Trouble Ahead for PFF?

Much has been written about the benefits of investing in passive exchange-traded funds (ETFs), namely market returns with a low management fee. However, investors need to consider the unique risks that arise when an ETF begins to dominate a niche space such as the preferred market.

In this article we will evaluate the largest ETF in the U.S. preferred stock market, the iShares U.S. Preferred Stock ETF (Ticker: PFF), which currently holds nearly $17 billion in assets. As an active preferred stock manager, Ulland Investment Advisors manages just over $225 million in the preferred space. We can offer a unique insight into the hidden risks associated with the PFF ETF, specifically focusing on market size risk, liquidity (or lack thereof) and interest rate risk (duration).

Weekly Market Update – June 16, 2017

The Dow finished up on Friday, rising 24 points to close at 21,384. For the week, the Dow rose 0.5% (S&P 500 +0.1%) and year-to-date is now up 8.2% (S&P 500 +8.7%). The yield on the 10-year Treasury rose 3 bps on Friday to 2.15%, after falling 9 bps on Thursday – our year-end expectation remains 2.75%.

US economic data were mostly negative this week. Retail sales, capacity utilization, housing starts, consumer sentiment, and industrial production all came in weaker than expected.  The NFIB Small Business Optimism Index and the Federal Reserve rate decision were as expected, while inflation measures were mixed (PPI better, CPI worse). With inflation continuing to run below 2%, the Fed decided to lower its Core PCE inflation projections to 1.7% in 2017 from 1.9% previously.

Wednesday, the Fed raised the Federal Funds Rate for financial institutions to a range of 1.00-1.25% from 0.75-1.00% previously, as expected. They also announced plans to allow maturities from assets held on their $4.5tn balance sheet to begin “rolling off” instead of being reinvested – gradually increasing the rate of roll offs from $10bn monthly to $50bn monthly – although no precise timing of when this process would start was given. This is another tool the Fed can use to tighten monetary policy. We expect one more rate hike this year, while the market places a 43% probability today (most likely in Q4).

As we noted last week, leadership from the mega-cap technology companies (e.g. AAPL, GOOGL, FB) has begun to slow or stall. We have become concerned in recent weeks that the technology space was becoming a bit “crowded” amongst investors and have thus been strategically trimming positions on the equity side and redeploying into Industrials and Financials companies where sentiment is more subdued today. I say “strategically,” meaning we are not touching our expected long-term secular winners like Amazon or Alibaba, but instead trimming names where the competitive advantage may be less defensible. Of note today, Amazon announced a $13.7bn purchase of Whole Foods Markets at a 27% premium and yet Amazon shares rose 2.5% on the news, a sign of approval by investors.

The price of crude oil fell 2% this week and is now under $45 a barrel – down 15% YTD. Crude stockpiles showed a smaller-than-expected draw – of 2.1m barrels – and product inventory of gasoline (+2.1m bls) and diesel (+0.3m bls) rose again. We have seen two consecutive negative reports; however, global inventories are still declining and we remain positive. Skepticism regarding OPEC’s ability to right-size global inventories remains an overhang on crude prices. OPEC believes their current production cut is enough to correct inventories, but may consider adjustments to the cut if it is insufficient.

Next week’s economic calendar highlights will include existing home sales on 6/20, initial jobless claims on 6/22, Markit US PMI on 6/23, and new home sales on 6/23.  The housing data is expected flat-to-slightly better than last month, while preliminary manufacturing activity is expected to tick up.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

 

Ulland Investment Advisors

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