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Archive for April, 2020

Weekly Market Update for April 24, 2020

by Jim Ulland

There was little dramatic news on the Covid-19 front from this week and the market ended a percent below where it started on Monday. Gilead’s treatment drug, Remdesivir, had some negative news from an uncompleted trial in China which disappointed the market. Three more trial results will be released by the end of May. News of progress on a vaccine will be market moving when it comes. The news we did get was more incremental. Deaths are declining and so are hospital admissions. Equipment shortages are less and the US is now sending ventilators to foreign countries to help them.

Important announcements came from several states, including Minnesota, which are allowing people to go back to work. Weekly unemployment claims declined, but were still at the fourth highest level in history. Admittedly, it is a delicate balance in getting people back to work and keeping them safe at the same time. Naturally this is easier in lightly populated area than it is in cities.

Securities trading improved this week. Volatility was lower and this is reflected in the volatility index called the Vix. Under normal market conditions, the Vix index is between 10 and 20. At the peak of distress in March, the Vix shot up to 70. This week’s Vix looked like this Monday +14.9%, Tuesday + 3.6%, Wednesday -7.6%, Thursday -1.4%, and Friday -13%. For the week, the Vix was down 4.8% to 36. Low volatility helps both fixed income and stocks. High volatility disrupts the market and can trigger harmful illiquidity. The pattern for the S&P 500 this week reflected lower volatility. Monday the S&P was -1.8%, Tuesday -3%, Wednesday +2.3%, Thursday -0.1%, and Friday +1.3%. The weakest sectors this week were banks (again), real estate (again), and utilities. Energy had rebound as the announcements of people going back to work increased.

In portfolios, we are putting cash back into the market gingerly. We continue to favor those companies that will benefit from new customer behavior. This means more technology than other sectors. Healthcare is also attractive as both medical need and government funding drives expectations.

Our fixed income strategy using preferred stock had a week of further gains. The returns on 10 Year Treasuries ended the week at 0.61% whereas the 5.56% annual yield on preferreds is nine to ten times higher and continues to be compelling.

Next week will have a lot of market moving earnings announcements: Facebook, Google, Visa, Apple, an, Amazon. Each will move the market.

Contact us as you have questions. We are delighted to have referrals to those you know who need income from their investments.

*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 for April 17, 2020

by Jim Ulland

The signs are evident that the market has ended its sharp decline and started a recovery. The market’s drop came directly from Covid 19, so we should look for signs of recovery there as well. The most dramatic news was from a trial by pharmaceutical company Gilead, which had preliminary data released on a Covid-19 treatment, where nearly everyone in the trial got better! Gilead’s stock rose 10% as did the country’s spirits and the stock market.

A second sign came from New York City which reported that death rates and hospital admissions were declining. This happened sooner than expected. Hospital beds in other hot spots are available and several temporary hospitals have been disassembled or reduced in size.

The third sign was a change in the tone of discussion on Covid-19. The discussion has shifted from “shelter-in-place” to finding safe ways to get people back to work. A vaccine is essential in the long term to get people comfortable with being close to other people whether in restaurants, planes, or sporting events. But a vaccine with take up to 12 months. Johnson&Johnson promised one on Tuesday. However, in the short term, testing is critical. Huge test capacity is on the way. Testing for Covid-19 might be the new TSA line.

Governors started announcing additional businesses that may reopen including logical ones like golf courses, marinas, and craft stores. Guidelines for reopening were being formulated and announced.

Securities trading improved this week. Volatility was lower and this is reflected in the daily market movements. The pattern for the SP500 this week was Monday -1%, Tuesday +3.1%, Wednesday -2.2%, Thursday +.6%, and Friday +2.7%. The weakest sectors this week were banks, real estate, and oil and gas. Retail had a little rebound, led by Walmart, Target, Amazon, and Costco which have been strong all year. The rest of retail is very stressed.

In portfolios, our strategy of reducing equity exposure has ended. We are putting cash back into the market gingerly. Those companies that will benefit from new behaviors are favored. For instance Amazon and Alibaba will see a permanent increases in business with their market leading home delivery. The more-time-at-home gaming companies Electronic Arts and Tencent are benefiting. Healthcare, of course, will have a long-term benefit especially those in testing, vaccines, and treatment. Technology continues to be the best positioned sector for the needs of the “new economy.” The NASDAQ was up 6% this week.

Our fixed income strategy using preferred stock had a week of strong gains. The returns on 10 Year Treasuries ended the week at 0.64% whereas the 6-6.5% annual yield on preferreds is ten times higher and continues to be compelling. One of the preferreds we use is issued by Synchrony Financial. It was up 10% on Friday! Contact us as you have questions. We are delighted to have referrals to those you know who need income from their investments.

*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 for April 10, 2020

by Jim Ulland

You probably remember the Dinah Washington song, “What a Difference a Day Makes.”  The four days of this week sure did that. Preferred stock had a breathtaking rebound and the S&P 500 was up over 12%, the biggest gain since 1974.  Our portfolios reflected these gains. The enthusiasm was triggered by investors feeling that progress was being made on Covid 19 and that the country would be back to work, at least mostly by May 1st. In Minnesota, 80% of the jobs can either be done remotely or have been deemed essential. The economic prospects were boosted by the passage of huge government programs to help people pay their rent and other obligations as well as to reduce layoffs and bankruptcies from certain distressed firms like restaurants, airlines, small business, and those working independently. There have to be jobs to return to for those on unemployment

The first quarter was a reminder about how harsh markets can be and the patience required to manage through these stressful periods. The equity market was down about 20% depending on index choice as shortly ago as April 1st.  During the first quarter our equity strategies were down a little less than the market in most portfolios.  Preferred stocks were down less than equities but more than we expected. Why did this variance occur and what do we expect for the rest of the year.

Almost all of the market stress in the first quarter came from the rapid onset of Covid 19, which had no vaccine or treatment.  Such a fear emerged in the equity markets, that there was a strong move to cash by investors who sold virtually anything that was publicly traded including fixed income.  The selling pressure was intense, complicated by the fact there were few buyers. One desk told Nat that there were 50 sellers for every buyer. Liquidity was tight and bid/asked spreads were wide. Our strategy during this  period was to look for mispricing and take advantage of distressed situations. With interest rates trending down, we also repositioned out of some floating rate securities into fixed rate. 

Ten days ago, after a couple days of better liquidity, the European bank regulators forced European banks to suspend their common stock dividends but not the dividends on preferreds. We have no European bank common stocks or preferred stocks in our portfolios.  However, this regulatory move raised concern that the US banks might confront the same restriction as a capital preserving measure. Thus, US bank securities including preferreds had another substantial drop. Our view at that point was it was unlikely for US regulators to stop US bank common stock dividends and that it was exceedingly unlikely they would force preferred dividends to pause, which would raise unnecessary and unfounded concerns about bank liquidity/solvency. Part of our reasoning was that US banks already had agreed to stop stock buy-backs which comprise 70% of the total return of capital to shareholders, only 30% is from dividends.

This week liquidity returned to the preferred markets and prices rose dramatically.  What triggered this was the fact that the yield on preferred had become about ten times higher than the yield on the 10 Yr. Treasury, .65% vs 6.5%. Less volatililty as shown by the decline in the VIX volatility index also helped. When Fed Chair Powell was asked Thursday about forcing the banks to eliminate their common stock dividend, he said, “I don’t think that is something that needs to be done…not appropriate at this time.”  Preferred stock dividends are paid before common stock dividends, so as long as banks have common stock dividends, they must pay the preferred stock dividends first. Preferreds moved higher on his remarks. We feel investors will continue to move funds from cash and government bond into preferreds to take advantage of the 9-10 times higher yield.

Our goal is to have portfolios close to even by year-end, but it is likely to be a bumpy road getting there.

*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 for April 3, 2020

by Jim Ulland

What will be the sign that the market has ended its sharp decline and started a recovery?  The market’s drop is virtually 100% attributed to Covid 19.  So what should we watch as a signal for the recovery?

The first sign will be a decline in the death rate.  This should happen in the later part of April in New York, the US epicenter.  A slightly earlier signal may come from the relationship between those admitted to hospitals and those released as recovered. Having more released than admitted will reduce the  reported deaths and free up hospital beds.  The rapid decline of the flu also is making beds available.  As a side note, through April 1st, there have been 18 deaths in Minnesota, eleven of which were in assisted care facilities and similar residences for seniors.

The second sign to watch is successful trials of vaccines and treatments.  The malaria and antirheumatics drug, hydroxychloroquine, has had small but relatively positive trials for Covid 19.  The advantage of this drug is that it has been used for 70 years for malaria prevention, so side effects and dosages are known.  Production could be ramped quickly.  We hope larger trials are positive. New drugs trials take longer to determine harmful side effects.  Ramping production also is more challenging.

Securities trading has improved a little this week.  The market publishes a volatility index.  It was lower at the end of the week than the beginning. Why is this important?  During high volatility, buyers often stop buying.  At the same time, sellers increase sales.  For instance, if an investors sells shares in a mutual fund or an ETF, the fund must sell the under lying securities almost immediately.  With few buyers and a lot of sellers, prices can fall a lot and in ways that don’t reflect the value of the security being sold. Imbalances between buyers (few) and sellers (many) are called periods of low liquidity.  Low liquidity is one of the causes of high volatility.  High volatility results in investors reacting to fear rather than value.  A continued decline in volatility, like this week, will help the market recover.

Here is the pattern for the S&P 500 this week: Monday +3.3%, Tuesday -1.6%, Wednesday -4.4%, Thursday +2.3%, and Friday -1.5%. The weakest sectors this week were financials, real estate, utilities, and retail. The concern in real estate and utilities was the new fear that consumers might not be able to pay their rent or utility bills.  Hopefully, the massive government rescue package will provide some replacement income. In Minnesota the Governor estimated that 78% of the state’s jobs can be performed at home or are in essential industries.  If a worker is in an essential industry and can work at home, they must. With 78% of workers still working, the economy in MN should recover more quickly than if a larger number were out of work.  Naturally, the balance between working and isolating is key.

Our team has made an orderly transition to working remotely although we have lost a little efficiency.   Calls to the office are automatically routed to our remote phones.  Emails are available as normal.

In portfolios, our strategy of reducing equity exposure and leaving the cash generated in cash or moving it to fixed income continues. We are waiting for the signals in paragraph one to reinvest.  Fixed income in preferred stock held on to most of last week’s gains. However, European banks did eliminated their common stock dividend, which caused a down day in US preferreds.  We own no European banks and we expect all US bank and utility company preferred dividends to be paid. Preferred dividends are paid prior to common stock dividends. Yet, it was a market concern. The returns on 10 Year Treasuries fell to 0.61% whereas the 6-7% yield on preferreds is ten times higher and increasingly compelling. Time is our friend.  Contact us as you have questions.

*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