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Market Commentary Archives

Weekly Market Update for April 3, 2019

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.

Weekly Market Update for March 27, 2020

by Jim Ulland

Huge volatility continued this week, but more of it was because the market was going up rather than down. Preferreds had a particularly good week and we were actively trading this market and putting cash to work.  The same was not true with equities.  Although equities had a great recovery, we continued to lighten positons and accumulate cash.  Where a client has both equities and fixed income, we moved some of the cash being generated to fixed income.

Here is the pattern for the S&P 500 this week: Monday -2.9%, Tuesday +9.4%, Wednesday +1.2%, Thursday +6.2%, and Friday -3.4%. The S&P 500 was up 10.3% in total over the last five days.  Part of the favorable news came from the White House and Congress as the large relief package was passed.  This was offset somewhat by the increasingly bad Covid-19 news from New York, where higher numbers of people are infected.

During the week, the Governor of Minnesota followed several colleagues around the country and, by executive order, required people to stay home starting Friday at midnight.  All of our office will be working remotely starting Monday.  Investment advisory firms are required to have a “Disaster Plan.” Ours is working as expected and the equipment to do our trading and record keeping is already in use remotely. Basically, our computers at home login directly to our computers at work, which allows us to have secured lines for data and client information.  Calls to the office are automatically routed to our remote phones.  You can continue to use our existing numbers: Nat Beebe at 612-312-1402, James Skjong 612-312-1406, James Ulland 612-312-1401, Jared Plotz 612 -312-1404, and JM Hanley 612-312-1407.  We expect Nasra to be back in the office on April 13, if employees are allowed to return, as the Governor indicated.

The new “stay at home” order in Minnesota and many other states is going to have a big economic impact. Now that the good news of the relief package has been announced, the market has few positive events coming until the number of those infected in the U.S. starts coming down or until positive test results are announced from either a vaccine or treatment.  Either of these announcements would turn the market.  The malaria drug, chloroquine phosphate when combined with another drug, is in widespread trials.  Since chloroquine has been used for 70 years, the dosage and side-affects are known.  Numerous other approaches are in trial.

Nike reported quarterly sales on Tuesday and said sales for the quarter in China were down only 5%.  Of course, Nike has a very aggressive digital sales platform.  Nike’s CEO said they were seeing the other side of the crisis in China.  Let’s hope we get there soon.

In portfolios, our strategy of reducing equity exposure and leaving the cash generated in cash or moving it to fixed income continues. We resisted buying stock even during the week’s recovery.  This is largely because the new flow of corporate earnings will be negative as will the economic projections. Bad news tends to depress stock prices.  Fixed income in the form of preferred stock had an historic week. Liquidity returned to the market and many found the 6-7% returns on preferreds vastly superior to the less than 1% returns on 10Yr Treasuries. We feel that 6-7% will continue to be compelling. Buying will stay aggressive as the market stabilizes.  Until then, be safe and enjoy one of life’s pleasures, the coming of spring.

*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).

 

Ulland Investment Advisors

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