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Weekly Market Update for April 18, 2019

by JM Hanley

The Dow was up on Thursday, rising 107 points to close at 26,560. For the week, the Dow was up 0.6% (SP500 flat) and year-to-date is now up 13.9% (SP500 +15.9%). The yield on the 10-year Treasury (an important interest-rate indicator) was unchanged, closing at 2.56%.

The indexes have grown indifferent to the headlines that had previously powered them upward; namely, constructive trade talks, a recovery in Chinese growth, and a newly accommodative line from the European Central Bank.  The dramatic year-to-date rise in equity prices this late in an economic expansion has understandably made investors cautious, with a significant amount of cash still idle. But they have been moving invested money around. The improving outlook for global growth actually hurt relatively recession-proof industries like utility companies this week. Funds were rotated to sectors that would benefit more, like banks and computer chip companies.

The price of crude oil was flat this week at $64 a barrel – up 41% YTD. US crude stockpiles showed a surprise draw – of 1.4m barrels – while product inventories of gasoline (-1.1m bls) and diesel (-0.4m bls) both fell as well. Oil received a boost on Tuesday when the EIA revised down their April production forecast and weekly industry data was likewise bullish. But oil reversed its gains on Wednesday when the official weekly stockpile report was more muted than the preliminary industry-released number suggested.

Firms continued to report first-quarter earnings this week – most notably, the big banks. Bank of America and Citigroup did well, Goldman Sachs less so. The banks have had great success at containing overhead costs, but business seems just okay.  Because of the big banks’ scale and involvement in all areas of the economy, their earnings can provide insight into global economic health.

United Health reported strong earnings, but nonetheless declined sharply along with other health insurers. Investors have grown concerned by the healthcare proposals advanced by a few presidential candidates, some of which would do away with private health insurance. The likelihood of such proposals finding broad support and being passed into law seems implausible in the extreme. But less specialized investors, who have long viewed insurance as a safe-haven for returns, are spooked.

Next week will be busy. Earnings from Facebook, 3M, Granite Construction, Visa, Amazon, and Euronet Worldwide are all on the docket.

*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 12, 2019

by JM Hanley

The Dow was up on Friday, rising 269 points to close at 26,412. For the week, the Dow was down 0.1% (SP500 +0.5%) and year-to-date is now up 13.2% (SP500 +16.0%). The yield on the 10-year Treasury (an important interest-rate indicator) rose six basis points, closing at 2.56%.

The rate of inflation declined last month to 2%, an unusual state of affairs for an economy with unemployment below 4%. Methodological changes were partly to blame, but the Federal Reserve is still worried. At their meeting last month, some Fed members blamed lower expectations for inflation. If businesses anticipate that inflation will be lower, they’re less likely to preemptively raise prices and wages to keep up. More tangible explanations include insurers’ success at containing healthcare and drug costs (believe it or not). A nationwide apartment-building boom has also slowed rent increases. Fed members apparently concluded they’d need to refrain from raising interest rates, which is ideal for preferred and equity markets.

News from China was better. After a strong manufacturing readout last week, Beijing reported on-target inflation, a growing stockpile of foreign currency, growth in exports, and easier lending conditions. This panoply of good news affirmed the market’s view that the government’s efforts to stimulate the economy helped prevent last year’s malaise from spreading. That leaves trade. Investors are confident that Washington and Beijing will soon sign a deal of some kind, but they want to know what will happen to the tariffs in place. If they’re all removed, stocks should react favorably.

After resolving matters across the Pacific, Washington will turn its attention to a second front in Europe. The Administration must decide whether to impose duties on imported European cars by May 18. The negative economic consequences of this course of action would seem to make it unlikely that they will follow through. Finally, the NAFTA rewrite has stalled in Congress. But in this case – as in the other two – markets are confident that the attendant economic damage will discourage the most extreme approaches as elections draw nearer.

The price of crude oil rose 1% this week to $64 a barrel – up 41% YTD. US crude stockpiles showed a greater-than-expected build – of 7.1m barrels – while product inventories of gasoline (-7.7m bls) and diesel (-0.1m bls) both fell. The global supply-demand balance continues to remain tight, with geopolitics playing an outsized role of late. Shares of US domestic producers rose 2% on the week, led by Anadarko Petroleum, our largest Energy portfolio position. Anadarko rose 32% on Friday after agreeing to be acquired by supermajor Chevron. The producer “catch up” to oil we argued was in order last week seems to be showing some initial traction.

First quarter earnings began today with big banks. JP Morgan had an excellent start to the year. A rebound in consumer and business confidence powered growth in the bank’s auto loan and card businesses, as well as its securities trading and corporate dealmaking divisions. Lower-than-expected corporate overhead was icing on the cake. Citigroup, Goldman Sachs, Bank of America, and United Health will report earnings next week.

*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

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