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Weekly Market Update for October 12, 2018

by JM Hanley

The Dow was up on Friday, rising 287 points to close at 25,340. For the week, the Dow was down 4.2% (SP500 -4.1%; NASDAQ -3.7) and year-to-date is now up 2.5% (SP500 +3.5%; Nasdaq +8.6%). The yield on the 10-year Treasury (an important interest-rate indicator) fell nine basis points, closing at 3.14%.

Higher yields on US Treasuries triggered the correction in the equity markets, which had returned to the peak reached in January. A few other trends suggested a reassessment might be in order. As firms prepare to report their third-quarter earnings, Wall Street’s estimates imply that the second quarter (which ended in July) will have marked the high point of profit growth.  Profit margins have returned to a crest last seen before 2008. A strengthening dollar will hurt firms that earn revenues in foreign currencies, and the tight jobs market means that labor costs have gone up.  Major indexes historically have experienced (temporary) turbulence as investors adjust to a new normal of higher interest rates and a stronger dollar.

On top of these factors, midterm voters will head to the polls in three and a half weeks. The prospect of a shift in the political terrain, and the attendant policy uncertainty, typically causes markets to underperform in midterm years. The indexes’ upward trajectory prior to this week’s correction had been exactly the opposite.

The price of crude oil fell 4% this week to $71 a barrel – up 18% YTD. US crude stockpiles showed a greater-than-expected build – of 6.0m barrels – while product inventories of gasoline rose (+1.0m bls) and diesel fell (-2.7m bls). The bearish DoE inventory report coupled with the pullback in US equities dragged oil lower mid-week despite favorable DoT data. The DoT data showed that mileage driven by US vehicles was up nearly 1% y/y in August, twice the YTD growth trend. Share prices of domestic oil producers fell harder than the commodity, down 6% this week.

Three of the big banks reported earnings today, signaling the unofficial start of third-quarter earnings season. JP Morgan’s profits were modestly better than estimates, driven by a high-quality portfolio of loans. Wells Fargo accelerated loan growth and reported favorable earnings on customers’ deposits.

In other corporate news, the Department of Justice agreed to let CVS buy Aetna. Aetna will merely need to sell a portion of its Medicare business to satisfy the DOJ’s anti-trust requirement. An agreement with a buyer is in place. Shares of both firms were nonetheless lower after the CFO of Aetna announced he would retire upon the merger’s completion.  United Health, Bank of America, and Goldman Sachs, among others, 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.

Weekly Market Update for October 5, 2018

by JM Hanley

The Dow was down on Friday, falling 180 points to close at 26,447. For the week, the Dow was essentially unchanged (SP500 -1.0%) and year-to-date is now up 7.0% (SP500 +7.9%).

The Administration struck a trade deal to replace NAFTA with Canada after months of negotiation. The details are largely immaterial from the market’s perspective. Since a deal with Mexico had been agreed upon earlier, this means that North America will remain a free trade zone. The Administration simultaneously intensified non-economic pressure on China. The state of play on both sides of the Pacific seems to change from one minute to the next, but Washington continues to work for a comprehensive restructuring of their trading relationship.

Payrolls increased a bit more slowly than anticipated last month. A rough hurricane season didn’t help. However, the figures for July and August were revised up substantially. Unemployment fell to 3.7%, its lowest level since December of 1969 (though labor force participation is lower). Wage growth remained stubbornly slow despite further tightening in the labor market. Paychecks increased 2.8% (annualized).

The yield on the 10-year Treasury (an important interest-rate indicator) rose 16 basis points, closing at 3.23%. This marks its highest level since 2011. The jobs report revealed that the labor market remains quite healthy, so the Federal Reserve might raise rates more than anticipated next year.  Higher rates would make the return on Treasuries, along with all other existing fixed-rate securities, less attractive. Lending some credence to this view, Fed Chairman Jerome Powell said interest rates remained low despite several hikes this year. But plenty of factors converged to make this the perfect storm. Deficit spending has increased. The government must issue more debt to pay the bills, so the new supply of Treasuries is growing. The Federal Reserve is also selling the Treasuries it bought during the financial crisis, adding even more supply. When supply goes up and demand doesn’t change, prices fall and yields rise.

The rapid increase in yields dragged down the technology sector and other high-growth equities. Companies that are growing quickly are valued based on the earnings they will produce many years in the future. Investors compare this future stream of earnings with the compounding value of what they can earn in low-risk options, like Treasuries. If the return on Treasuries increases, tech companies’ future earnings look less attractive than before, and valuations fall.

The price of crude oil rose 1% this week to $74 a barrel – up 23% YTD. US crude stockpiles showed a greater-than-expected build – of 8.0m barrels – while product inventories of gasoline (-0.5m bls) and diesel (-1.8m bls) both fell. Oil prices continued climbing early in the week, but reversed course following the inventory report and amidst a falling equity market. There was also chatter that Saudi Arabia and Russia may have secretly agreed upon an in their production rates. Share prices of domestic oil producers followed the commodity this week and provided an offset to the broader equity market weakness.

General Electric replaced its CEO, John Flannery, with Lawrence Culp, the former chief of fellow industrial conglomerate Danaher. The move followed GE’s announcement that its cash flows would weaken due to ongoing struggles in its power business. Flannery’s plans for restructuring GE were appropriately far-reaching, but his execution was slow. Culp’s success at turning around Danaher augurs well. GE’s stock rose 17% this 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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