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The Risks of Passive Investing: Trouble Ahead for PFF?

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The Risks of Passive Investing: Trouble Ahead for PFF? 【Outdated】

Please see our updated version at: http://www.ullandinvestment.com/pff_troubles_ahead/

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For the full article, please visit here: PFF Article FINAL.

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Weekly Market Update – March 17, 2017

The Dow finished down on Friday, sliding 20 points to close at 20,914.  For the week, the Dow was up 0.1% (S&P 500 +0.2%) and year-to-date is now up 5.8% (S&P 500 +6.2%).  The yield on the 10-year Treasury fell 4 bps Friday to 2.50%, ending the week down 9 bps.  Through Thursday, March 16, our trust preferred portfolios were up over 1.5% YTD, substantially more than the Barclays Aggregate Bond Index, which is flat.

US economic data was generally as expected this week.  The NFIB Small Business Optimism Index remained high in February.  Inflation is tracking around 2% y/y.  The FOMC hiked the federal funds rate as expected by 25 basis points to 0.75-1.00%.  Housing starts for February came in at an annualized pace of 1.29 million.  And the Conference Board’s Leading Economic Indicators for February were up 0.6% m/m, similar to last month.  This past week, investors continued to move funds into equities, particularly US value funds and materials stocks, at an accelerated pace.

Obamacare remains at the center of congressional and media attention.  Republicans are actively massaging the administration’s proposal and the President is reportedly making concessions to Medicaid requirements as well as some alterations to proposed tax credits.  Tax reform remains next in line for consideration and infrastructure stimulus seems to be on the backburner. 

The price of crude oil was up 1% on the week to ~$49 a barrel – down ~9% YTD.  EIA reported crude stockpiles declined this week – by <1m barrels – after nine weeks of builds, and also that product inventories of gasoline (-4.2m bls) and diesel (-5.2m bls) continue to fall hard as refinery utilization is down almost 4 percentage points y/y.  Saudi Arabia sounded a bit more positive this week as Oil Minister Al-Falih reassured oil markets that an extension of the OPEC cut was very much on the table for the OPEC meeting May 25th.  The US rig count rose 20 this week (+14 oil, +6 gas).

Next week’s economic calendar may be a bit quieter, with housing data (prices, existing-home sales, pending-home sales) on Wednesday (3/22) and Thursday (3/23), weekly jobless claims also on Thursday (3/23), and durable goods orders on Friday (3/24). 

Have a great weekend!

Weekly Market Update – March 10, 2017

The Dow finished up on Friday, rising 45 points to close at 20,903, partly recovering from a mid-week softening.  For the week, the Dow was down 0.5% (S&P 500 -0.4%) and year-to-date is now up 5.8% (S&P 500 +6.0%).  The yield on the 10-year Treasury fell 3 bps Friday to 2.57%, but ended the week up 9 bps.  The yield is now up 9 bps since the beginning of the year as well.

US economic data was generally positive this week.  January factory orders positively surprised, up 1.2% m/m vs. the 1.0% expectation.  The January trade balance was in line (-$48.5bn).  Weekly initial jobless claims came in slightly weaker, but continuing claims were better.  And the big February employment report was encouraging; non-farm payrolls added 235,000 jobs (vs. 190-200k expectation), the unemployment rate of 4.7% was in line, and average hourly earnings growth (+2.8% y/y) was also as expected.  This past week, investors continued to move funds into equities, particularly Financials, and inflation-protected treasury bonds as “Fedspeak” continues to heat up and as market expectations shift more “hawkish” (i.e. towards higher interest rates).

House Republican leaders unveiled their replacement plan for Obamacare, which was met with mixed responses.  We won’t run through the details here, but the plan will require some massaging to win over governors and legislators.  The tax reform plan is still being written and timing could be pushed out.  The President, Paul Ryan, and Kevin Brady (House Ways and Means Chairman) are all sticking to a summer timeline, but Senate Majority Leader Mitch McConnell and Finance Committee Chair Orrin Hatch suggested that a passage before Congress’ August recess was unlikely.  In Europe, ECB chief Mario Draghi kept policy unchanged given underlying core inflation remains well below 2%, but did state that the “sense of urgency” for further accommodative actions has passed.

The price of crude oil was down ~9% on the week to $48 a barrel – down ~10% YTD.  EIA reported crude stockpiles increased again this week – by over 8m barrels – but also that product inventories of gasoline (-6.6m bls) and diesel (-2.7m bls) continue to fall.  Like Saudi Aramco did last week, Iran lowered their official selling prices (OSPs) to Asia for April delivery, which has sparked some concerns of competitive intensity and the likelihood of an OPEC cut extension for the second half of 2017.  On the other hand, geopolitical turmoil in Iraq and Libya continues to threaten production in those regions.  The US rig count rose 12 this week (+8 oil, +5 gas).

Next week’s economic calendar highlights will include the February NFIB Small Business Optimism Index on Tuesday (3/14), February inflation data on 3/14 & 3/15, February retail sales and the FOMC rate decision on Wednesday (3/15), February housing starts on Thursday (3/16), and the Conference Board’s Leading Economic Indicators for February on Friday (3/17).  The FOMC’s rate decision on Wednesday is the most likely item to move the markets next week, although the likelihood of a rate hike (from a 0.50-0.75% federal funds rate to a targeted 0.75-1.00%) is now close to certain.  The odds of a March rate hike suggested by Bloomberg, and based on fed funds futures data, is close to 100% versus 40% two weeks ago and 28% a month ago.  We had expected two or three rate hikes this year, and at this point it appears the latter may be more likely.

Have a great weekend!

 

Ulland Investment Advisors

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