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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.

Weekly Market Update for March 20, 2020

by Jim Ulland

This week the market continued to have huge swings of volatility. Here is the pattern for the S&P 500: Monday -12%, Tuesday +6%, Wednesday -5%, Thursday +.5%, and Friday -4%.  The S&P 500 was down 15% in total over the last five days.  So far this year, this index of the largest 500 companies is down 28.9%.  The index represents the largest companies, so it is easy to understand that small companies did worse.

Why are we seeing this abnormal fluctuation?  First, we all know the Coronavirus Covid-19 is the apparent cause of this market stress.  We know that the death rate is around 1% vs. .1% for the flu. The virus is contagious and about twice as contagious as the flu. The problem in using this as a market explanation is that we knew all of this last week too.  In fact, the virus news out of South Korea this week can be viewed as encouraging.  South Korea is only 15% the size of the U.S., so if you adjust their numbers to predict what could happen in the U.S., we would expect 596 deaths vs. their 94.  The deaths would come from 54,875 cases vs. their 8,652.  U.S. hospitalizations would run from 5,000 to 10,000.

If we have the same experience as South Korea, it is relatively good news.  Remember 40,000 people in the U.S. die on average annually from the flu out of the approximately 30 million infected.  Also, South Korea seems to be on the other side of the problem with fewer people being newly diagnosed vs. the number of recovered patience leaving the hospitals.

What seems to be the new information hurting the market is the reaction to the virus.  For instance, the Governor of California asked the entire state work force to stay home except for essential personnel.  If that goes on for more than two weeks, the economic crisis may be bigger than the health crisis.  That is what I think is the new concern of the market as evidenced by the lead editorial in the Wall Street Journal 3/20. The quickest resolution of this complicated problem would be the announcement of a vaccine or treatment.  There are several good prospects one of which is a 70 year old treatment for malaria called chloroquine phosphate.  There are others as well in the trial stage.   An announcement of success would turn the market.

In portfolios, we have continue our strategy of reducing equity exposure and leaving the cash generated in cash.  We resisted buying stock even though prices were getting more attractive.  The big news was in fixed income.  We had been battling a market with few buyers and thus prices of the preferreds were getting battered.  That situation changed on Thursday and liquidity returned to the market.  Buying was very active both Thursday and Friday.  Prices rebounded sharply and Nat was busy putting cash in fixed income accounts back into the market at yields of 6-7% on very high quality issuers.  We feel that 6-7% will be compelling to a lot more buyers as they compare this to the yield of 1% on US Treasuries.  For buying to continue at the aggressive levels of Thursday and Friday, we will need a somewhat stable market.  However, even with today’s volatility, preferreds were up strongly while stocks were down 4%.

Please call or email as needed.  Half of our staff is at the office and half working remotely.

*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 13, 2020

by Jim Ulland

Normally, if the stock market moves 1% in a day, it is a very big deal.  This Thursday the market declined 10% only to recover 9.4% on Friday.  Keep your seat belt fastened.  Thursday, investors and program traders were desperate for cash and sold whatever they could.  This put a lot of pressure on stock prices.  Even our fixed income securities, which had been particularly stable for weeks, dropped sharply.  The energized reversal of Friday was triggered by an “over-sold” condition, which means there were a lot of bargains. Prices had gotten unrealistically low.  To start buying, bargain hunters also had to believe that we would get through the coronavirus without traumatic harm to the economy and that the government would “ride to the rescue” with a series of beneficial policies. That is exactly what happened just before the market closed on Friday.    The President announced a series of actions that restored confidence in the market and off it went.

Substantive news was also available on the coronavirus.  South Korea announce that yesterday, for the first time, more people were released from the hospitals (treated and recovered) than new cases of infection:  177 people released and 110 new cases.  Korea has had only a 1% death rate: 7979 cases with 70 deaths.  Not only is the death rate below expectations, but the infection rate also is quite contained.  The same news has come out of China, but few have confidence in Chinese data, which at times is manipulated.   We do know that the CEO of Starbucks just announced that hundreds of its stores in China had been reopened and that 85% of its total stores were now operating.  Apple announced that all of its stores in China were being reopened today.

In civil and criminal law, there is a general principle of proportionality, which basically says that the level of punishment should fit the seriousness of the crime.  If this was translated to journalism, the size and intensity of the story would reflect the impact of the news event.  So far this flu season, there have been from 22,000 to 55,000 deaths from the flu.  There have been 42 deaths from the Coronavirus.  Yes, there will be more and maybe a lot more, and the death rate of the virus is 1% vs. .1%. However, you never read in the news about the 20,000 plus who die each year of the flu.   Fears about coronavirus have infected the market.  What will calm the markets?  More news like we are getting from South Korea and China will help.  The announcement of a vaccine, even if not available for 6 to 12 months would be huge.  Having test kits flood doctor’s offices and health clinics to test all who have any symptoms would limit isolation to those infected rather than having large groups of people self-isolating.  And finally the fear will diminish when people realize that, yes, this situation will get worse and then it will be over.

What have we done tactically and strategically in portfolios?  For clients with equities, we have sold companies that were small or in a “turn-around” cycle.  We sold over half of our oil and gas companies.  Cash has been accumulating and waiting for market stability.

In fixed income, we have rotated into better quality and also accumulated cash.  The cash has recently been deployed into preferreds with depressed prices and higher yields.  The 10 Year Treasury pays about 1%.  Our preferred portfolios pay from 5-6%.  You can see why we expect the preferreds to be in high demand once we get a period of calm.  Please call if you have questions on your individual portfolio.

*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 6, 2020

by JM Hanley

After the biggest decline in more than a decade in the prior week, the market swung back and forth and ended relatively unchanged this week. Investors weighed fears about a worldwide spread of the coronavirus against an otherwise favorable backdrop. Wall Street is watching day-to-day developments like the rest of the public. In the US, test kits to quickly diagnose new cases appear to have been in short supply, which has raised fears that the highly contagious disease could have spread. The effect on the US economy thus far is noticeable, if muted. Hotel bookings and box office receipts, among other items, seem to have ticked downward slightly. Air traffic is off more sharply.

Updates from China, which has been hardest hit by the outbreak, present a mixed picture – and a possible harbinger of developments in the rest of the world. The number of new cases of the virus has dropped dramatically over the last week and a half. While official economic data won’t come until March 16, “high-frequency” indicators of economic activity provide some reasons for hope. Consumption of coal, used to generate electricity, is far below last year’s pace, but has begun to increase at an accelerating rate. Traffic congestion has also increased, albeit mostly on weekdays. Discretionary travel on weekends still seems sharply curtailed.

The Federal Reserve attempted to do its part for the economy with an interest-rate cut of half a percent. This marked the Fed’s first emergency rate cut since the financial crisis of 2008-2009. Markets expected a cut, but half a percent was higher than most predicted. Fixed-income securities outperformed accordingly. Attention now turns to the Fed’s meeting in two weeks, when the FOMC is expected to cut rates again. With the target interest rate now at just a percent, some think they could simply opt to cut to 0%. Much will depend on how far the virus spreads in the US.

If they cut rates to zero, Fed’s tools for further monetary stimulus would be limited. Fed members seem unenthusiastic about negative interest rates. They may resort to purchasing US Treasury bills, as they did as the economy recovered from the last recession. This would inject cash into the economy, but many think stability rather than cash to be what is needed.

News beyond the coronavirus was mostly positive. Joe Biden’s success on Super Tuesday makes him the front-runner for the Democratic nomination; health insurance stocks rallied in relief. The economy added significantly more jobs than expected last month, although (as ever) wage growth was sluggish. Energy was a rare weak spot. Members of OPEC and Russia failed to agree on cuts to production in the face of lower demand precipitated by the outbreak. The price of oil fell 9% as a result. Bank stocks were also weak as the prospect for earning meaningful returns on cash deposits evaporated with the fall in interest rates.

Expect next week to be dominated by coronavirus headlines. An interesting and overlooked fact is that this year 18,000 people in the US have died of the flu and only 15 from the coronavirus. The best estimates put the mortality rate near one percent. That is somewhat higher than the flu but a fraction of (admittedly less contagious) recent outbreaks like SARS and MERS.

*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