Weekly Market Update – July 17, 2015
Stocks finished the day mixed Friday despite a record day from Google. The Dow fell 34 points while the NASDAQ, buoyed by Google’s strength, surged nearly 1%, closing at a record high. For the week the Dow was up 1.8% and for the year the index is now up 1.5%.
Google rose more than 16% Friday on better-than-expected second-quarter earnings, boosting its market cap by over $65 billion, the largest single-day gain ever. Led by Google, the technology sector posted its best week since 2011. Overseas, Greek debt negotiations continued Friday as the European Council approved a short-term $7.7 billion loan to Greece while the European Central Bank announced it would increase its emergency liquidity to Greek banks, which are set to reopen Monday after being closed for the past three weeks.
The yield on the 10-year Treasury held steady at 2.35%, down 7 bps for the week and now up 18 bps for the year. Earlier in the week Fed Chairwoman Janet Yellen reiterated that interest rates would likely begin to rise later in the year, but at a slow and measured pace.
Oil fell 12 cents to $50.79 Friday, down 3.9% for the week. A stronger dollar, oversupply concerns and the fear that Iran will flood the market with additional oil on the heels of its nuclear deal contributed to the price decline.
Next week’s economic calendar highlights include June housing data on Wednesday and Friday and weekly jobless claims on Thursday. Expect the housing data to show an increase in activity from May and weekly jobless claims to again fall in the 280-290,000 range (from 281,000 this week). Second quarter corporate earnings will continue as well. To date, earnings have been better-than-expected, helping to drive markets this week.
Weekly Market Update – October 17, 2014
Positive quarterly earnings reports and economic data drove markets higher Friday, the Dow gaining 263 points to finish the week down 1.0%. For the year the index is now down 1.2%.
GE, Honeywell and Morgan Stanley all reported better-than-expected Q3 results, helping to ease concerns about the effect of weakening global demand on US companies. To date, 81 S&P 500 companies have reported third-quarter results with approximately 2/3s beating expectations. Data-wise, consumer confidence rose in October to the highest level in more than 7 years while September housing data showed an increase in activity from the prior month. Even with the rally Friday, the Dow experienced its fourth straight weekly decline, the longest such stretch in over 3 years. In Europe, stocks surged, posting one-day gains not seen in over two years.
The yield on the 10-year Treasury rose 5 bps to 2.20% Friday, down 11 bps for the week and now 83 points lower than on January 1. Oil closed at $82.75 per barrel, down 3.6% for the week but up after falling below $80 Thursday, its lowest level in nearly 4 years.
Next week’s economic calendar highlights include September existing home sales on Tuesday, inflation data on Wednesday, weekly jobless claims on Thursday and September new home sales on Friday. Expect the housing data to show a slight increase in activity from August, inflation to remain in check and weekly jobless claims to fall in the 290,000 – 300,000 range (from 264,000 this week). Q3 earnings reports will continue next week as well.
Weekly Market Update – July 11, 2014
Markets rose Friday on the strength of Amazon and eBay despite continued European financial concerns. For the week the Dow was down .7% and for year the index is now up 2.2%.
Optimism in the growth potential of Amazon and eBay pushed the two blue chips 5.6% and 2.3% higher, respectively, helping to invigorate the broader market in the process. The ‘rally’ on Friday helped pare losses in what was the S&P’s worst week since April. Contributing to the downturn this week were worries over the strength of the economic recovery in Europe as news of financial stress in Portuguese banks again injected nervousness into markets. Banco Espirito Santo, the Portuguese bank at the center of the mini-crisis that reportedly missed debt payments, insisted it is financially sound and has enough capital to meet its financial obligations. Despite the assurances, the bank’s stock fell another 5.5% Friday after a 17% tumble on Thursday.
In the US, the first bank to post second-quarter earnings, Wells Fargo, reported profit in-line with estimates. Citigroup, JPMorgan Chase and Goldman Sachs will report next week. Overall, S&P 500 companies’ profits are expected to show growth of 4.5% in the second quarter.
Interest rates fell slightly Friday with the yield on the 10-year Treasury falling 1 bps to 2.52%, down 13 bps for the week and now down 51 bps for the year. Through Thursday, July 10, our trust preferred portfolios are up over 8%, on average, versus 3.79% for the Barclays Aggregate Bond Index.
Next week’s economic calendar highlights include June retail sales on Tuesday, inflation data on Wednesday, weekly jobless claims and June housing data on Thursday and a consumer confidence reading on Friday. Expect retail sales to show a slight improvement from May, inflation to remain a non-issue, weekly jobless claims to fall in the 310,000 – 320,000 range (from 304,000 this week), housing data to show improvement from May and consumer confidence to hold steady. Second quarter corporate earnings continue next week as well.
Profiting from Preferreds
We agree with Gregory Zuckerman and his article entitled, “Favorable Currents for Preferred Shares.” Preferred shares are a unique type of security that feature characteristics of both stocks and bonds. Like bonds, preferred shares are issued with a stated dividend coupon and a par value. Although preferred shares don’t have the same voting rights as common stock, they are higher up on a firm’s capital structure and their dividends must be paid out before a common stock’s dividend can be paid, providing them with more safety in the event a company runs into trouble. Preferred shares also have the benefit of trading like common stocks, both much easier and cheaper than trading bonds. The combination of attractive stock and bond features suggests that preferred securities are worth a serious look.
One of the appealing features that the article mentions about preferred securities as compared to common stock is the trading characteristics. Andrew Zimmerman, the chief investment strategist at DT Investment Partners LLC, was quoted as saying, “Preferred shares are slightly more like bonds than stocks as their historical price volatility more closely matches that of bonds.” The preferred securities’ high dividends and place on the capital structure help to act as a cushion against volatility and price swings when the market is confronted with economic shocks. This quality is particularly appealing to investors who are reluctant to invest in common stocks which many feel are due for a pull-back given their strong year to date gains.
Traditional preferred shares also have a favorable tax treatment that is typically only reserved for common stock dividends. The tax is much lower than that on corporate bond interest. Traditional preferred shares’ dividends are deemed, “qualified,” meaning they are taxed at the long term capital gains rate instead of the ordinary income tax rate applied to interest from corporate bonds. For those in the top tax bracket, the difference is between paying a 20% federal tax rate and 39.6%, respectively. As such, a corporate bond would have to yield 9.27% to keep pace with a traditional preferred’s dividend coupon of 7% on an after-tax basis. The preferential tax treatment of the preferreds compared to higher taxes and lower yields on corporate bonds makes preferreds a compelling choice.
Mr. Zuckerman appropriately noted however, that most preferred securities are perpetual in nature, and thus sensitive to interest rates. As such, when interest rates go up it is common for the prices on these securities to go down, the same reaction long term bonds would produce. While every investment has risks, a couple ways to partially mitigate the risk in preferreds is to find preferred securities from companies with improving fundamentals that are intent on redeeming their preferred shares. An improving credit profile may result in an increase in the price of the preferred share that may partially offset a resulting decrease in price from rising interest rates. Also, a company that is expected to redeem its preferred security will be less sensitive to interest rates similar to a short term bond. Another mitigating factor comes with preferreds that pay dividends over 7.5%. High dividend yields are somewhat insulated from interest rate moves.
Traditional preferred securities combine many of the favorable features of both bonds and stocks into a unique security: high dividend yield, favorable tax treatment, and lower historical volatility than common stock. Given these security characteristics and investors’ need for income in this historically low interest yield environment, preferred securities present a compelling choice, which explains why they are a core component of our Defensive Growth strategy.