Greece remains the European hot spot, where government leaders are working to pass austerity measures necessary for a much-needed second bailout package.  On Thursday, an agreement was reached between the leaders of Greece’s coalition government on a package, but Eurozone finance ministers did not approve, stating additional cuts to the budget must be made.  A parliamentary vote will most likely take place on Sunday or Monday amidst new worker strikes and public displeasure, as Greece has until mid-week next week to make further budget cuts.  Markets will respond to results of the vote accordingly.

Compounding the European distress was a report issued by the International Energy Agency lowering its full-year global oil demand projection on concerns of slower global growth, and a report from China showing that Chinese imports and exports both fell for the first time in two years.  Although the price of oil fell on the release of the IEA report, it still closed just under $100 a barrel for the week.

In the US, though consumer confidence dipped on Friday, initial unemployment claims on Thursday fell for the second straight week, an encouraging sign.

Our trust preferred portfolios continue to perform well, returning almost 8.5% year-to-date through yesterday, Thursday, February 9^th, beating the Dow by almost 3%.

Next week, economic reporting highlights include January retail sales data on Tuesday, initial unemployment claims on Thursday, and January inflation data releases on Thursday and Friday.  Look for retail sales to increase over December, unemployment claims to rise a bit from last week’s 358,000 figure, and inflation to tick up slightly.

On the heels of a better-than-expected unemployment claims report on Thursday, Friday’s employment release displayed even better numbers.  The economy added 243,000 jobs in January – the largest monthly gain since April of 2011 – and the unemployment rate fell from 8.5% to 8.3%.  To compliment, non-manufacturing data showed an increase in activity in January, with the related index producing its best result in a year.

In Europe, Greece is moving ever-closer to finalizing a deal with its lenders, with those owning Greek bonds expected to take a 70% “haircut,” or loss, on the investments.  The situation in Greece has temporarily taken the focus off other troubled Eurozone countries, but attention is shifting back to Portugal, the next “weakest link,” where bond yields have soared and a debt restructuring by the end summer is becoming a possibility.

Problems in Europe continue to inject nervousness in markets, but the promising US economic data indicates a gradual US recovery is underway.  Benefitting this week from the perceived economic growth was oil, which closed up $1.45 on Friday to $97.81 per barrel on the strength of a projected increase in demand stemming from economic expansion and tensions in the Middle East.  Financial stocks also exhibited strength, boosting trust preferred share prices.  For the month of January, our trust preferred portfolios returned almost 6.5%, besting the Dow by over 3% and the S&P 500 over 2%.  Foreign ETFs also had a big week.

Next week is a quiet one for economic reporting with the initial unemployment claims number on Thursday being the only release of great interest.  Watch for the claims number to continue its downward trend from 367,000 this week.

Have a good weekend,

James Skjong

Domestically, economic data for the most part discouraged investors.  The Fed’s announcement on Wednesday that interest rates will remain low until 2014 and that further stimulus measures are not out of the question spurred markets for a day, but reports announcing a decline in December home sales, an increase in weekly jobless claims, and a lower-than-expected first estimate of fourth quarter 2011 GDP (the consensus estimate was 3.0% – actual was 2.8%) sent markets lower.  Though the GDP result was the highest growth rate since the second quarter of 2010, it’s worth noting that most of the growth came from inventory rebuilding.

In Europe, negotiations continued between Greece and its creditors, with progress reportedly being made.  Borrowing costs for Italy and Spain fell to levels not seen in months, though the two countries were downgraded by Fitch Ratings, with a mention of the chance of further downgrades in the next two years.

Trust preferreds continue their solid performance in the new year.  Through yesterday, Thursday, January 26^th, our trust preferred portfolios were up over 6.5% year-to-date.

Next week, economic reporting highlights include the release of January manufacturing data on Tuesday and the ever-important January employment numbers on Friday.  Look for manufacturing to remain relatively flat from December, the number of jobs created in January to decline slightly from December, and the unemployment rate to remain at 8.5%.

Here are a few of the key points and quotes from the article.

Jim Ulland, CEO, Ulland Investment Advisors

“ ‘These are the best buy of any fixed-income in the market’… clients are getting an average of 7.75 percent on their trust-preferred portfolios”

“ ‘The most attractive TruPS are those that are trading below or just at par’ ”

“ ‘clients who want to buy TruPS…. (should use) a diversified portfolio of the securities backed by the largest U.S. banks’ ”

Josh Peter, Editor, Morningstar DividendInvestor

“ ‘What was a cheap form of regulatory capital is now just an expensive form of long-term financing. The advantages for big banks to have them are essentially going away’ ”

(and thus trust preferreds will be redeemed at par over the next four years)

Guy LeBas, Chief Fixed Income Strategist, Janney Montgomery Scott

“Even with regulatory changes, not all TruPS will be called immediately. That would require a big outlay of capital”

“ ‘We’re in a yield-starved environment. With 10-Year U.S. Treasuries yielding less than 2 percent. That type of return won’t help investors with their retirement goals.’ ‘’

Phil Jacoby, Chief Investment Officer, Spectrum Asset Management

“ ‘Although TRuPS investors do have to be aware of the risk of banks failing, there’s not likely to be a better income game in town when comparing preferred yields relative to their overall long run historical default characteristics’ ‘’

A link to the entire article can be found here:

http://www.bloomberg.com/news/2012-01-04/bofa-trust-preferreds-tempt-investors-with-high-yields.html

In Europe, the focus was on Greece and its ability to negotiate with international lenders.  Greece is trying to cut its debt by 100 billion euros by offering to exchange old Greek bonds with high interest rates with new bonds with lower interest rates.  The sticking point is how low the interest rates on the new bonds will be.  The difference between the new and original interest rate will be the “haircut,” or loss the lenders will have to realize.  Greece wants lower rates on the new bonds, lenders want higher rates.  Negotiations continue, with hopes of a solution before Greece’s next round of bond payments in mid-March.

Oil fell below $100 per barrel, ending the week at $98.33.  The decline was attributed to a contraction in Chinese manufacturing and Greece’s ongoing debt crisis negotiations, as well as a softening of rhetoric from Iran concerning the closure of the Strait of Hormuz should an oil embargo be imposed.

Trust preferreds continue to show solid performance in 2012.  Through yesterday, Thursday, January 19^th, our trust preferred portfolios were up over 5.5% year-to-date.

In the US, though housing starts were down, building permits remained level and housing sales increased in December from the prior month (the third straight monthly gain).  Jobless claims fell 50,000 to 352,000, the fewest since April of 2008, and the core inflation rate, which excludes energy and food prices, came in at 2.2% for 2011, the highest rate since 2007 but still one deemed acceptable by the Federal Reserve.

Next week, attention will be focused on Wednesday’s Federal Open Market Committee meeting during which the Fed will release, for the first time, its own interest rate projections, inflation objectives, and perhaps even an unemployment rate target.  Also up for debate is another round of stimulus, though the recent emergence of better economic data will most likely delay any such action.  December new home sales data on Thursday and the first estimate of Q4 2011 GDP on Friday will round out the weekly data release.  Look for home sales to increase slightly and Q4 GDP to increase to around 3% from 1.8% in Q3.

Have a good weekend,

James Skjong

Early in the week, news out of Europe was reassuring, as both Italy and Spain experienced successful bond auctions (in both quantity sold and price).  Nervousness, however, resurfaced Friday on news that Standard & Poor’s was set to downgrade multiple European countries, including France and Slovakia.  Downgrades would raise the cost of funding the Eurozone bailout fund, as borrowing costs are dependent upon the credit quality of the countries that back it.  This could cause a negative ripple effect, as in turn the rescue fund would have to pass on its higher borrowing costs to already struggling countries, hindering budget balancing efforts.

In the US, consumer confidence rose, but so did initial jobless claims, though the number again remained below 400,000. Retail sales were up but were less than estimates.

Developments in the Middle East and Strait of Hormuz keep oil in the spotlight.  Oil closed below $100 at $98.11, mainly on news that a European oil embargo will be delayed by up to six months so alternative supply can be found.

Trust preferreds have performed well so far this year.  Through yesterday, Thursday, January 12^th, our trust preferred portfolios are up almost 5% year-to-date.  In case you missed it, last week Ulland Investment Advisors was featured in a Bloomberg article highlighting trust preferred securities. Below is a link to the article:

http://www.bloomberg.com/news/2012-01-04/bofa-trust-preferreds-tempt-investors-with-high-yields.html

If you know of someone who might be interested in our trust preferred strategy, please contact Nat Beebe at nat.beebe@ullandinvestment.com or 612-312-1402, or you can e-mail the article by using the e-mail icon at the bottom of the this article.

Next week, economic reporting highlights include the release of December inflation data on Wednesday and Thursday and December housing data on Thursday and Friday.  Expect inflation to remain a non-issue and housing starts and existing home sales to dip slightly from November.

In observance of the Martin Luther King, Jr. holiday, our offices will be closed on Monday, January 16^th.