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Weekly Market Update for April 3, 2019

by Jim Ulland

What will be the sign that the market has ended its sharp decline and started a recovery?  The market’s drop is virtually 100% attributed to Covid 19.  So what should we watch as a signal for the recovery?

The first sign will be a decline in the death rate.  This should happen in the later part of April in New York, the US epicenter.  A slightly earlier signal may come from the relationship between those admitted to hospitals and those released as recovered. Having more released than admitted will reduce the  reported deaths and free up hospital beds.  The rapid decline of the flu also is making beds available.  As a side note, through April 1st, there have been 18 deaths in Minnesota, eleven of which were in assisted care facilities and similar residences for seniors.

The second sign to watch is successful trials of vaccines and treatments.  The malaria and antirheumatics drug, hydroxychloroquine, has had small but relatively positive trials for Covid 19.  The advantage of this drug is that it has been used for 70 years for malaria prevention, so side effects and dosages are known.  Production could be ramped quickly.  We hope larger trials are positive. New drugs trials take longer to determine harmful side effects.  Ramping production also is more challenging.

Securities trading has improved a little this week.  The market publishes a volatility index.  It was lower at the end of the week than the beginning. Why is this important?  During high volatility, buyers often stop buying.  At the same time, sellers increase sales.  For instance, if an investors sells shares in a mutual fund or an ETF, the fund must sell the under lying securities almost immediately.  With few buyers and a lot of sellers, prices can fall a lot and in ways that don’t reflect the value of the security being sold. Imbalances between buyers (few) and sellers (many) are called periods of low liquidity.  Low liquidity is one of the causes of high volatility.  High volatility results in investors reacting to fear rather than value.  A continued decline in volatility, like this week, will help the market recover.

Here is the pattern for the S&P 500 this week: Monday +3.3%, Tuesday -1.6%, Wednesday -4.4%, Thursday +2.3%, and Friday -1.5%. The weakest sectors this week were financials, real estate, utilities, and retail. The concern in real estate and utilities was the new fear that consumers might not be able to pay their rent or utility bills.  Hopefully, the massive government rescue package will provide some replacement income. In Minnesota the Governor estimated that 78% of the state’s jobs can be performed at home or are in essential industries.  If a worker is in an essential industry and can work at home, they must. With 78% of workers still working, the economy in MN should recover more quickly than if a larger number were out of work.  Naturally, the balance between working and isolating is key.

Our team has made an orderly transition to working remotely although we have lost a little efficiency.   Calls to the office are automatically routed to our remote phones.  Emails are available as normal.

In portfolios, our strategy of reducing equity exposure and leaving the cash generated in cash or moving it to fixed income continues. We are waiting for the signals in paragraph one to reinvest.  Fixed income in preferred stock held on to most of last week’s gains. However, European banks did eliminated their common stock dividend, which caused a down day in US preferreds.  We own no European banks and we expect all US bank and utility company preferred dividends to be paid. Preferred dividends are paid prior to common stock dividends. Yet, it was a market concern. The returns on 10 Year Treasuries fell to 0.61% whereas the 6-7% yield on preferreds is ten times higher and increasingly compelling. Time is our friend.  Contact us as you have questions.

*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 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, 2019

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.

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Ulland Investment Advisors

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