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Weekly Market Update – September 18, 2015

The Dow fell 290 points Friday as markets digested the Fed’s decision to keep interest rates unchanged.  For the week the Dow was down .3% and for the year the index is now down 8.8%.

On Thursday the Federal Reserve opted to hold interest rates steady, citing concerns about the global economy, market volatility and low inflation.  The Fed also stated it wanted to see “greater improvement” in the labor market before acting.  In response, markets sputtered on Friday as the prospect of an additional period of “wait and see” sentiment failed to incite any positive momentum.  The prevailing thought has been that the Fed will announce a rate increase in December at the latest, though even this action is not guaranteed, as the Fed warned that any further negative financial developments globally could restrain economic activity and put downward pressure on inflation – a recipe for further delay.  

The yield on the 10-year Treasury fell 9 basis points Friday to 2.13% on the heels of the Fed’s decision, down 5 bps for the week and now down 4 bps for the year.  Oil fell 4.7% Friday to settle at $44.68.  Global growth concerns weighed on prices despite a report showing a further reduction in the operation of domestic oil drilling rigs.

A brief update on one of our largest positions, Magnum Hunter: Magnum Hunter is an energy company that primarily explores for and produces natural gas in southern Ohio and West Virginia.  Preferred shares from Magnum Hunter are in many portfolios.  Natural gas prices have been hurt as much as crude oil prices and companies in this sector are stressed as much as the crude oil companies.  To improve its liquidity, Magnum Hunter has publicly announced that it is selling its pipeline, which they say is worth about $600 million.  Pipelines have been attractive to buyers as this sector consolidates and pipeline capacity is particularly short in the area where Magnum Hunter’s pipeline is located. 

Because of a delay in the announcement of the sale, there has been a lot of selling in Magnum’s preferred shares, the value of which has been hit hard.  Despite our continued conversations with management (as recently as this week), in which the company maintained its stance that a pipeline sale is coming, we have decided to start to reduce our preferred position.  Our initial plan was to wait until there was an announcement of the pipeline sale before we started selling because the announcement would be a positive catalyst for the price of the preferreds.  However, because of the delayed announcement, we expect to make an orderly reduction in this position over the next several weeks.  If you have any questions please don’t hesitate to contact us. We expect making this change will return the portfolios to their low volatility pattern that our clients have come to expect. 

Next week’s economic calendar highlights include August housing data on Monday and Thursday, weekly jobless claims on Thursday and consumer confidence and a revised Q2 GDP number on Friday.  Expect the housing data (existing and new home sales) to show a slight decline in activity from July, weekly jobless claims to be in the 270-280,000 range (from 264,000 this week), consumer confidence to dip slightly and the GDP revision to show growth of 3.5% in Q2 (versus the prior reading of 3.7%). 

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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