FALL 2011 NEWSLETTER
Welcome to Bedell Frazier!
Our company was founded by Jude Bedell in 1975. Mike Frazier joined the firm in 2002 and was named a partner two years later. To memorialize Mike’s partnership in the company, we are pleased to announce our new name: Bedell Frazier Investment Counselling, LLC. Nothing is changing in terms of our business. Jude continues as Chief Investment Officer and oversees our BondDepartment. Mike has been managing day-to-day operations for years and will continue to do so. This name change speaks to our team approach. It speaks to continuity and planning for the future. Our best days lay ahead.
The final fiscal quarter is historically strongest for stocks. The consumer should lead the print to year-end with help from Santa. IfEuropecontains its credit contagion, we could be setting up for a strong finish to a turbulent year.
Influenced by worldwide chaos, the stock market is bouncing around like a pink rubber ball. It is locked in a tight trading range between over-bought and over-sold. We are bouncing becauseGermanywants to lead, but not pay forGreece’s bailout. We are bouncing because economic data is some days better than expected. Other days, not so much! We are bouncing because the market is always open in our new 24/7 world.
LONG, HOT SUMMER
Confidence is the greatest casualty of the long, hot Summer. Investors don’t trustWashingtonto deliver collaborative leadership to solve serious financial problems. Congress played with fire while perceived debt ceiling deadlines loomed … and the whole world got burned. Europeans don’t seem to trust anybody very much, especially each other. Despite the S&P lowering our credit rating, there is no doubt theU.S.maintains safe-haven status.U.S.stocks have held significantly better than nearly every other global market. The 7% decline for the S&P 500 in 2011 is mild in comparison to Germany, France, Hong Kong and Brazil which all dropped 20+%.
Investments that “worked” this Summer will likely morph into market leaders this Fall. The trend remains that large American companies producing innovative products and services will dominate. They remain lean, liquid and profitable cash flow machines, despite economic uncertainties.
DIVIDENDS are back in vogue like platform shoes and wide neckties. They will continue to gain prominence in portfolios because they are taxed at the 15% bracket instead of the earned income level which, for many working Americans, approaches 34%. Dividends have the ability to cushion a stock from falling too low if selling pressure appears.
TECH STOCKS will continue to lead the pack, despite few dividends, because they CREATE wealth.America might not make stuff anymore, but it still makes-up things that never existed before. Creativity and engineering talent create a better way of life every day: by entertaining, communicating, time-saving; or merely waking you up in the morning. Call it the Facebook effect; people are staying connected better than ever.
JOBS are causing major angst among investors. We constantly hear the world will never be the same again unless jobs are created. This is half true. The job world inAmerica will NEVER be the same. Many jobs are gone forever, replaced by technology, computers and mobile communications.
HISTORICALLY LOW INTEREST RATES are the glue holding our American recovery together. With our central bank pledging to keep rates close to zero for two years, banks should soon stop whining about the strict government paperwork and write some loans so businesses can hire and innovate and create wealth in our country. Since the lackadaisical bank lending practices dug this financial hole until the collapse in 2008, it seems only logical and morally right that banks help dig everyone out.
The leaves may still be on the trees and sweaters still in storage, but in the world of retail, the holiday selling season has already arrived with bells on.
Consumers are in need of a pep talk. The pressures of unemployment, housing and high prices at the pump are eroding her confidence. She is guarding her cash. And saving it. Five years ago, the savings rate was a meager 1.7% but today has reached 5%. Because the consumer represents two-thirds of theU.S.economy, we expect some of her savings will be spent to welcome Santa.
We expect tepid 2.5% growth in holiday spending this year but some growth is better than no growth. Consumers will do more shopping online (at an expected increase of 12%) but will also buy holiday gifts in the mall. This year, smart shoppers will be armed with lists and know their prices before leaving home.
Three things will convince consumers to open their wallets this holiday season:
1. Price-sensitive shoppers will be drawn to sales
2. New colors and silhouettes in apparel are important
3. “Hot” electronic gadgets, especially anything that begins with an “i” as in iPad or iPhone, will win.
While this holiday season will be challenging, we believe the holiday spirit will prevail. Ho ho ho!
TECH BOUT by J.K. Bedell
The social networking battle has begun.
GOOGLE+ VS FACEBOOK
In this corner is Facebook, the reigning champion with 800,000,000 members, fresh off a first-round knockdown of Twitter. Even your grandma has Facebook.
In the opposite corner is Google+. It’s new but 25 million users signed up in the first 27 days, of which 75% are male.
As the bell rings, Facebook attempts a facelift to compete with the upstart Google+. Possibly Facebook shot themselves in their billion dollar foot by drastically changing the look and feel that made them famous drawing comparisons to the now devoid-of-life MySpace.
More updates as the heavy-weight social media bout progresses.
On August 5, bond pits erupted at the news that Standard & Poor’s downgraded the credit rating of theU.S.from AAA. Markets sold off around the world; ironically, money plowed into U.S. dollars as well asU.S.Treasury Bonds. Despite our credit rating, theU.S.remains a safe harbor.
The latest policy from the Federal Reserve Bank has been coined Operation Twist. The Fed will purchase $400 billion U.S. Treasury Bonds with long maturities. Simultaneously, they will sell the same amount of bonds with short maturities. This action exerts downward pressure on long-term interest rates, especially mortgages. Lower mortgage rates should revive the beleaguered housing market, as you can see in the box below.
BONDS STILL IMPRESS
Our bonds still impress us with rock solid prices amidst global unrest, while yields continue to lord over CD and Money Market returns. Municipal bonds continue to show relative strength as the fiscal constraints in municipalities have subsided since the flare up last fall. They continue to show strong demand with their tax-free status and known outcome.
Interest Rates on 30-year mortgages fell to 4.01 %, the lowest level in 60 years.
Mortgage rates tend to track the yield on the 10-year Treasury note. Worries overEurope’s debt crisis drive investors into safe US Treasury bonds, thus forcing yields lower.
Cheap mortgage rates haven’t helped home sales yet because many Americans are too strapped to buy or refinance. High unemployment, scant wage gains and large debt loads have kept them stuck. Low mortgage rates could provide some pop for the economy, therefore, the government is expanding programs to help more eligible homeowners refinance. When people refinance at lower rates, they pay less interest on their loans and have more money to spend. Hence, consumers can leadAmericaback to normal growth.