Summer 2011 Newsletter

Bedell Frazier 2011 Summer newsletter bannar

Stocks and Bonds are in the sweet-spot for investor capital, and the Summer of 2011 should set the stage for a second-half rally on Wall Street.

The Spring economic “Soft-Patch” was exacerbated by the Japanese earthquake and its ensuing disruption of the global supply chain. OnceJapangets back on grid, economic activity should normalize worldwide. In addition,Chinashould once again commence investing in its own economic infrastructure after successfully cooling inflation fears. A return to global growth could be just around the corner.

CorporateAmericaremains in strong shape. Companies are sitting on sizable cash positions while maintaining clean Balance Sheets that are superior to most governments’. The Fed will keep interest rates low for the remainder of the year, making money markets and CD’s unattractive investment vehicles.

On the negative side of the equation areU.S.housing and European debt. OurU.S.debt worries the world. Smart business managers know the best way to reduce debt is by increasing sales/revenue. The second best way is cutting costs. In any efficient business, BOTH methods are used in tandem. TheU.S.government could follow this simple model.


One of the most stressful issues facing Americans today is fear of outliving their savings. The first round of Baby Boomers turn 65 this year but have to wait to collect Social Security due to changes in the rules! The full retirement age is now 66. Really!

This large segment of the population has significantly influenced American economic activity since World War II. They will exert even greater pressure on our economic system as they begin to draw down their Social Security benefits, their pensions and their 401K accounts. The wake-up call is ringing because HALF the Baby Boomers face a lower standard of living in retirement. WHY? Because one-in-four has zero savings. ZERO. Social Security was never designed as a total solution to old-age income; it’s meant to be a safety net. We work diligently to preserve nest eggs by growing them sanely via the compounding of dividends and interest, as well as picking certain investments to appreciate over time. Nothing works unless Boomers develop a budget and stick to it. This is more than a shameless plug for our financial planning work but the combination is what works when coupled with careful investment selection and discipline.


Baby Boomers are creating demand for dividend stocks to complement their Social Security and pensions. Therefore, solid stocks paying reasonable dividends should be rewarded by rising prices. This dividend demand will surely pick up in the coming years. Retirees will want income generated from their investments, but still NEED growth. Quality dividend stocks provide both. Favorable tax treatment will not expire until 2012, but we don’t see a big change, perhaps a jump to 20-22%, which would still make dividends quite attractive. To magnify the benefit of dividends: The tax rate on qualified dividends is 0% or 15% depending on the individual’s income tax rate.


Droves of Baby Boomers are seeking income and stability from bonds. This desire to gather income-producing investments has driven bond prices through the roof. This is good for bond investors who are watching their net worth soar. But this surge in demand makes it tougher to find bonds with solid credit ratings as well as adequate cash flow to supplement Social Security.

There is plenty of good news though, because bond yields will rise as soon as the economy heats up. This is an excellent time for corporations to issue bonds because interest rates are almost zero. As more bonds are issued, yields will return to more normal levels and the games will begin in earnest.

Consumer Corner  by Meredith Rosen

Summer is upon us, but theU.S.consumer is still worrying about high gas prices at the pump, stubborn unemployment and FOR SALE signs in the neighborhood. Penny Pinching has become an aerobic sport at the grocery store. Consumer sentiment is flat, but buying always picks up when the BACK TO SCHOOL signs appear. In the retail cycle, December is just around the corner … which means the holiday shopping spree that begins in September should pump up consumer spending.

As the Summer driving season heats up, prices at the pump are cooling off. The Federal Government released oil reserves just in time to save the Fourth of July. The average price stands at $3.63 nationally, which is still $1 more than we were shelling out last Summer. We often refer to pump-price inflation as a “phantom tax” on the consumer. Lower prices at the pump means consumers will have more money to spend elsewhere. Any decrease in gas prices will be a catalyst for consumer spending.

Housing weakness weighs heavily on consumer sentiment. Home prices in some areas are at the lowest levels since 2003. The inventory of pre-owned homes listed for sale fell to a nine month supply. With 1.7 million currently in the foreclosure process, the housing supply may rise before it can fall again.


Hollywoodis helping consumers get off of their couches and into movie theaters. As usual, it’s time for the Summer blockbusters: those films that mean big bucks not only for the studios but also for hoards of retailers selling product tie-ins.

Movie studios are no longer just making films, they are building franchises. If a title was successful once, chances are it will be successful again. Look at the lineup: Cars 2, The Hangover 2, Kung Fu Panda 2, Pirates of theCaribbean4, Transformers 4 and Harry Potter 7.5! For many of these franchises, a successful film can lead to much more than box office bucks: we’re talking merchandise here, folks. Disney has put over 300 Cars 2 products on the market, such as Cars Kleenex and Cars juice boxes. Wall Street expects those licensed retail sales to eclipse Toy Story 3 which made about $2.8 billion. The Cars franchise has already generated $10 billion in global retail sales since 2006. Vrooom! Vrooom!

Bonds   by Mike Harris

As we reach the midpoint of the year, it’s time to re-visit some unusual influences effecting interest rates, hence the bond market. There are a few phenomena occurring

in theU.S.which will be very advantageous to bond holders.


First is demographics. Today, there are over 40 million Americans 65 years old or older, which is 13% of our population. 10,000 Baby Boomers hit the magic age of 65 every day! By 2030, the +65 year old group is set to reach 25% of our Population. Never before in our history has the 65 and older group been such a large percentage of the populace. This group will drive the demand for safe, interest-bearing, fixed-income securities to a level we haven’t witnessed heretofore. Since 2000,U.S.pension assets have increased 50% and their allocation to fixed income (Bonds) has steadily risen with it. Advantage: bond holders!


Modest domestic growth is keeping a lid on interest rates. When economies are firing on all cylinders, companies and individuals continue to demand loans to invest in future plans. Banks and lenders can increase interest rates because there is robust demand and the borrowers continue to believe they can beat their cost of capital.

USbanks are struggling under the weight of decaying mortgages. Our central bank has been propping up the banks by lowering interest rates, which now stand close to zero. The combination of lower housing prices and historic low mortgage rates has made housing the most affordable in years. Housing is a large component of calculating inflation and therefore, has counteracted the impact that rising commodity prices have had. This surely doesn’t help a family without a mortgage and a fixed budget to pay for groceries, but it does have a profound impact on keeping interest rates lower which is positive for bond holders.


As the calendar changes to July, it brings the end to the Federal Reserve’s Quantitative Easing II. This program aimed to stimulate asset prices by purchasing Treasury securities to keep interest rates as low as possible. Even with the Fed stepping back from its purchases of Treasuries, the large demographic shift combined with modest current growth and low inflation will continue to keep demand strong for Treasuries and all high-quality Bonds.

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