TGIF! April 15, 2016

Competition is an important thing.  Taking an idea or concept and working hard to see it through to success has been the backbone of our economy for decades.  It’s the American way.  Innovation has brought new inventions and achievements previously considered merely a dream.  Competition brings out the best performance.  It’s really grow or die.  That’s nature’s way.  The Space Race was really triggered by Soviet leadership.  The “Sputnik moment” was the realization that the US needed to really focus and work tenaciously to get ahead or risk being left behind.  NASA responded with a fever pitch, and put the first man on the moon.  

Competition often starts between 2 leaders.  Example: For years it was Coke vs Pepsi, Ford vs Chevy, McDonald’s vs Burger King, and IBM vs HP.  It also applies to sports, with Lakers vs Celtics and Martina vs Chris.  These were classic duopolies who seemingly owned the marketplace for years.  Competition was fierce between 2 titans, with very scattered smaller competitors fighting for scraps.  It is easy to understand why people were afraid to compete with the big boys.  But if 1 of the Titans slipped, not only would its largest rival be ready to take advantage, so would the little guys.  And in most cases, throughout history, it’s the little guys that are the innovators that the Big Boys need to keep an eye on.   The best and the brightest tend to start small, shakeup the competition and build an empire from scratch.  Apple, In-n-Out Burger and Gatorade quickly come to mind.

The Golden State Warriors are proving this out brilliantly.  This team and their style of play has captivated the nation, and have the rest of the NBA scrambling to catch-up.  People who don’t really care about sports, let alone basketball, are tuning in with greater frequency to catch the excitement at Oracle.  73 wins in 82 games had never happened before.  It was unthinkable for the Warriors just 5 years ago.  It’s such an astounding accomplishment.  But it certainly won’t mean as much if they don’t finish the postseason on top.  They’re going for it, and their chances are great for another title.  But they have to continue to play well when it counts.  They have to compete when the level of competition rises.  Win or go home.  It’s a great thing.

One institution not used to competition is the Organization of the Petroleum Exporting Countries, better known as OPEC.  The organization was created for pricing power and strong influence in the oil market. It’s a cartel.  OPEC is not known for innovation.  Their skill has been more in price manipulation.  OPEC produces approximately 1/3 of global oil today. Saudi Arabia is the largest producer in OPEC.  The Saudi’s and the rest of OPEC benefited mightily from years of $100 oil.  It could be said that OPEC got complacent.  All the while, the Energy industry has experienced a renaissance from innovation throughout the US.  Technological advancement made it happen.  We are no longer importing as much oil as we used to.  We are also using alternative, renewable sources like never before.  The US is producing more energy now than it has in decades, becoming the top producer by eclipsing both the Saudi’s and the Russians.  Russia is not an OPEC member.

Russia will be attending a significant meeting this weekend in Qatar.   OPEC will be discussing the current state of energy and how to best compete.  The price of oil has been extremely volatile going from $110 down to $26 in just 18 months.  Since those lows in February, the price of oil has surged 60% to over $40.  OPEC needs higher oil prices. They hate that their control has slipped.  The plummeting oil price earlier in the year was devastating to global markets. There are so many entities, countries and companies, that were facing default if low prices continued.  There was tremendous stress in the financial system.  Higher oil prices was really the only savior.  They got it. It’s provided major relief.  Stocks have rallied.  The DOW is back near 18,000, and it’s all-time highs.  Few in February thought this was possible.

Things are much, much better than they were 8 weeks ago.  But they’re far from perfect.  Our big concern entering the new year was the substantial stress in the credit markets.  We’re not convinced its over yet.  The price of oil is a key barometer.  So is the Dollar.  Oil is traded in Dollars and have a natural inverse relationship. Recently the Dollar has been weak while oil has been strong.  That could easily change at anytime, and we are studying it closely.  Dollar strength would surely send oil lower, and likely stock prices too.  This has been a strong rally, and we’ve enjoyed it.  We expect volatile price action to continue for a while longer.  We’re on it.

We’ll be following the Warriors on Saturday and OPEC on Sunday.  Bedell Frazier is always competing for the benefit of your financial health and well-being.  We’ll be back, dark and early, on Monday.


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