Thank God It’s Friday                                                      February 17, 2012

The 3^rd Monday in February is also known as “President’s Day” in the United States.  Some no doubt think of it as another ski day, or clean out the garage day, or the day where every retail store offers unbeatable deals.

 The roots lie with Congress, in 1880, honoring George Washington, and making his birthday the first Federal holiday to honor an American citizen.  The holiday was observed on his actual birthday every year.  In 1971 the holiday was permanently moved to the 3^rd Monday of the month.  It later unofficially incorporated Abraham Lincoln’s birthday, and in the 1980′s became known as President’s Day.  For those keeping tabs, Lincoln never had an annual Federal holiday in his name.  They are both at the top of the list of Great Americans.

President’s Day 2012 will be especially eventful.  Not just because it’s an election year, and the campaign trail is kicking up plenty of dust and debris.  While we Americans will be honoring our Chief Executives, European leaders will be behind closed doors, in heated debate, trying to hash out another deal to bail out Greece.  Without more financial aid, Greece will default on their debt obligations in March.  Greece’s financial problems have been well documented for years now.  The country is still running 160% debt to its GDP.  That can’t last.

The Market has continued its strength in this new year because expectations have grown for this second Greek bailout.  Our international sources believe the European financial ministers are on track to approve a deal on Monday.  The proposed deal will allegedly contain a list of 24 “prior actions” Greece must undertake by month’s end to receive funding.  Unlike other troubled European nations, the Greeks have not embraced austerity measures to force spending cuts.  Time is almost out.

A healthy recovering Europe is a critical missing piece of the global economic puzzle; it’s a big one.  Remember, the US and Europe combine for half of global GDP.  Clearly this is going to be a long, drawn out process, as there is no quick fix to Europe’s troubles.  But you gotta start somewhere, and tough issues are finally being addressed.  This will be a big weekend in Europe. 

Needless to say, they won’t be celebrating President’s Day on Monday…. But we will.  George and Abe knew a little bit about dealing with a crisis. 

We’ll be back, dark and early Tuesday morning. Have a great weekend!

By: Mike Frazier

Thank God It’s Friday                                         February 10, 2012

The Greek tragedy is getting more complicated as their Parliament is balking at austerity, and the Greek people have staged another violent rally in protest, something we haven’t seen in months. European concerns are back weighing down this market which is already over-bought.

To bail-out Europe from recession, dysfunction and illiquidity, the International Monetary Fund (IMF) is utilizing KEYNESIAN policies to repair the European economies.  You may recall learning in ECONOMICS 101 class that Keynesian Economics embraces the theory that recessionary economies can be made to grow and unemployment reduced by increasing government spending and making reductions in interest rates.  It is a theory based on the ideas of economist John Maynard Keynes that optimum economic performance could be achieved by influencing aggregate demand through government fiscal (public spending and taxation) policy, not through the free market philosophy characterized by the classical and neo-classical schools.

While the drama in Europe continues to frighten American investors, we were hitting some important price resistance levels on the S&P-500 Index and DOW.  This seems like an appropriate time for markets to cool-off.  The spectacular rally we’ve seen to start the year is really an extension of the rally launched in October with little contraction nor consolidation.  The timing is ominous since historically February is amongst the toughest months of the year, rivaling September.  We had anticipated some profit taking, which is why we have been trimming positions on strength, and writing calls.  We are expecting 2011-like volatility to kick in a bit for the first time in 2012… and we are ready. 

Even with the broad market unraveling a bit, Apple stock has gone parabolic: Up nearly 25% on the year, and has blown through resistance.  Aside from Apple, the Market feels heavy, and a healthy correction is on the horizon.  Price weakness should be buyable, but we don’t necessarily need to jump in quickly.  We continue to let the Market be our guide, and the Market internals have been quite strong in 2012, and suggest ultimately more upside ahead.  But Europe and Iran are two menacing risks that cannot be taken lightly.

By: Jude Bedell

Thank God It’s Friday                                February 3, 2012

As we enter Super Bowl Weekend, stocks racked-up their best January in the 21st century. So, pass the dip and have a good time. Celebrate all the wins. Facebook moved this week to join the investment super bowl by filing its IPO, Initial Pubic Offering. Let the games begin for the behemoth of Social Networking. You’ve gotta LIKE it.

Markets are moving higher on the back of barn burner Payroll employment numbers published today.  243,000 new jobs in January doubled expectations. Doubled!  The unemployment rate declined to 8.3% from 8.5%.  All in all, this is an extraordinarily robust employment report.   As a consequence, we estimate industrial production rose 0.8% in January and personal income advanced 0.5%.  Obviously these improvements are bullish for stocks but a slight weight upon Treasuries which are still yielding around 2%. 

Back to our football metaphor! Just as DEFENSE wins championships, BONDS create defense in investment portfolios.  Stocks put points on the board BUT bonds keep the other team from scoring! We need a solid defense as much as we need a dynamic offense. You can’t have one without the other if you expect to win the game.

Still climbing a wall of worry, stocks are busting-out despite the negative noise from Europe. Meanwhile, there are plenty of investors who are mostly turning to indicators suggesting that the global economy might avert a recession in 2012 and may even surprise us all with its resilience. Globalization is getting some bad press right now, but nothing else has created so much global prosperity in such a short time in history.

Our fearless roving analyst, Mike Frazier, checked in today from Orlando after interviewing Defense Secretary Gates. Defense: Get it?  Mike also interviewed Mickey, Little Mermaid, Snow White and Tigger, too, with a little help from his twin daughters. Their report is expected next Friday.  In the meanwhile, enjoy the Super Bowl and relish in the thought of your investments climbing higher in 2012.                                     

By: Jude Bedell

Thank God It’s Friday                           January 27, 2012

2012 is the Year of the Dragon. It started on January 23rd. In Eastern philosophy, the Dragon is said to be a deliverer of good fortune. Hopefully, this year we’ll see a profitable relationship between the stock and bond markets and the Chinese Zodiac. The Year of the Dragon recurs every 12th year, and 2000 wasn’t a good year for stocks but 1988 rocked!

The US economy could deliver good fortune this year based on the “double recovery” scenario. Such a rosy outlook depends upon long-delayed recoveries in housing, autos sales, and employment this year. We are encouraged by recent confirmation of this scenario by several economic indicators especially our nation’s GDP which counts the total market value of all the goods and services produced. Today, we learned the GDP rose 2.8% in 2011. Not bad. Not bad at all. We’ll take it!

It goes without saying certain doomsayer economists disagree with our optimism. According to Bloomberg Research, the dismal economists at Goldman and Nomura are already spoiling the fun by claiming seasonal adjustment factors are unreliable due to the severe economic downturn at the end of 2008. They also blame the weather. Please? This year is experiencing warmer and drier weather than usual, but that is no reason to whine. Many business indicators are affected by weather.

It often makes sense to expect the worst, but we are not convinced the economy is fundamentally weak. Au contraire, we are encouraged by consumer confidence rebounding recently. The Consumer Sentiment Index and the Consumer Confidence both rose sharply during December, with the former continuing to move higher in early January. Both indexes are highly correlated with employment trends. This tells us that the labor market is improving because the economy is warming up. Car sales are hot, really hot.

The Federal Reserve Banks of New York, Richmond , and Philadelphia publish indexes which are decidedly upbeat. The details suggest that the fundamentals really are improving. Saving the best for last, this week the Federal Reserve Bank announced interest rates will be kept low for the next 3 years. This gives our bond portfolios a strong advantage. By pegging the federal funds rate at zero and targeting inflation at 2%, THE FED is fostering growth in the USA . We’ll take it and make money. Keep your eyes on the Chinese Dragon though. There are signs it is coming back to life and could provide a big spark to the global economy.

By: Jude Bedell

Thank God It’s Friday                              January 20, 2012

At Bedell Frazier, we’ve always been big fans of technology. We use it all the time to boost our productivity and stay ahead of the curve. We launched our own website 15 years ago, long before our peers.  We have an all-MAC office now.  Last year, we moved many of our systems to the Cloud but enough about us. Suffice to say: We love tech.

When the tech bubble burst 12 years ago, we affirmed our discipline: Don’t pay too much for growth, especially in the IT sector. The problem with most Information Technology industries is that there are far fewer barriers to entry and less protection from failure than anywhere else in our economy. Rapidly growing tech industries and companies attract lots of financial and human capital that can quickly destroy “yesterday’s” technological innovations and rapidly erode profit margins. No other industry is as prone to commoditization as is technology. Tech companies come and go rapidly.

Since 2009, tech stocks have been selling at about the same multiple of earnings as the overall market. The Price-to-Earnings Multiple is known as P/E Ratio.  You may recall the P/E for tech stocks peaked at a record 48 during March 2000.   Some companies didn’t even have earnings.  We called it the dot.com bubble.  Fast forward to today when we enjoy CHEAP tech stock multiples around 13 times earnings. This is the same P/E as the overall market, making today’s prices the cheapest they have been relative to the market since December 1995. Tech is a highly competitive sector with a higher profit margin and faster growing earnings than many other sectors. To repeat, we still love tech!

This week, GOOGLE missed earnings expectations but IBM beat estimates. GOOG is barely a teenager founded a dozen years ago, while IBM, founded in 1910, is over the century mark. BOTH companies have a market cap of roughly $200 Billion. Sure GOOG stock got a little ahead of itself, but has the momentum and is still trading at 13 times this year’s earnings. But those earnings should grow 20%.  Worried? Nope.  We are not worried about GOOG or IBM.  They’re both re-inventing themselves daily. 

We are enjoying a stellar start to 2012 for the Bulls, the best start since 1987.  But that darn 10-Year Treasury Yield hovers around 2% which suggests we aren’t out of the woods yet.  The Bond Market is almost always smarter than stocks.  It keeps us on guard, but we are positively benefitting from this rally. 

BTW: When the 49ers face the NY Giants on Sunday, we’ll be yelling GO NINERS.  Please join us!

By: Jude Bedell and Mike Frazier

THANK GOD IT’S FRIDAY!                                   January 13, 2012

Happy Friday the 13th: A day that spooks many around the world. JP Morgan spooked the Market this morning with a revenue miss. Banks stocks have flown this year, so no surprise they’re getting hit on this news.

Adding to the bad luck background today Standard & Poors downgraded multiple European country credit ratings. France lost its prestigious AAA credit. This was no surprise. You may recall S&P did the same to the US in 2011. The downgrade is not news; but it most certainly is noise which spooked some investors. Today, on Friday the 13th, there are only 13 countries with AAA status.

Europe seems to be back on the fence with a potential embargo of Iranian oil. Euro leaders plan to meet January 23rd to discuss it further. Our educated guess sees any Eurozone embargo being delayed for 6 months. China has already said it will continue making purchases from Iran. Japan has joined with the US in the embargo. Meanwhile, UN nuclear officials are going to Tehran at the end of the month to begin discussions on Iran’s nuclear program.

We’ve had a nice start to 2012, so today’s sell-off is healthy. It felt as though we were moving too far, too fast. That said, this Market is demonstrating resiliency and it knows about all of these problems. Bonds continue to perform well after beating all other asset classes in investment performance last year. The 10-Year U.S. Treasury yield below 2% is a concern though, as it suggests that we have more problems ahead. Treasuries and Dollars are rallying against a weaker Euro today, which is down to $1.26. Time to pack your bags full of cheap Euros for a bargain vacay in Paris?!

Remember we’ll be closed Monday on the national holiday honoring Dr. King. TAX ESTIMATES are delayed until Tuesday, January 17th due to the holiday.

And finally, the San Francisco 49ers return to Playoffs tomorrow at 1:30PM. It’s going to be huge. Candlestick is going to be jumping like it hasn’t in 10 years. It’s good to be back. Go Niners!

By: Jude Bedell and Mike Frazier