Quarterly Newsletter
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Quarterly Newsletter
SPRING 2012 NEWSLETTER
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Put a Little Spring in Your Step!
by Jude Bedell & Mike Frazier
Spring Fever. Some define it as the feeling of restlessness experienced by many people at the onset of Spring. We define it as both a blessing and a curse. Why? Because although it lifts our spirits, it also invites risky behavior.
Spring is a prolog for Summer, and many people think theU.S.economy will wilt in the Summer heat. TheU.S.stock market had its best start in 14 years. The euphoric rocketing of stock prices suggests that a pause is needed, and we won’t be surprised with a bit of a correction, though not convinced one is imminent. Stock market corrections are a healthy filtering process within bull markets; they clear-out excesses and keep stock prices real. Our Spring/Summer optimism is based on three economic indicators. These are gauges we watch to confirm that theU.S.economy will continue to perform well heading into Summer.
1: INITIAL UNEMPLOYMENT CLAIMS
These claims do not suggest economic slowdown. In fact, statistics reflect proliferating perceptions that the labor market is making a solid comeback. For good reason, improving job numbers are positive for stocks. New claims were running around 400,000 last year. We expect new claims to drop to 300,000 by year-end, an impressive 25% improvement. Though still high, the unemployment rate is at three-year lows.
2: CONSUMER COMFORT
Despite rising gas prices at the pump, consumer confidence levels continue to rise. Mild weather across theU.S.brought an early Spring shopping season. This “shop until you drop” attitude will be further aided by a late Easter. (It’s two weeks later than it was last year.) This translates into more pedal-pushers, bonnets, open-toe shoes and dresses, dresses, dresses. Spring fever is boosting consumer spending sooner than usual. High gas prices remain the biggest risk here.
3: LEADING ECONOMIC INDICATORS
Ten different indexes are now showing decisive signs of improvement. We identified two of them above. A third one is the Stock Market itself. Why? Because it has always been a forward-looking indicator of the economy, both good and bad. TheU.S.economy should continue to perform surprisingly well in coming months. Further expansion should also push bond yields higher and cause more investors to shift funds from bonds to equities. (See page two for our analysis of the bond market!)
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Weekly TGIF
Every Friday since July 5, 2002, we’ve published a newsletter called TGIF. The genesis of TGIF was our five-year participation in the Contra Costa Times stock picker’s column. We were among ten firms competing. Our internal brain trust would get together every Friday afternoon to compare notes and come up with our stock recommendation for the week. The competition was a huge hit with readers and we enjoyed participating in this column. In fact, we once got an unsolicited phone call on a Wednesday from a subscriber inquiring about our next pick, so the eager investor could front-run and buy the stock ahead of time. We got a chuckle out of that.
If you recall, 2002 was a challenging time for stocks. It was the worst of the three-year Bear Market resulting from the dot.com bubble burst in 2000. Most of our co-participants abandoned the contest, complaining it was bad PR. Many scarred investors loathed stocks, and couldn’t tolerate the Stock Market. We were one of the last three standing when the Contra Costa Times decided to pull the plug on the endeavor. The Stock Market hit bottom in October of that year.
Since we enjoyed our Friday strategy sessions so much, and found value in putting our ideas on paper, we decided to bring it directly to our valued clients. TGIF allows us to communicate our thoughts and strategies in an efficient manner and hopefully provide some education and entertainment along the way. TGIF is now nine years old and counting and we hope you enjoy it!
Thank God It’s Friday! May 18, 2012
Welcome to Facebook Friday. The biggest and most hyped IPO finally came to market today.
The buzz was high, and the BIG question was where the shares would actually begin trading. The final IPO pricing was $38 Thursday night. It opened at $42, hit a high of $45 and closed right back at the IPO price of $38. Nearly 600 Million shares traded in its debut. Unbelievable! For perspective, at a $104 Billion Market Capitalization, the Facebook Company is instantly more valuable than Disney. This is a moment in history to remember.
The business reporters failed to remind investors that one of the unique experiences of today’s IPO was the skinny sales commissions awarded brokers. FB’s management restricted the commission to 1.5% so the “little people” could participate in the future growth. Also it’s the 100-share buyers who will tuck away the new shares for their grandchildren whereas the day traders would buy at 38 and flip the shares moments later to grab the quick trading buck. The PLAN worked. Management also authorized releasing thousands more shares than anticipated which gave even further distribution to the kind of investor who will hold the shares for long-term growth rather than a quick flip.
Unfortunately, the Social Media hype couldn’t help curb the slide for the Global Markets as the DOW has seen a decline in 12 of the 13 trading days in May. It’s been a rough go, but not a complete surprise. Europe remains quite sick. Everyone knows the well chronicled debt issues on the European continent. That’s not news. Greece has effectively already defaulted, but the major concern right now is its future with the European Union; will they leave on their own accord, or get kicked out? Regardless, a Greek departure would set a dangerous precedent for this economic union that started in 1993. Having one nation leave, would make it much easier for another, and then another. The Market doesn’t like it.
We’ve been on guard all year hoarding substantial cash positions to cushion the blow of a market correction. We will survive whatever comes our way, and play strong defense. But we won’t abandon our ability to look out beyond the near-term mess, and seek sound growth investments in companies that continue to innovate. The Facebook effect is real, and actionable.
Have a nice weekend.
By: Mike Frazier
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