TGIF – Emerging Markets on the Run

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Emerging Markets on the Run

Emerging Markets have been running hot this year. But you don’t really hear much about it. Investors are finally taking notice. A decade and a half ago, Emerging Markets were all the rage. It was the BRIC nations that represented the greatest growth opportunity around the globe for investors. BRIC stands for Brazil Russia India and China. The BRIC nations got hit hard during the Financial Crisis, and have only recently recovered. Emerging Markets are up over 20% this year, but are well below their all-time, pre-crisis highs. In fact, they still remain below their 2014 levels. China is now the 2nd largest economy in the world, but is still considered an Emerging Market. Of the 4 BRIC’s, India stands out.

India is now the 7th largest economy in the world. Growing over 6% annually, India’s economy is accelerating again and is on track to become #3 by the end of the decade. Prime Minister Narendra Modi has been implementing economic reforms required to bridge the gap between the potential and the reality. Modi announced a plan to spend $59 Billion on India’s infrastructure, focusing on roads, rail and airports. Also included in the plan is a massive Tech buildout of servers, networks and storage. India is investing in themselves and their bright future. Apple has made a big push recently to capture the Indian market, the second largest market for phones. The lack of internal infrastructure in India has led to many internet-based business models, and they’re taking off. India is where China was 10 years ago, in terms of consumer spending. But the opportunity for growth is enormous.

Emerging Markets account for 85% of the world’s population, but only half of global GDP and less than 10% of global market cap, i.e. Total Global Stock Market value. Importantly, Emerging Markets will be responsible for over 70% of the economic growth in the coming years. India and China are the fastest growers. They also have the largest populations by a long shot, with over 1 Billion people each. Most Emerging Market nations have very young populations. Half of the world’s population is under the age of 30. 9 out of 10 live in an Emerging Market.

Besides the young populations, Emerging Market nations share another common theme: Commodities. Emerging Market nations in Africa, South America, South East Asia and the Middle East are rich in raw materials. When the global economy picks up momentum, demand for raw materials like industrial metals, agriculture and energy go with it. Global infrastructure and development is about building new stuff, modern stuff. That requires tons of raw materials. These are longterm themes that look sustainable.

The DOW and S&P hit fresh all-time highs again this week. The gains continue to come in the face of so much skepticism. Earnings Season has just begun, which will provide the necessary facts to confirm the health of this rally. The global economy is expected to grow 3.5% this year, while the US is slated for 2% growth. Emerging Markets are expected to grow 4.5%, leading the way and their stock markets have been playing catch-up, but remain well below their all-time highs. For those concerned that the DOW is too high, rest assured, there are plenty of investment opportunities out there. We could see a needed breather ahead, but see tremendous opportunity beyond.

Have a nice weekend. We’ll be back, dark and early on Monday.

Mike

P.S. Check out the huge difference between the charts since the Financial Crisis below!

TGIF – Big Picture Metrics

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Big Picture Metrics

As we turn the corner into the 2nd half of the year, we thought it timely to show a few Big Picture metrics we follow to help give a sense of where the economy and markets sit.

Jobs

The June jobs report came out today and was about where we expected it to come in and stabilize the run rate of annual jobs created. After the economy broke positive in 2011 from the financial crisis we have averaged a run rate of +2.14 million jobs created annually. Today’s report puts us right back at that trend at +2.18 million created. For reference, the hottest peak labor market hiring was +3.3 million in February of 2015.

Manufacturing & Industrial Production

Both hit new cyclical highs in June after peaking in late 2014. If you recall we saw the S&P 500 go through a flat period from 2015 to early 2016 as these numbers started to slow. Manufacturing & Industrial Production started to show expansion last fall which gave clues the economy was about to expand again after resting for a year and a half. These are both humming along as expected for a strong fundamental backbone of the markets.

The Bond Market

We saw the 10-year Treasury yield start 2017 at 2.45% and drop to a low of 2.14% in June. Fast forward a few weeks and the 10-year Treasury yield is pushing back to 2.40%. What was unique about this move down in interest rates at the longer end of the Yield curve, was how much the Yield curve Flattened, because the front end actually rose. What does that mean? The Yield curve is measured by taking the 30-year yield, or furthest out in time, and subtracting the 1-month bill or 3-month bill yields, or closest to today. The yield curve was 2.62% steep as we began 2017. Now a few weeks ago the curve “flattened” from that 2.62% all the way down to 1.85%. Why is this important? Often times when the Yield curve inverts or goes negative (pays higher rates in the front maturities then the further out maturities) it is a big sign of economic weakness and potential recession. For reference the last “Inverted” Yield curve we saw was in 2006/2007 and we know what followed a year or so later.

The Yield curve since that 1.85% low has “steepened” back towards 2.0% in a quick 2 weeks. This is exactly what we want to be seeing in tandem with rates beginning to move back up. The end of the curve is moving up more than the front again.

Earnings & Revenues

Earnings rose 13% and 5% for Q1 and Q2 respectively, while Revenues rose 8% and almost 4% for the first 2 quarters. Earnings are still on pace to grow around 12% for 2017 and revenues around 6%, which would be sufficient to earn $128 a share and support our 2500+ target on the S&P 500 this year.

There will continue to be quick dips and vacillations along the way, but from our perch these are not the characteristics of a stock market top. They continue to look like very normal “late stage” economic cycle fundamentals.

Have a nice weekend.

Mike Harris

TGIF! June 30, 2017 – Bedell Frazier Summer Newsletter

The Bedell Frazier Summer Newsletter is here! We are officially two-quarters through the year 2017, and it’s certainly been eventful. The US Stock Market continued its record run to close out the first half of 2017, despite the increasing turmoil both here and abroad. Earnings are the biggest driver for stock prices, and earnings growth has accelerated for the first time in a couple of years.  The US economy continues to chug along while the global economy has actually strengthened.

To download the complete Bedell Frazier Summer Newsletter, please click here.

TGIF – The Price We Pay

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The Price We Pay

When you think of inflation, what immediately comes to mind? Do you think about mortgage rates in the early 1980’s? Maybe the cost of a loaf of bread today or what a Coke cost when you were 10 years old? You probably cringe at the thought of how much you paid for that hot dog and beer at the ballgame the other day. Inflation is the general increase in price of a product, good or service. Sometimes it’s driven by increased demand or reduced supply, while it also can be a function of a higher cost to produce. We see the results everyday.

Anyone who has paid attention to California real estate over the years knows very well that prices have increased substantially over time. A house purchased in San Francisco in 1987 is worth on average nearly 6X more 30 years later. In 1987, tickets to Disneyland cost $21. It’s over $100 today. A can of Coke has doubled in cost from 30 years ago. A call at a phone booth cost a dime in 1987 while today it costs… wait a second, what’s a phone booth?

So clearly there have been inflationary pressures over the years. We certainly have seen it in the price of food, healthcare and education. But we’ve also seen some serious deflationary pressures as well. Intel Founder Gordon Moore observed that computing power would increase over time while cost would decrease at an exponential pace. Moore’s Law has proven a valuable force in pricing innovative products. A 50-inch television in 1987 cost over $1200. You can get a 50 inch HDTV today for under $300. Stating the obvious, the quality of the picture has improved quite a bit in 30 years while the price has dropped dramatically. We’ve certainly experienced deflationary pressures in our industry. The average trade commission for stocks was around $50 in 1987, though some “full service” brokers charged as much as $500! Electronic trades are under $10 today.

Price at the Pump

Gas prices have experienced both inflation and deflation over the years. A gallon of gas cost 79 cents in 1987. It’s $2.27 today. When the price of oil reached $150 in 2008, the national average was $4 per gallon and over $5 in California. Historically, gas prices and oil prices have been a barometer for economic growth. Stronger demand implies economic growth, which drives prices higher. That hasn’t been the case of late because oil and gas prices today are driven by the increasing supply in the US, which has outpaced demand. Importantly, demand continues to grow, particularly overseas. Some people have been concerned that falling Oil prices means a recession is coming. The deflationary pressure in gas prices is not a negative sign for economic growth, in fact the lower prices are an important stimulant, particularly for the American Consumer, which represents nearly 70% of the US economy.

The Fed has been concerned about deflation ever since the crisis, which is why they were so aggressive to increase the money supply with rounds of quantitative easing to help stoke inflation. The Fed has yet to achieve its goal of 2% inflation, as measured by the Consumer Price Index, on a consistent basis. Part of the issue is we have been importing deflation for years in the form of Chinese manufactured goods. The Amazon effect has driven consumer pricing down as well since commerce has become much more efficient. This is a trend that should continue. It’s great for consumers but can hurt jobs.

Pay attention to prices this summer and think about what they used to be. In some cases you’re paying a lot more for seemingly the same thing while in other cases you’re getting quite a bit more and paying much less. Of course I’m factoring in absolute Dollars and not considering currency inflation and deflation, which is another subject altogether. I know my grandfather, who passed away in 1992, wouldn’t believe people today pay $3 for a bottle of water…

Have a nice weekend. We’ll be back, dark and early on Monday.

Mike

TGIF – The Amazon Effect

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The Amazon Effect

The big news of the day, the week and perhaps the decade for retail is Amazon buying Whole Foods. It looks like a really compelling fit. Amazon needed help cracking the urban retail market and Whole Foods needed help in pretty much everything. Amazon has a disruptive business model. It has had the greatest influence on how people make purchases today. The Jeff Bezos led company started off selling books. Amazon has shaken up every aspect of retail. Today they just torpedoed the grocery business.

Amazon the Disruptor

Amazon sent shockwaves throughout the North American retail chain with news it is buying Whole Foods, in an all-cash deal. It will be the biggest deal in Amazon history. It will be the biggest deal in the history of the $800 Billion grocery business. With this deal, Amazon will immediately be the 5th largest grocer in the US. It won’t stop there. It’s going to be a game changer of great proportions. Amazon has built an empire and has proven that it can and will compete with nearly everyone. The Amazon effect has reached nearly every industry. It changed the retail business. It changed the server and storage business. It has changed the logistics, delivery and distribution business. Only Amazon could get the mailman to work on Sunday! Amazon has even disrupted Hollywood, breaking into show business when so many others failed. Amazon won an Oscar this year, the first time for a streaming video provider. The company has been active in original content with Amazon Prime series for a few years.

The opportunities are boundless for Amazon with these physical stores integrated with its web based stores. There is quite a bit of overlap between its existing Prime members and Whole Foods shoppers. Amazon has mastered the study of consumer behavior. It has been tracking people’s purchases and searches for years and know more about people than they perhaps know about themselves. It has so much data and metrics to analyze. Amazon has been an innovator in the artificial intelligence space, and knows a great deal about human behavior and continues to sell people things that they want or need in a very efficient and easy manner. Amazon is pretty good at selling things that you don’t need too…

Amazon is paying nearly $14 Billion for Whole Foods. That comes down to roughly $30 Million per store. The grocery business is a tough business. It’s hyper-competitive. The profit margins are very low. Amazon knows low margin business. It was clear that Bezos wanted to get into the food business when he rolled out Amazon Fresh. But early experiences saw the difficulty of providing fresh food sold over the web. People generally don’t like bruised bananas and moldy berries. Most prefer to see the meat and touch the fruit before purchase. Having Whole Foods stores will enhance the Amazon Fresh pickup model, where you have the option to buy merchandise online and pick it up within 15 minutes. It’s clear that Amazon doesn’t plan to stop here. What Amazon is likely thinking; they just purchased over 400 upper-income area hubs throughout the country to distribute pretty much everything they sell. Competitors be warned.

What does this mean?

We ask ourselves this question all the time. Clearly all retail stores have been struggling, and this will make things even more difficult. Drug stores are on watch too. Amazon could be a huge player in the prescription drug industry and it already thrives on selling dry goods. Warehouse stores like Costco will feel the pressure. But how about this; online food delivery is expected to grow 15 times faster than the restaurant business through the end of the decade. People would rather order meals online and have them delivered to their home than go out to eat these days. Amazon will no doubt capitalize on this trend. There will be more white Amazon vans coming to the neighborhood.

Generally, mega deals don’t work. This one looks like it will. It should be good for consumers but possibly bad for jobs. Amazon will drive already competitive prices even lower. It should bring Whole Foods prices down too. But it speeds up the irreversible trend towards automation. That’s been a job crusher. You know Google and Apple are watching with interest. I saw an interesting tweet this morning which said that a summer job returning shopping carts in the parking lot just became an entry level position in high tech. Perhaps so. It’s the Digital Age.

Have a nice weekend. We’ll be back, dark and early on Monday.

Happy Father’s Day!

– Mike

TGIF – The State of the World

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Planet Earth Is A Confusing Place

Trying to make sense of these global developments has been a challenge. We are always up for challenges.  The thing is, these days information travels at the speed of light. The problem is: knowledge does not.

I had the great fortune of meeting Former CIA Director and Defense Secretary Leon Panetta a couple of years ago. This week I attended his lecture series with Former Secretary of State Condoleezza Rice and Former Defense Secretary Ash Carter, who succeeded Panetta in 2014. These are 3 of the smartest people on global issues. The topic was THE WORLD, and the focus was on Russia, North Korea, Cybersecurity and the United States. It was quite an event.

The discussion began with the established understanding that the United States is facing threats not seen since World War II. Growing aggression and failed states are breeding grounds for terror. Foreign governments are behind much of the cyber espionage, manipulation and theft. How the international community is responding to these threats has changed in 2017. The panel reminded us that the “international community” is a bit of a farce. Self interest always drives strategies. Pre World War I was a zero-sum game, driven by national interests. Post World War II has seen global collaboration with democratic competition in relative peace. The fact is, Americans have become “allergic” to war and nation-building overseas after Afghanistan and Iraq. The populist movement created the Trump Presidency and Brexit. NATO and the Paris Climate Agreement is testing the strength of the West’s 7-decade allegiances. The current administration’s foreign policy is still evolving according the panel. The One China policy and NATO are examples of this. Secretary Carter said that the US needs to stand for things and get what we want through competitive behavior with collaboration.

Rice, Carter and Panetta all agreed they would have advised the President to stay in the Paris Climate Accord. Even though it is limited in what it can do, Condoleezza Rice said she believes the U.S. can and will continue to achieve economic growth in an environmentally conscientious way, embracing sustainable energy sources with traditional. The panel also reminded everyone that nothing will change until 2020 at the earliest. Rice said that China leading the environmental push is a joke. “Have you tried to breathe the air in Beijing recently?” She quipped. Rice reminded the group that the U.S. continues to lead as evidenced by its 66% reduction in carbon emissions output over the past several years.

Naturally, someone in the audience asked them about their thoughts on the President’s use of Twitter. They acknowledged it was a serious issue, but was also a method that helped get him elected. Broadly speaking, Panetta, Rice and Carter are concerned about the use of social media and politics. “Democracy takes time. It takes listening and compromise”, said Secretary Carter. Today, people send out personal thoughts immediately, often emotionally driven, and it is documented forever. Having emotional thoughts and discussions is as old as humankind. But they are best practiced behind closed doors in a professional forum. They’re dangerous out in the open. Leaders need clear and consistent messages. We don’t always get that right now.

© Panetta Institute via YouTube

As it pertains to Russia and Vladimir Putin, Condoleezza Rice had this to say: “I know him pretty well and he is an eye-for-an-eye kind of person. He is still unable to accept that the Cold War ended as it did. He called the end of the Soviet Union the greatest tragedy of the 20th century”. Rice said he always tries to project strength. He only respects strength. He thinks of himself as “Vladimir the Great”, following the line of other Russian and Soviet leaders. Putin has played a weak hand masterfully as he has reasserted Russian influence on the global stage. The fact is the Russian economy is a 20th century model, driven by fossil fuels. They are having trouble competing in the digital age, but the weakening alliances in the West and the political infighting in the United States could not have been scripted better for the Russian leader. Putin loves these disruptions. An interesting observation that the panel made was what an effective move that Secretary of State Rex Tillerson did when he said the Russians are either complicit or incompetent in Syria. He called them on it, to their face, on Russian ground. That was an important moment. Vladimir Putin makes sure that nobody questions his competency.

In closing, Mr. Panetta asked what issue kept them up at night. Ash Carter gave a list in order of North Korea, Russia, Iran and China, but that his “job was to stay up at night so Americans could sleep”. Condoleezza Rice answered differently. Her greatest concern is that America loses the energy, commitment and confidence to do the right thing. As soon as we stop defending values, the American way begins to dissolve. “It would be an ugly world without us…”.

Despite all of the problems we face, America’s best days could absolutely lie ahead. It won’t happen by itself. We have a vibrant, innovative economy and a way of life that is the envy of the world. But there are serious issues to address. There’s a great deal of anger and animosity. Listening and patience are being left behind. We’re never going to agree on everything. Unfortunately, compromise has become a four-letter word. United we stand. Divided we fall.

Have a nice weekend. We’ll be back, dark and early on Monday.

– Mike

TGIF – New Highs and Mixed Messages

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New Highs and Mixed Messages

It’s a new month, but a similar theme: The Stock Market just doesn’t want to go down.

It had been trading sideways since March, in a very tight range. June started out with a bang and the rally continued, with the DOW and S&P reaching fresh new highs. It keeps happening in the face of so much turmoil and confusion in Washington and around the globe. Many are just scratching their heads in disbelief.

It seems so counterintuitive, but it shows that stocks are driven more so by earnings and corporate growth than politics and geopolitics.

Friday brought a disappointing job report. What’s worse, both April and March were revised lower, showing the labor market is not as strong as previously thought. A big problem is the fact that some jobs can’t be filled due to the lack of qualified skills, particularly in Silicon Valley. It may also be a sign business leaders are reluctant to expand their workforce until they see more evidence the White House plans are translating into legislation that’ll simplify and lower taxes and accelerate growth. Our sense is this Market had been pricing in tax reform and other pro-growth policies being passed in early 2018, not this year, but it’s still very much up in the air.

With these revisions, the 3-month average of payroll gains was the weakest since 2012.

Is the economy slowing or is it a temporary issue?

The Bond Market is showing some signs of concerns with the 10-Year Treasury yield back below 2.2% for the first time this year. Money has been flowing into Bonds of late, seeking a little safety. As a refresher, Bond yields drive prices. When yields go up, prices go down and vice versa. Will this new bit of uncertainty have the Fed switching gears? It doesn’t seem so, with the Futures Market pricing in a 91% probability of another interest rate hike in 2 weeks. We will find out soon enough. One thing is certain, there still is a great deal of skepticism out there.

As we’ve mentioned on numerous occasions, Bull Markets generally grow on skepticism and die on euphoria. There is very little euphoria out there, but there is some brewing. We’re starting to see it in Tech, where some stocks have been soaring while the broader Market has not. The Top 5 stocks in the S&P 500 are having a huge impact on this Market rally. They are Apple, Google, Microsoft, Amazon and Facebook. Case in point, these 5 stocks represent a mere 1% of the 500 S&P companies. However, they represent nearly 13% of the weighting of the index. These 5 Tech stocks have been the biggest drivers for the US Stock Market. It’s even more pronounced when you consider the Tech-heavy NASDAQ. The same 5 stocks represent over 40% of the weighting of the NAS 100 index. It’s a handful of stocks that are driving the rally. It’s a momentum rally. The Bull Market is maturing. A rotation of leadership is overdue. It’s needed for the next stage of this Bull, in our work. We still see higher levels to be reached. We definitely expect the choppy price action to continue.

Have a nice weekend. We’ll be back, dark and early on Monday.

Mike

TGIF – What’s in Your Wallet?

Bedell Frazier Investment CounsellingTGIF!

Bedell Frazier Investment CounsellingTGIF!

Currencies are always Market moving, but what happened this week was particularly noteworthy.

Currencies are always Market moving, but what happened this week was particularly noteworthy.

Currencies are always Market moving, but what happened this week was particularly noteworthy.

Bitcoin is all the rage.  The value surged in price, crossing $2,000 for the first time.  One bitcoin was worth nearly $2,800 on Wednesday.  It was worth $1,000 just a month ago.  Some of you might be wondering what exactly is Bitcoin and where did it come from?  Bitcoin is what’s called a cryptocurrency.  You don’t carry them in your pocket.  It’s completely digital.  Bitcoin was created in Japan in 2009.  The actual creator is unknown, but believed to be a group of software programmers under the name “Satoshi Nakamoto”.

Most retailers do not accept bitcoin for purchase, but you might be surprised who does.  Bitcoin is accepted at the Gap, Subway and Whole Foods.  It can also be used on Expedia and Virgin Airlines.  There’s a Bitcoin ATM at a North Beach Market in San Francisco and a gas station in Concord, California.

Bitcoin runs through a digital network known as a blockchain.  It keeps a secure record of each transaction all in one place. Every time anyone buys or sells bitcoin, the transaction is logged.  No one controls these blocks, because blockchains are decentralized across every computer that has a bitcoin wallet, which you only get if you buy bitcoins.  It’s a very efficient system.  Competition in the digital currency space has been fierce.  Bitcoin used to account for over 85% of the Market in February, but is now just 45%.  One of its competitors, Zcash, is up over 200% since it cut a deal with JP Morgan Chase.  You can see why tech savvy consumers love it and government  regulators do not.

Bitcoin’s anonymity also lends itself to crime.  Bad guys use them too.  In fact the recent WannaCry ransomware demanded payment in Bitcoin.  It was reported that Disney was a victim and the new Pirates of the Caribbean film was being held for ransom.

Despite the rapid growth of cryptocurrencies, cash is still king.  Cash is convenient. Cash is private. Cash is intuitive. Cash does not require transactions costs.  But cash really only works with direct handoff and can be clunky to carry and easy to be stolen or lost.  In this digital age, there absolutely is a pressing need for a digital currency that works.  Cryptocurrencies serve that purpose.  It’s still very early in this trend.  Despite many attempts, nothing rivals the US Dollar.

Today, over 1/3 of consumer transactions in the United States are paid with cash.  It is still the single largest source of payment.  But, if you combine debit and credit cards, they account for nearly half of consumer spending habits.  Roughly 10% of all purchases are made online today, and it’s certainly growing.  Bitcoin is included in this.  Checks and other electronic payments are less frequent but tend to account for the larger transactions.  No surprise, cash is more popular for smaller purchases.  But outside the United States, over 80% of transactions are paid in cash.  Cryptocurrencies will likely play a much bigger role overseas over time as new consumers enter global markets.

The world still loves Dollars.  It’s probably not a surprise that the $1 Bill is the most common note in circulation.  George Washington’s face is on just over 30% of the $1.1 Trillion Federal notes in circulation.  What might be a surprise is the $100 Bill is in greater circulation than the $20 Bill.  It’s close (26% vs 23% of total), but Ben Franklin wins out over Old Hickory.  There are more $100 Bills overseas than in the United States.  Have you ever wondered why our money is green?  It was hard to copy, which helped prevent counterfeiting.  In 1861, money was first printed with green ink on the back, which quickly earned the name the “Greenback”.  Knowledge is power.

These Markets move fast, but we’re all over it.  Have a fantastic Memorial Day weekend.  We’ll be back, dark and early on Tuesday.

Mike Frazier & Alice Scarlett Baker

 

TGIF! May 19, 2017

Bedell Frazier Investment CounsellingTGIF!

Bedell Frazier Investment CounsellingTGIF!

TGIF - The Bull is Still Alive and Kicking

TGIF – The Bull is Still Alive and Kicking

“Has Trump killed the Bull Market?” That was a headline from one of our research sources this week. The title is certainly an attention getter, and many investors have been no doubt thinking this was possible, if not probable. But remember, Politics rarely drive Markets. Earnings and economic activity take that role. To be sure, Politics absolutely influence Market activity. Government policies can both help and hurt investment as it applies to tax treatment and regulation among others. But earnings and economic cycles are much more powerful and natural. They’re demand driven. Politics feed on emotion, which can be enhancers and detractors from progress. These are indeed emotional times in which we live. We do not think the Bull Market is coming to an end quite yet. We have however prepared for increased volatility.

The Market finally got rattled this week as the issues at the White House continued to escalate and the severity of the situation grew by the minute. For most of the 7 months since President Trump was elected, the Market has taken his controversial and unconventional behavior in stride. The focus has been on earnings and economic acceleration. Both have been better than expected. That is a really good thing. But it feels a little different now, and the controversy surrounding classified intelligence and Russia is catching up to the President. The prospects for tax reform and other pro-growth policies are seemingly slipping away while the White House scrambles to maintain composure. The Market doesn’t like it and has begun repricing those expectations. Wednesday brought the biggest selloff on the year. But keep in mind the S&P 500 hit a fresh, all-time high on Monday. The week ended on a high note for stocks, but the weekend no doubt will be full of more news and events.

Things still look ok under the hood, no cause for panic yet
The credit markets are functioning properly. That wasn’t the case in previous corrections. The yield curve has flattened a bit, but mostly because the front end has increased, which is normal with expected Fed rate hikes. The Dollar is weak, and has been for a while. After hitting 15 year highs, the Dollar has erased all its gains for the year, and is back at the level it was ahead of the election. This is important because it suggests that the Market believes there is risk to a strengthening US economy and the stability and predictability of the US government is actually in question. But a weak Dollar is good for American products overseas. The only problem is, global markets are still mired in the debate about free trade and fair trade. That will likely continue. Our sense is the Fed will be a little more careful with their interest rate hike campaign now, in light of the Washington turmoil. A rate hike in June is still likely, but beyond is very much in question. For the first time in years, money has been flowing out of US assets into international stocks. Gold has also been a recipient of money leaving the Dollar. We like our exposure in both these areas, which we began building last year.

It was a big week for Oil, which broke above $50 again. Russia and Saudi Arabia, the 2 largest oil producers, agreed to extend production cuts for the rest of the year in an attempt to drive the price higher. They’re also combatting the continued production acceleration in Texas. But global demand is increasing, largely driven by India and China. The global economy is showing signs of acceleration. Energy stocks have had a tough go this year, but we believe higher levels are ahead.

Earnings Season is basically over, and was very solid, with the S&P growing earnings over 13% in Q1. It was the best quarter in years. But the focus has turned towards Geopolitics, which brought more volatile price action to the mix. So many investors haven’t trusted this rally and are shocked that the Market has gone up as much as it has this year. This Bull Market is definitely in the latter stages of its life. Low rates and slow growth are unique characteristics that could make it the longest in history. Right now it’s second only to the Dot.comrally in the 90’s. As famed investor John Templeton eloquently said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria”. There is no euphoria today, a dominant characteristic from the 2 prior Bull Markets that ended very poorly. But Bull Markets don’t move in straight-lines  either. We are not getting overly aggressive to protect the downside, as we still think there is more life in this Bull yet. But we did raise cash and initiate a hedge for a reason last week. A healthy correction is coming; the only question is when. Tighten those belts and hang on for the ride. We’re all over it.

Have a nice weekend.

Mike

 

 

TGIF! America’s Got Energy

Bedell Frazier Investment CounsellingTGIF!

Bedell Frazier Investment CounsellingTGIF!

Gas prices are falling ahead of Memorial Day, which is the official start to the Summer driving season. Usually, gas prices start rising.

TGIF – America’s Got Energy

Gas prices are falling ahead of Memorial Day, which is the official start to the Summer driving season. Usually, gas prices start rising. It’s not due to demand. With the US economy accelerating and unemployment low, cars are expected to be on the road en masse this Summer. Low gas prices have also triggered more purchases of large SUV’s, which consume more fuel.

The US economy is far less dependent on oil now than in year’s past, but we still consume a lot. Americans consume roughly 20 Million barrels per day, the most in the world. China is second at 12 Million. Demand has been growing, which is a really good sign for the global economy.
Russia is the largest producer, recently overtaking the Saudi’s. Both produce over 10 Million barrels per day. Someone else is right on their tail.
America’s shale boom has brought unwanted competition to OPEC, and less demand for foreign oil. The US is now producing 9.3 Million barrels a day. It is back near all-time highs. We produced 5 Million barrels per day just 6 years ago.
I was in Texas this week for my annual trip meeting with clients and visiting rig sites. 40% of US oil production comes from Texas.  Most of the new production is coming from the Permian Basin in West Texas. Midland is booming! Drilling rigs and pumps were everywhere and active. Hotels and restaurants were packed and real estate prices have surged. It is the complete opposite from what I encountered there 2 years ago when the region was depressed from collapsing oil prices.
Technological innovation has made oil production much more cost effective. The US has led the charge and have completely disrupted the Energy industry and is driving OPEC nuts. The Middle East and Russia don’t know how to deal with the US producers because they’ve never had such nimble and strong competition.
The US has become the swing trader in global oil and that’s a powerful place to be. The Market enjoys this situation because the growing US Energy production adds stability and predictability to the global equation.
If you’re surprised that the DOW and S&P are holding up so well with the alarming issues in Washington and around the world, look no further than earnings growth and stable energy supplies. The credit markets are acting well too. 6 years ago the Market would have been rattled by these events. The Russians know it. The Chinese know it. Outside the drama of DC, big things are happening across the country. We are still believers in the future for renewables. But for now, in these challenging times, the world still runs on crude.
Happy Mother’s Day!
We will be back, dark and early on Monday.
Mike

 

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