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Looking Forward: 2008 — the Year of the Rat

2008 is the year of the rat. The Chinese say those born in these years make good and wise advisors and at times hunger for power and money. They are also charming and intelligent. Sounds about perfect to us money-manager types!

Following five years of a Bull Market in stocks and bonds, the rat that will plague Wall Street in 2008 is the credit crunch. We are braced for an economic slowdown in the U.S. for the next two quarters as a result of credit market turbulence.

Eco 101 defines a recession as two consecutive negative quarters of GDP. Simple folk describe it as the time your neighbor loses his job. A depression is when YOU lose your job … but we digress.

A 2008 recession? Probably not. But slowing growth is a virtual certainty. 2001 was our last U.S. recession. It lasted eight months. While we see the U.S. avoiding a true recession in 2008, American economic weakness will likely be exported to Europe and then to Asia.

Despite our prediction of NO recession, we plan to invest as though one were imminent, just to be on the safe side.

We will invest in sectors that flourish in times of economic weakness, such as bonds, high tech, digital-based entertainment, energy and utilities, global healthcare and anything “green” … except the U.S. greenback. This is called TARGET investing. It worked well for us in 2007 when the stock market rose only 3.5% blamed on credit, housing, slowing economy and the dumpy dollar. Our stocks dramatically outperformed. WHY? Our targeted investments were themes and trends that were on-point; these investments powered forward as the economy began to lose steam. For more information, see “Looking Back” on page three.

The investment themes we will follow in 2008 are:

Bond investing will pick up in 2008 as a safe haven. Yield-seekers will persue the elusive investment goal of known outcome in their portfolios. Predictable and budgetable cash flow from bonds is especially vital for retirees. The graying of America is a solid investment theme for 2008.

Energy investments which surged 30% in 2007 have long been the centerpiece of our investment strategy and 2008 will be no exception. Stalwarts like Exxon and Chevron
have tripled in the past 5 years while
returning investors some pretty fat dividends. Why? They’re growth stocks now, no longer just dividend-rich old faithfuls. Tight supplies and growing global demand from developing

nations will keep crude oil prices elevated and comfortably above the critical $86 level while heading for $125/barrel, ending the year at $97. Continued terror threats and the weak U.S. dollar keep pressure on oil prices.

The cleaner-burning alternative, natural gas, has reaped considerable profits for our investors in 2005, 2006 and 2007. 2008 won’t be any different as we ferret-out successors to Burlington Resources and Western Gas which were both acquired.

Green (Alternative) Energy thrives on high oil prices as citizens of the world seek cleaner air and a safer environment by eliminating CO2 from their space. A push to be less dependent on middle east crude oil contributes to the green-fever. Cleaner and cheaper fuels such as solar, wind, and even nuclear will prove that crude oil is not the solo solution to

our long term energy needs. The alternative energy trade is only JUST BEGINNING. Green is the new red, white and blue! We expect great things ahead even though our darling solar stocks have risen 100% to 200% in 2007.

High tech: The tech revival was the main theme of 2007 and will repeat that dominance in 2008. High tech means innovation, which is why both consumers and corporate wallets will continue in earnest to chase the tech stock leaders. Emerging populations and new wealth open new markets and the biggest and brightest should

continue to dominate. This is good for Apple, Google and Cisco among others. We will continue to build meaningful long term positions in these leaders of the pack but take some time to dally with an upstart from time to time. During slow growth economies, tech stocks play like entertainment stocks in their resilience to recessionary pressures.

Global health care continues to intrigue us as new middle-classes emerge from developing nations. The politics of healthcare is the kill-joy but Baby Boomers with increased life expectancy should help investors stick with the natural winners. We intuitively KNOW healthcare costs are rising and it is only a question of WHO will pay the bills: the government, the employer or YOU. This assumption makes Generic Drug investments a no-brainer. Ditto for medical software and Medicare management.

China hosts the 2008 Olympics. Skeptics say the August international event will spell the end of the China Boom. Wrong. Once the world SEES China “Up Close & Personal” on NBC-TV, Chinese investing will hold

more allure than ever before. The Shenzhen which is reserved exclusively for Chinese investors went up nearly 500% since 2005

Inflation is our silent enemy and it looks like CPI inflation is back above 4%. This is the result of U.S. dollar weakness. We think the Fed will have to spend considerable inflation-fighting effort in coming years which will result in a tepid recovery from the 2008 slowdown.

The Fed has been unusually accommodative but is probably close to the end of its rate cuts, and will try to use other confidence-building techniques going forward. Housing fears are overstated. Yes, mortgage delinquencies and foreclosures are real but should not have a severe impact on the 2008 economy.

In closing, as we research, trade and monitor your investments in 2008, we will remember the words of French novelist Marcel Proust (1871-1922) who proclaimed, “The voyage of discovery lies not in finding new landscapes, but in having new eyes.”

Happy new year from all of us at BIC!

Looking Back: 2007

By Mike Frazier

2007 brought us a heavy dose of just what we expected. In fact, several of our beginning-of-the-year predictions have proved accurate—and the proof is in the portfolios.

This time last year, we foresaw that the Fed would be lowering interest rates to keep the U.S. out of recession. Indeed, the Fed has been vigilant and proactive, lowering rates by a total of 125 basis points in 2007. Thank you, Mr. Bernanke. And speaking of interest rates, we expected the 10-year bond to linger between 4 ½ and 5 ½%. This was accurate for most of the year... pre-credit crunch.

Energy prices surged to new highs as global demand heated up and geopolitical risks remained high. $100 per barrel of crude oil was the whisper this time last year here at Bedell and 2007 brought us prices frighteningly close to this

prediction, closing the year at $97. Our overweight positions in the energy sector—and the accompanying gains—are a testament to the prescience of this insight as well as to the world’s voracious appetite for oil.

High oil prices, along with a growing consciousness of climate change, have rocketed investments in alternative energy to spectacular heights.

Last New Year we announced our renewed commitment to power our portfolios with GREEN stocks and have reaped rewards from our solar plays. “Green” was a dominant theme of 2007 and it’s not going away anytime soon.

Speaking of green, the greenback took a serious pounding in the past year. The dollar fell 10% against the Euro and other currencies. Growing more wary of the U.S.’s growing deficit, global investors chased assets in higher-growth economies. This theme caused

overseas investments to outperform domestic ones and the foreign names in your portfolio—as well as US names that do big business overseas—have enjoyed impressive gains.

We’ve wrote extensively during the year on the troubles in the US housing market and indeed, the multi-year boom in home prices came to an abrupt halt in 2007. The villain: reality. Homes just couldn’t keep appreciating 20+% per year.

The boom was fueled by sub-prime mortgages. Then banks and other lenders took a good hard look at just how many loans were likely to turn sour, and massive write-offs of bad debt expense took the whole financial sector on a slippery slope. We have been significantly underweighted in financials for this very reason.

Fixed income investments other than Treasuries took a similar turn for the worse for the same reasons as financial stocks. No one can be certain who is holding the undesirable bag of sub-prime loans and investors clambered for the safety of Uncle Sam’s promise to pay.

Overall, 2007 was a good year for average investors – and a great year for strategic investors. We were diligent to spot trends and themes; insightful enough to discretely add them to appropriate portfolios, and disciplined enough to stay the course. Therefore, 2007 was a very good year.