The Decade That Was
By Jude Bedell & Mike Frazier

The first decade of this 21st century ended on a high note, at least as it applies to investment markets. The historic Recovery Rally of 2009 has helped heal some of the wounds wrought by worldwide financial collapse, but much work remains to be done to resume a strong and sus­tainable U.S. economy. Back-to-basics investing has improved our footing since we emerged from the rubble of recession just nine months ago. Growth has returned to America, and though more jobs are needed, once again the resiliency of our people has been tested.

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Google celebrated its fifth anniversary as a public company this year while APPLE blew out 33 candles. Both were game changers and remain in front of the pack, forging forward with new applications, new hardware and broader access for millions around the globe. These two companies literally changed the way Americans do business with each other and the world at large. Sure they had help from the chip guys, the telecom crowd and the garage gang but it was the entrepreneurial integrity of these masters that sent the Internet into warp speed. And the best is yet to come as Google’s version of iPhone hits the hype waves on January 5, followed shortly thereafter by Apple’s new tablet. We’re following expectations, sales and earnings probabilities for both companies. Both stocks are heading higher in 2010 and we do not plan to miss the fun.

A stellar example of the influence of the Internet is our up­coming book about bonds. Instead of publishing it the old fashioned way, we went straight to the Internet and directly onto KINDLE, the digital reader made famous by AMAZON. Kindle sales have tripled this year. There is already an APP STORE version for your iPhone and a free version of Kindle for your home computer. Welcome to the new world!

Healthcare
As our nation struggles with changing the American healthcare system, we are finding myriad investment opportuni­ties. Most of the best ideas result from our superior technology being applied to one of the prickliest problems we face in the ensuing decade.

Many companies sell software and many others sell services, but we are focused on the application of software in medical treatment, specifically the sharing among health professionals of a patient’s tests, exams and prescriptions for better, faster and less expensive treatment.
We abandoned investing solely in large pharmaceuticals. We stuck with BIOTECH companies seeking cures for cancer and AIDS. We believe in GENERIC drugs. We continue to embrace these investment themes while beginning to surround them with new ideas like electronic medical records.

2010 will feature change in healthcare, so we are prepared for volatility among healthcare stocks. However, God hates cowards so we are investing NOW in companies that will do well in the new environment where many more people will seek medical care and buy more prescription medicines. It is time again to think proactively about investing in healthcare where enormous progress to cure patients is happening every day. Let’s be there!

Energy By Mike Frazier As the global economy continues to recover, demand for energy will be at the top of the list. The eco­nomic crisis sent oil and gas prices plummeting. $100+ per barrel of oil had producers feverishly ship­ping oil supplies to market, which resulted in an oil glut. Speculators took prices to nearly $150 a barrel, a seemingly artificial high. When the crisis ensued, demand evaporated, and that oil bubble burst. After a freefall, which took oil prices down 80% to $30 per barrel in just five months time, black gold is on the ascent once again. Despite the need for alternative fuels, the world still runs on crude. And it will for a while. There is a finite supply and growing demand should keep the price of oil elevated.

In response to the economic crisis, oil companies cut back on production substantially. Oil and gas exploration is a multi-year program, which is costly, and results take time. The supply/demand balance is difficult to manage.
Fueling this global economy will rely heavily on new supplies of oil and gas. China has been building oil reserves for months now, and cannot get enough energy to meet its insatiable thirst. The Chinese are seeking new oil across the globe, from the Middle East to Africa, Brazil and Canada.

The massive discoveries of natural gas within North American shale can go a long way to bridge our dependence away from foreign oil. For that reason we continue to like natural gas investments. It’s abundant, it’s 50% cleaner than crude and coal, it can be used for transportation today, and it’s free from unfriendly foreign regimes. Exxon’s purchase of XTO lends credence to this call, and will go a long way to raise awareness for this cleaner fuel.
We stay committed to the long-term prospects of alternative energy, such as solar, nuclear and wind. Technological advancements will ultimately make these solutions cost effective and viable. But they won’t replace crude. Despite the weakness in 2009, Energy was the best investment industry in the decade by far; it was up over 100% during this time. The stocks are cheap, and the future remains bright for the energy sector.

International
The recovery has been led by international markets, and this is a trend we see continuing in 2010 and beyond. China has been the biggest driver as the country modernizes. China is no longer an emerging market; they have emerged. The Chinese are an economic superpower and have a peerless appetite for growth. In fact, China has grown from 5% of the global economy to 8% in just five years. The U.S. has held firm at 25% for a while. At this rate, China is expect­ed to supplant the U.S. as the dominant economic power by 2030. As China transitions from an economy of exports to one of consumption, the demand for energy, consumer goods, and other basic materials will remain strong. We con­tinue to seek investment in companies that make products and services that Americans need and the Chinese want.

Brazil and Australia are nations heavy in raw materials. They provide much of the stuff that builds the Chinese infra­structure, like copper, iron-ore, uranium and oil. They’re also among the largest miners of gold. Both nations’ econo­mies benefit from growing demand and rising prices for commodities. These growing export economies are creating new wealth domestically, which leads to increased consumption and demand for goods and services at home. And a critical ingredient that both Brazil and Australia possess are stable governments that believe in free markets and glo­balization. Transparency cannot be underestimated.

Brazil is the dominant economy in South America. You might be surprised to know that Brazil is now the largest pro­ducer of beef, chicken, coffee, sugar and orange juice. With its recent award to host the Olympics in 2016, Brazil will show the world that they’ve emerged too. We are proud to have been there early.

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In 2010, consumers are resolving to change their spending and live within their means. They have been burned too many times: watching their 401ks get pummeled, suffering severe house price depreciation and seemingly insur­mountable credit card debt. Consumers are using credit cards far less – in part because creditors have lowered their spending limits and in part as a way to curb their spending and stick to their New Year’s resolution of living within their means.
The one area shoppers will continue to spend is technology, but luxury retailers, jewelry and apparel will suffer.

The successful retailers of 2010 will be the ones who have the right blend of the right merchandise at the right time and at the right price. To survive another year, retailers must keep inventories lean yet plentiful and sell effectively online and internationally – where demand continues to increase.

Santa may have kept many retailers afloat in the fourth quarter of 2009 but one thing is for sure: the consumer is more cautious than ever before. For this reason big box retailers like Costco will continue to profit and retail food out­lets like McDonalds will flourish.

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In 2009, we witnessed an unprecedented rally in credit markets. From Corporate bonds to Preferred stocks to Municipal bonds, they all rose dramatically in value as their respective yields fell. A huge bifurcation between Treasuries and Corporate/Municipal bonds occurred in 2009. The ultimate safety trade reversed quickly as Treasuries lost almost of 15% of their value. The 10-year Treasury yield moved up from 2% to close the year at 3.8%, with a lot of large swings back and forth. Your Corporate and Municipal bonds, however, maintained a steady upward trajectory in price throughout the year.

With the Federal Reserve holding down interest rates for an extended period of time, short-term rates and money market yields will remain in the cellar for the foreseeable future. Longer term rates have started to creep up as the bond market prepares for better economic growth. With inflation remaining in check and continued strong demand for bonds, it is hard to see rates drastically rising in 2010. This is a great time to be a bond investor.

Interest rates reflect supply and demand. The U.S. Government has already announced its plans to sell $2.55 trillion worth of Treasuries next year, a 38% increase over 2009. We are still in a long deleveraging cycle and the demand for interest-bearing instruments has never been greater. With short term rates among historic lows, investors are forced out along the yield curve to seek higher returns. Investors aren’t happy with their hard earned savings earning close to 0% in money market funds, therefore, strong demand for bonds will continue well into 2010 and help keep a lid on the popular media hyperbole of runaway interest rates.