TGIF – Back to School and Bull Markets

Bedell Frazier Investment CounsellingTGIF!

Back to School and Bull Markets

We hit the road, hosting our traditional “Back to School” events in the Bay Area. We were in Marin and San Francisco last week and Alamo this week. Our goal was to provide a check-in on where we think we are in this current Bull Market which began in the Spring of 2009, map out where we think we are headed and draw comparisons to its rival, the Dotcom Bull which came to an end in the year 2000.

We entered the year feeling very bullish for the Stock Market. Optimism was not widespread in January. There was a large segment of the population that was concerned if not downright scared about what was ahead. The uncertainty with the new administration and the vast geopolitical issues such as the Russian investigation, a potential trade war with China, and bubbling tensions with North Korea were very real, but unquantifiable. They were overhangs that we thought would continue but not derail the most important factor for the Market; accelerating earnings growth. It’s earnings that drive stock prices. After 2 years of earnings contraction, we believed that a return to growth was ahead and the rally would accelerate in 2017. In our minds, earnings were going to trump geopolitics, and send stock prices higher.

Our work suggests that a breather is now overdue and a 5-10% correction is coming. We’ve prepared for it, but so far it has not materialized. A healthy correction would clear out some of the excesses built up in this rally, and test the uptrend, which we believe has more to go in 2018 before a major top is formed and a deeper decline comes. We project that to be a 2019 event, which would set up another big move higher the 2020’s before this Bull Market finally comes to an end. This is how we see things playing out deep out on the horizon, but will always shift gears if something changes in our work.

So how does this 8.5-year-old Bull compare to the Dotcom Bull from the 1990’s that formed a bubble and burst in 2000? There are some similarities. Both were driven by Technology stocks, which became the largest sector by far. In 2000, Tech accounted for 34% of the S&P 500. Today, Tech is 23%. The Dotcom Bull was up over 400% while the current Bull is approaching 300% gains since inception. The major difference is profitability and valuation. Historically, the S&P 500 has had an average Price/Earnings (P/E) ratio of 15.5X forward earnings estimates. Today it is trading at 17.7X 2018 estimates. That is definitely on the high side, but not ridiculously expensive. When you consider the historic low-interest rates, the current environment is supportive of a higher multiple. Stocks have been much more attractive than Bonds with a comparable income yield. The Dotcom Bull was excessively expensive, trading at over 30X 2001 earnings estimates. And as it turned out, those 2001 estimates were a mirage, and never materialized which resulted in the crash. The Dotcom Bull will be remembered for irrational exuberance and companies like Webvan and Pets.com, which had neither profits nor a plan for profitability.

The current Bull will be remembered for Apple and Google and Amazon and Facebook; the new American Titans in this Digital Revolution in which we live. The seeds were planted in the rubble of the Dotcom bubble burst and the growth accelerated after Steve Jobs launched the first iPhone. That was the game changer, which connected everyone everywhere. Communication, content consumption and commerce all formed a confluence of activity on a very smart mobile device. Innovative companies capitalized on the move disrupting traditional businesses ill-prepared. Amazon certainly took it to the traditional retailers. Start-ups thrived in Silicon Valley and business models were created with an App and a digital footprint. The trends are sustainable and very much investable. The prospects for Artificial Intelligence, Virtual Reality and 3D printing are really just beginning.  Many of the stocks are just ahead of themselves right now. The Tech Titans have strong foundations and plenty more growth ahead.

This 2017 rally has exceeded our optimistic outlook. As we approach year-end this Market feels way overbought, but not excessively overvalued. There have been 53 record highs reached in 2017. We got defensive towards Summer’s end and it has proved to be too early. But our conviction that this Market is vulnerable to a correction is still in place. The DOW and S&P have gone up 16 of the last 18 days. The price action has not been normal. And they keep rising in the face of so many concerning issues that are seemingly escalating on a daily basis. At some point, the geopolitical risks will put some pressure on stocks, it just hasn’t happened yet, much to our surprise. On a big picture, we do think there is more room to run for this current Bull. Shorter-term, things look pretty slippery and signals that we are seeing below the surface still indicate a near-term sell-off is way overdue. Investors are pretty excited about DOW 23K. Today’s exuberance is not necessarily irrational, but it has grown in enthusiasm in certain areas. It’s much different than the more somber attitudes in the beginning of the year. Keep in mind, Alan Greenspan gave his “irrational exuberance” speech in 1996, 3.5 years before the bubble burst.

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

Mike

TGIF – Fire & Strength

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Fire & Strength

This has been just a horrific week in the Bay Area with the relentless fires just devastating substantial acreage in Northern California. So many of us know friends, family and colleagues that have been impacted, with many losing their homes, possessions and memories. It’s a complete nightmare. Our thoughts continue to be with the people in Santa Rosa, Sonoma and the Napa Valley, and the whole surrounding area. We have been in touch with our clients up there and continue to get updates day by day.

As was the case in the response to the hurricanes along the Gulf Coast, Florida and Puerto Rico, times like this bring communities together. It really puts things into perspective. How we deal with adversity is the true test of character. The people of Northern California are a tough and resilient bunch. Americans have unconditionally come together again to help other Americans.

Many of you remember the Oakland Hills Fire in 1991. That was in October as well. I will never forget it. I was a sophomore at Cal. Three friends and I headed up to the hills behind the Claremont Hotel to see if we could help. We came across a guy who was hosing down his house as his wife was feverishly packing up their station-wagon with their two little girls. We grabbed the hose and shovels to help dig a bit of a fire break until the fire department forced the evacuation. This family left their home not knowing whether they would return to see it. Three days later, I went back up to see if the house survived. It did. Unfortunately, so many other homes did not. I often wonder where that family is today in their lives. I never saw them again. I will never forget that day. I know so many of you won’t either.

As the winds have subsided a bit this week, firefighters from throughout the Western United States have been able to contain more of the relentless flames. There is a lot more to go. We have our fingers crossed for low winds and more containment over the weekend. The rebuilding process can’t begin until these fires are extinguished. The stress level in the area is just unimaginable.

We have been sending clothes and other supplies up there for those who had to leave their homes with just the clothes on their back. Many people still don’t know whether their house has survived the flames. We continue to send positive thoughts as well.

Santa Rosa Strong. Napa Strong. Sonoma Strong.

Mike and entire Bedell Frazier Team

TGIF! Bedell Frazier Fall Newsletter

The Energizer Bull keeps going and going… This Market just does not want to go down. The path of least resistance has absolutely been higher. Three quarters through 2017, the Bull Market continues to reach fresh, new highs in the face of so many challenges. Many of said challenges are political, geopolitical and social in nature. The one constant in 2017 has been strong earnings growth, and it is indeed earnings that drive stock prices.

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

 

TGIF – Tax Reform and a Remarkable Market Marathon

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Tax Reform and a Remarkable Market Marathon

Throughout history, people have loathed paying taxes and hated the tax collector.  It’s not dissimilar to how we feel about meter maids today. You know the drill, but the consequences just make you cringe.

At the top of the Market’s Washington wishlist all year has been tax-reform. The White House revealed an aggressive tax plan that was labeled “once in a generation”.  The goal is a tax cut for all Americans and a vast simplification of the overly complicated tax code. The plan received immediate praise and criticism, to the surprise of pretty much nobody. This is the largest attempt to fix the tax code since 1986. The plan sets out three Federal tax brackets for individuals: 12%, 25% and 35%, down from the existing seven rates, which currently tops out at 39.6%. The rate on corporations would be set at 20%, down from the current 35%, and businesses would be allowed to immediately write off their capital spending for at least 5 years. Pass-through businesses would have their tax rate capped at 25%. The White House tax plan also calls for repealing the alternative minimum tax, the estate tax and the generation-skipping estate tax. There is also a proposal for a one-time low tax rate for American companies returning offshore cash. That has been an issue for years, particularly for Tech companies.

A big sticking point to this White House plan is the elimination of the state and local tax deduction. Eliminating it would raise an estimated $1.3 Trillion that could be used to offset the plan’s proposed tax cuts. The issue goes straight to California, New York and New Jersey. Combined, these 3 states account for over 20% of the US population and nearly 40% of the deductions. This tax plan under its framework would actually result in higher taxes for many Americans, when it is being billed as a tax cut for everyone. Both Republicans and Democrats, particularly in these 3 states, are digging deep into the limited details. Further details are expected in October. The White House said they are open for negotiations on the state and local deductions but the 20% corporate rate is not negotiable. Now the hard part begins. Getting enough votes to pass will come with challenges. There are proponents and opponents on both sides.   Our sources believe ultimately a deal gets done, with many concessions and a corporate tax rate at 22-25% and in 2018, not this year. Let the Congressional games begin…

2017 continues to be a year with few rivals. September closed positive on the S&P for the first time since 2013. That certainly wasn’t expected. That sets up an interesting Q4, which is historically the strongest period on the calendar for stocks. As Washington keeps pushing back and forth on party politics, things are getting a little more unsettled overseas. The Spanish referendum vote is posing an increasing risk to European stability. Germany’s election secured Angela Merkel’s leadership, but the momentum has swung towards nationalism. Brexit talks continue but how the exit will go is anyone’s guess. Studies are showing that North Korea has made significant progress in their nuclear capability, which is much more sophisticated and dangerous than thought. Iran is considering abandoning the agreement in response to US comments. The world is far from stable.

This Market has found a way to stay up under any and all circumstances. It’s really quite remarkable. Investing is indeed a marathon, but there are so many sprints and lags along the way. There has been a major shift in Market leadership of late. For most of the year, the high-flying Tech sector dominated the gains. But in the last few weeks, Growth leadership has moved to Value. Tech and Health Care handed the baton to Energy and Financials. Energy was up a whopping 10% in September, by far the best performing sector. 2017 has been a tough year for Energy. But it is no longer the worst performing sector on the year and has serious momentum. Financials probably stand to benefit the most with a tax plan passage and were already moving higher with higher rates. Tech and Health Care are still the best performers on the year, but the leadership spread has shrunk. We are now 3 quarters down for 2017. The final 3 months will be eventful. Hold on for the ride. It’s been a Remarkable Market Marathon. Say that 3 times…

Our Fall Newsletter will be out next week, mapping out how we see and plan to position for year-end.

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

Mike

TGIF – Action Plans and Execution

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Action Plans and Execution

The headlines this week were dominated by tough rhetoric at the United Nations session regarding Geopolitical issues, with an emphasis on North Korea. The situation is concerning, without a doubt, and presents risks of great proportions. It’s been an issue for 7 decades but seems to be reaching a boiling point. That said, perhaps the most significant thing that occurred this week was the announcement that the Fed, for the first time, plans to begin the process of unwinding its $4.5 Trillion balance sheet, which was the result of aggressive policies to defend against the Financial Crisis 9 years ago to the date. It was a very risky and controversial quantitative easing experiment that took place under then Fed Chairman Ben Bernanke’s leadership. By most accounts, it worked. But not everyone believes that. The US Economy avoided a multi-year depression. The US Stock Market has nearly tripled in value. Taxpayers and investors made money on the experiment. Both the tactic and the length of time have been debated since day 1, and the debate continues.

Fighting the Financial Crisis

To combat the crisis, the Fed launched a couple of rounds of quantitative easing to help unclog the financial plumbing. The Fed bought troubled mortgages as well as Treasury bonds in order to increase the money supply, cut interest rates, keep borrowing costs low and help prevent further defaults. The Fed was a huge buyer of bonds in the open market which instilled confidence at a time when there was very little. Over the years, the Fed kept buying additional assets when the debt securities matured. It took the proceeds and kept buying new debt to keep interest rates low and ensure stability in lending. The result is a $4.5 Trillion bond portfolio. The make-up of the portfolio is $2.5 Trillion in Treasuries and $1.8 Trillion in mortgage-backed securities with the balance in other scattered assets.

Part of the Fed’s goal back then was to encourage investors to take a little more risk. The S&P is up 270% since the 2009 lows, making this current Bull Market the second largest and longest in US history. But investors who stayed in cash or bought CDs were disadvantaged. Now, for the first time since the crisis, the Fed will stop purchasing new assets with the proceeds from maturing securities. It is a passive strategy and something the Fed has signaled for quite some time. It’s yet another step towards normalcy in the aftermath of the Financial crisis 9 years ago. To be clear, the Fed is not selling any securities, something that would have a much greater impact, both mechanically and psychologically. But it’s no longer buying either.

A Really, Really Big Number

The Fed has never had a balance sheet this large in American history. It was $900 Billion pre-crisis. That in and of itself is a really big number. $4.5 Trillion is a massive sum of money. In other words, it’s $4.5 Million Millions. It also adds up to $13,000 for every American. How about that for perspective? The Fed’s goal is to get its balance sheet gradually down closer to $3 Trillion by 2020.

The process of unwinding its balance sheet could prove to be a little bumpy and isn’t without risk. In addition to the asset roll-offs, the Fed indicated its intent to raise interest rates one more time this year, three times next year, twice in 2019 and once in 2020. A lot will happen between now and 2020, but that’s the current plan. Central banks around the globe will be paying close attention, particularly in Europe and Japan who followed the Fed with aggressive monetary policies. The ECB and BOJ are still buying bonds today.

How this Fed unwind goes is anyone’s guess. Global markets were rattled in 2013 when the Fed started merely tapering the rate of its money supply injections. Interest rates spiked and global stock markets sold off. The Fed does not like to be the source of panic. Because of this, a very cautious path has been carved out for the balance sheet unwinding. There really is no case study to use to compare because it has never happened before. Taking such a large buyer out of the mix will have consequences, but the financial plumbing is so much healthier now. Fed Chair Janet Yellen said there is a high bar in place that would force a return to purchases. She said it would take a major shock to the system to switch gears and provide stimulus to the economy. Keep in mind, it remains unclear whether Janet Yellen will even be at the Fed after her term expires in February. So far, the Market has been taking it in stride, knowing this was coming for quite some time. But the actual doing is the most important part. Strategy and preparation are important, but it’s all about execution. As the great philosopher, Mike Tyson once said; “Everyone has a plan until you get punched in the mouth.”

We will be studying this very closely. We do expect some more bumps ahead. When the facts change, so do we.

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

Mike


The results are in from last week’s unscientific iPhone survey.

Despite only having 15% of global market share and 34% of the US market, over 90% of our survey responders own an iPhone.

Thank you to everyone who responded!

The numbers look like this: 

TGIF – The iPhone Turned 10

Bedell Frazier Investment CounsellingTGIF!

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The iPhone Turned 10

A Star is Born

10 years ago, on a warm Friday in June, our lives changed forever. It wasn’t obvious at the time. It sure is now. We had never seen anything like the device that went on sale that day. Now, you can’t go anywhere without seeing them. People are absolutely hooked. They bury their heads in them spending hours per day surfing, typing, listening, watching and talking to it. And it even talks back. It’s the iPhone, which was born in 2007, and it has revolutionized how people live their daily lives. It has so many functions. If you’re over 30, chances are you even use it as a telephone…

Before introducing the iPhone, Steve Jobs told people to “remember the moment: The moment before iPhone. Because, in the next moment, everything will change.” Mr. Jobs’ creation set the tone for the next stage of the digital revolution in which we live. It was the next big thing and it didn’t disappoint. The iPhone created an ecosystem for people to integrate devices and content, both remotely and in the home. It made it easier for companies to market and sell their products from anywhere. Transactions were made so much easier. It launched a flood of software start-ups who developed “apps”, a term Apple created when they started the App Store. Steve Jobs believed apps were an easier, faster and more personalized and eloquent way to engage content. Billions of people seem to agree with him.

The iPhone was not the original smartphone. Motorola, Blackberry and Palm all had theirs earlier. In fact, IBM’s Simon is considered the first smartphone, which arrived in 1992. It didn’t seem to make as big of a splash for Big Blue. The functionality of the previous devices was nothing like the iPhone. In 2007, Steve Jobs introduced the revolutionary multi-touch interface that let the iPhone smoothly pinch-to-zoom, scroll quickly, and the multitasking that allows you to seamlessly move from music to call to web to email and back. Indeed, we had never seen anything like it. Today, the iPhone accounts for 2/3 of Apple’s annual revenue. It’s that big!

The Next iPhone Super Cycle

This week, the most anticipated event for Apple, and perhaps Silicon Valley at large, took place in Cupertino. It was held at the brand new Steve Jobs Theater. The 10th anniversary iPhone was announced. It is called iPhone X; the Roman numeral 10 not the letter X. This was Apple’s biggest product launch in years and comes with many new features for the Apple ecosystem. The greatest attention getter seems to be the 3D Face ID Recognition feature. There’s no more need for passwords or security codes to use the phone. The device will directly capture a 3-dimensional image of your face, which will be required to open the phone and authenticate use of Apple Pay and other financial accounts. And Apple says that you need not worry if you grow a beard, or wear a hat or glasses, the phone will be able to identify the real you. They say only identical twins that are mad at each other are capable of unauthorized access. That will be a fun test at my house down the road. Of course, this Face ID function comes with its own controversies, but you can see the advancement in technology.

The new iPhone X is water resistant and has a powerful camera that would have been the envy in Hollywood just a couple of years ago. The phone is 70% faster with its A11 bionic chip. It will also come with a charging pad, so you’ll be able to get rid of all those cords. The screen is bigger too, taking up the whole face of the phone. The Home button is gone too. And the price tag starts at a whopping $999.

Augmented Reality

Perhaps one of the most important additions for this new phone will be its Augmented Reality (AR) functionality. This is the concept of superimposing 3-D objects into the real world. You football fans know how helpful the yellow first down stripe is on TV; that was a very primitive form of AR. The Pokémon Go craze last year was a great example of the capability and the global interest. It’s really just beginning. Video gamers know all about this, and it’s expanding. Retailers are starting to use Augmented Reality to help customers visualize what a piece of furniture would look like in their living room or to try on clothes for custom fitting. Augmented reality will be utilized in sports, further in television as well as in the stadiums and arenas. Augmented reality could be the next big thing for innovators and investors. I just hope it doesn’t prevent people from continued human interaction and enjoying the great outdoors.

Keep in mind, while all of this is new to the iPhone, Samsung has offered a lot of these innovations in its Galaxy phones. Samsung uses Google’s Android operating system, which has over 80% of global market share for smartphones. Apple has just 15% of the total market. But most smartphones in circulation are much cheaper and don’t offer the same functions as an iPhone. The iPhone has a 34% market share in the United States. Apple might not be the innovator like it was under Steve Jobs, but the company continues to produce cool, must-have devices at a consistent pace and its loyal customers continue to pay the high prices. Over 500 Million people visited an Apple Store last year. This new super cycle led by the iPhone X will be a big test. The stock has had a nice run in anticipation. There is a common theme with Apple’s stock and its iPhone launches. Of the previous 11 events, the stock declined on 9 of them. That happened again this week. That’s what you call a “sell-the-news” event. The stock historically sells off for a few weeks after an iPhone launch, but 6-months later the stock was lower only 3 times. Stocks price in anticipated future events. This event didn’t disappoint.

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

Mike

TGIF – Dollars and Sense

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Dollars and Sense

The US Dollar continues to slide to multi-year lows. It is never exactly clear why, but the potential for military combat in North Korea, the diminishing probability of another Fed interest rate hike and the increasing likelihood of the European Central Bank’s Quantitative Easing plan coming to an end are all contributing to the falling Dollar. Normally, with heightened geopolitical issues, investors around the globe flock to the Dollar for safety as the Universal Currency. That just isn’t happening now. As we all know, this environment is anything but normal. But Corporate America, with substantial revenues overseas, is really enjoying the weak Dollar. It makes American products much more attractive overseas.

The Euro jumped above $1.20 this week. That is the first time the European currency has seen that level since December of 2014. The Dollar and Euro were near parity as we started this year when the Euro touched $1.03. The Euro has surged 14% since, which is a really massive move for a currency. A strengthening European economy with low inflation is helping fuel the move. But European exporters are feeling the pain as American products are more attractively priced on the open market due to currency conversion. And that $350 a night hotel in Paris is now $420.

But it’s not just the Euro that the US Dollar has been losing ground to. The Dollar has also has been falling against the Japanese Yen, the British Pound, the Swedish Krona and even the Mexican Peso, which was battered off the Presidential election with debates about NAFTA and the Wall. Keep in mind, the Dollar spiked higher off the election results last November. Expectations of tax-reform and other pro-growth policies saw money from around the globe pour into Dollars. It peaked in January and has fallen ever since. At this stage, the prospects for comprehensive tax-reform this year are approaching zero. Even simple tax cuts appear unlikely in 2017. It seems like it’s been more of a move away from the Dollar rather than an aggressive move into these other foreign currencies.

Interest rates continue to fall too, with the 10-Year Treasury yield down to 2.06%, the lowest of the year. The Bond Market is telling us things are far from perfect. The yield curve is flattening, which does happen periodically, but is one of those signs to pay attention to. The 30-Year bond yield is down to 2.67% while the 1-Month bill is 0.96%. The front-end of the curve has been rising while the back-end has been shrinking. It is much healthier when the yield curve steepens. Think about it this way; would you want to take 20 more years of risk for just an additional 0.6% increase in income yield? For the vast majority, the answer is categorically no. But for insurance companies with liabilities who need to spread out reserves and foreign buyers looking to get money out of their country and get some yield with the currency conversion benefit, the answer is yes. Right now the spread between the 30-Year Treasury and the 1-Month is the tightest it’s been since 2007. For perspective the Yield curve inverted in 2006, more than a year prior to the stock market decline. We are still a long way from inverting now, but it is something we always keep a close eye on.

In July, the Market was pricing in a greater than 50% chance of another interest rate hike by year-end. Now it’s assigning just a 31% probability, and shrinking daily. The US economy continues to grow at a very sluggish pace and inflation remains benign. The thinking is why raise when there is little risk of an overheated economy. Most representatives at the Fed are in the dovish camp. That means they are cautious with monetary policy and prefer to provide support until it is absolutely clear it is no longer needed. The Market has known this all along since 2008 and has rather enjoyed the magic Fed elixir. This week the Vice Chairman of the Federal Reserve, Stanley Fischer, announced he will step down in October. This was an interesting and rather unexpected event, but it actually has us thinking that it enhances the chances that Janet Yellen stays as the Fed Chair when her term is up in February. But right now February seems like a long way away.

Looking under the hood, this Market has some issues that need addressing. It’s what a correction is all about. The Bond Market is the smartest of markets. It’s telling us that September into October should provide more turbulence. There’s just some weird stuff going on which has us on guard. We’re on it and we have your back.

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

Mike

TGIF – Harvey and the American Spirit

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Harvey and the American Spirit

Hurricane Harvey proved a menacing force. It devastated Southeast Texas. Harvey could wind up being the most expensive natural disaster in American history. But it couldn’t wreck the American spirit. This matters for so many reasons. 

Houston is now the 4th largest city in the U.S., by population and economic output, behind New York City, Los Angeles and Chicago. Houston’s economy is heavily exposed to Energy, but is still fairly diversified with heavy exposure to Health Care, Aerospace and Tech. Its economy alone is roughly the size of Sweden. Southeast Texas has the largest oil refineries in the country. Roughly 20% of total the US refining operation was taken offline from the storm, which has driven gas prices to 2 year highs. It’s coming at a time where demand is strong for the Labor Day weekend. The national average for unleaded gasoline is now $2.52 per gallon. Prices really spiked along the East Coast, which receives a lot of their gas from the Gulf Coast. The precedent from Hurricanes Katrina and Rita in 2005 suggests that the impact will still be felt for several months. You can see the impact the hurricane will have on the US economy.

For those of you surprised that this Market has gone higher in the face of some really concerning events, consider this: An important factor has been the lack of volume this week, which is normally very light heading to the Labor Day weekend. This week had the lowest volume since Christmas. Low volume sessions are generally bid up. The DOW jumped back above the 22K level Friday before closing just below it. We’ve been seeing lower highs and lower lows. Next week will be telling when trading desks are full again and the focus turns to issues and year-end. The speed will pick-up significantly. We still think lower levels will come too with a continuation of the correction before a year-end rally. The risks at this stage are greater than the potential rewards in our estimation.

The devastating storm in Southeast Texas decimated the region, but not the spirit of the people. How the first responders and the people in the greater Houston area rallied together is truly inspirational. The best in human kind was brought out with people from all walks of life coming together to help each other get through the pain. It is indeed going to be a long road ahead in recovery for the Gulf Coast region. Let’s hope the message of unity and togetherness will last far longer.

The Houston Astros return home to play the Mets tomorrow. The team is giving away free tickets to first responders. They’re also sending 10,000 player jerseys to local shelters. The Astros are in first place in the American League right now. Imagine what it would mean for this city to see this team make it to the World Series. I’m pulling for Houston. That would be very cool.

After the Market closed for the week, our team began assembling backpacks with school supplies, which are now headed to homeless and underprivileged kids in Houston. These kids didn’t have much to start with and lost everything they had during the storm. We were inspired and wanted to help. Hopefully they will be inspired and these materials will help them begin the rest of their lives in pursuit of their dreams. Great things start with a dream. The thought makes me smile.

Have a nice weekend. We will be back, dark and early on Tuesday. Our office will be closed Monday for Labor Day.

Mike Frazier

TGIF – Here Comes Amazon, Again…

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Here Comes Amazon, Again…

Remember back in the day when you drove to the grocery store, navigated the crowded aisles, had to wait in line to pay and sometimes even had to bag your own groceries? The concept will be a distant memory a couple of decades from now. My kids often join me every Sunday at the grocery store loading up for the week. The chances are very slim that their kids have the same experience. Grocery shopping will take place on the couch or in the kitchen, like a digital magic wand. Amazon is changing all of it. It will be great for consumers… well, sort of.

I spent the last 2 days in San Francisco meeting with industry leaders discussing present day issues and hypothesizing where things are headed. The topics ranged from Artificial Intelligence to driverless cars to digital currencies to geopolitics, and so much more. It was all in the context of innovation and investment. I plan to cover these fascinating topics over the coming weeks. I’ll start with the Amazon Effect.  I touched on it a few weeks back when news broke of the Whole Foods deal. This is a follow up with a fresh perspective as to where things might be headed as we see it.

The Amazon Grocery Store

Amazon will officially own Whole Foods on Monday and they have already announced major price cuts. Rival grocers are shaking in their boots, ill-prepared to compete head-to-head. Fresh is going on sale next week and Amazon Prime will become the Whole Foods customer rewards program. You just know it won’t stop with price reductions on bananas, avocados, meat and eggs. Amazon has over 60 Million Prime members and it is estimated that over 60% of Whole Foods customers are members of Amazon Prime. The synergy is already there. The door is wide open for more cross-selling for Amazon products.

The thing is, Amazon has been a brutal competitor in every aspect of their operation. Amazon notoriously sells items at break-even or even at a loss to gain market share in sectors it sees as a priority. That strategy will no doubt be utilized in groceries. Grocery stores are already low margin businesses. Amazon has the ability to squeeze margins even further as they look out longer-term. Most grocers don’t have that luxury.

Amazon now has a network of nearly 500 physical stores in some of the most desirable locations throughout the country. These retail stores could also become a distribution point, not only for grocery deliveries, but also for Whole Food’s prepared foods in an attempt to compete against startups like GrubHub and Foodler and crush other delivery providers like UberEats. Some of these stores will soon have Amazon’s in-store lockers for package pickups. The lockers could be a first step in reducing Amazon’s delivery costs by offering customers more pickup or delivery options. Those white vans that you’ve been seeing in your neighborhood with increasing frequency; it’s Amazon. We’ll be seeing them more and more in the coming months. But they won’t have human drivers forever. Self-Driving vehicles will be next as well as drone delivery. Oh yes, Amazon wants to send stuff out with drones. Amazon recently filed a patent application describing large, multi-story drone towers in urban centers. The hive-like towers will have loading docks and warehouses on the lower floors and bays for drones higher up. And the drones may be repaired and supplied by robots. This is just mind-blowing.

It’s All About Logistics

Amazon has been hyper-focused on its plans to create the world’s most efficient order-fulfillment system. That includes a network of warehouses and the means to deliver the goods efficiently and expeditiously. Last year, Amazon started a shipping subsidiary called Amazon Maritime to transport goods on cargo ships from China to the United States. Amazon has built out a robust digital storage operation over the years called Amazon Web Services with a who’s who customer list of Fortune 500 companies and small start-ups, including Netflix, NASA and the CIA. Amazon competes directly with IBM, Microsoft, Google among so many others. Amazon pretty much competes with everyone.

Amazon’s Magic Wand

You might have met Alexa, but have you seen Amazon’s Dash Wand? It’s a handheld device that comes equipped with a speaker, microphone and a barcode scanner. It is powered by Alexa, which has been a big success in the Artificial Intelligence arena, and is seemingly just getting started. The Dash Wand is battery operated and has a magnet that lets it stick on the refrigerator. It was primarily designed as a grocery scanner and is meant to hang around the kitchen. You can either tell the Dash Wand to order an item or scan a barcode to automatically add that item to your cart on Amazon. Prime Members will get their items at their door within 48 hours.

Things are coming full circle with home delivery. Remember the milkman coming to your house? Well, it’s making a comeback, and in a much different form. These are fascinating times in this digital age in which we live.  It’s all investable.

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

Mike

TGIF – Market in Correction Mode

Bedell Frazier Investment CounsellingTGIF!

Market in Correction Mode

I’m just going to say it:

This is by far the most bizarre investment environment that I’ve experienced in my 20+ year professional career. 

This Bull Market has proven its resiliency time and again throughout its 8-year run. It has faced tremendous pressure and uncertainty in 2017, but very little has slowed it down. It’s not our job to be political. We stay away from that. But it is our job to interpret politics as it applies to your investments. It’s been quite a challenge. There is so much confusion and so many moving parts, which have been extremely difficult to analyze and understand where things are headed. Despite the increasing divide politically and socially in our nation, the Market has remained focused on pro-growth policies like tax-reform all year, even as it was looking less and less likely. But this week was different.

The Market’s Guy

The Bull got tripped up by a confluence of events, namely Corporate America walking away from the White House and more terrorist attacks overseas. Corporate America has been losing confidence in the President’s policies at a rapid rate and the mass exodus from the Corporate Councils, which led to complete dissolution, is a big reason why the strong gains for the DOW and S&P shrunk. Perhaps the biggest key is Gary Cohn, the President’s chief economic advisor, who was rumored to be considering resignation. Thursday’s selloff gained serious momentum when whispers circulated that Cohn was leaving. Gary Cohn is the architect of the growth plans and is widely considered the favorite to replace Janet Yellen at the Fed if she does not continue on next year. There has been massive turnover in the White House. For the Market, Gary Cohn probably matters most. As it stands, tax-reform and the other pro-growth policies are very much at risk. Without Cohn, they’re pretty much dead in the water. Gary Cohn is a Market guy. The Market likes Gary Cohn and does not like the prospects of his departure.

The S&P 500 saw only its sixth 1% decline of 2017 this week. It’s been over a year since it experienced a 5% selloff, something that historically occurs every 10 weeks. It has been way overdue for a snapback. We’ve already seen some cracks. The recent rally has not been broad-based. Leadership has narrowed sharply. Only 4 of the 11 S&P sectors have outperformed the overall index, and it has been dominated by Tech. The S&P is up 8% on the year, but the average S&P stock is only up 5%. The S&P 500 is naturally market cap weighted, and has been dominated by the 35% gains in Apple and 30% gains in Amazon. Small Caps are actually down on the year now. Energy has struggled mightily. The correction has begun.

Fundamentally Sound

Q2 Earnings Season is coming to an end, with over 90% of the 500 S&P companies having reported. It’s been very solid. Earnings have grown 12% year-over-year on the back of 5.5% revenue growth. Revenues are key, because it is the purest measurement of demand. It’s been strong. Corporate earnings have accelerated since the 2-year earnings recession came to an end last year. It’s earnings that drive stock prices, and these strong earnings should keep a tight floor under the Stock Market. But, the end of Earnings Season means the Market will be more susceptible to Geopolitical issues. And they’re certainly on the rise. Considering events surrounding North Korea, Russia, Venezuela and Spain, many around the world believe the US has become the biggest geopolitical risk. Think about that for a minute.

Normal Seasonal Weakness

We prepared for a correction. We wrote about it 2 weeks ago. We raised cash, we have used options as well as other Market hedges firmly in place. We also have heavy Gold positions, which are demonstrating strength. We are long-term investors who know how to deal with short-term risks. We’ve got one on our hands right now. It’s all about a strong defense. Historically, selloffs begin in August, accelerate in September and find a bottom in October setting up for a year-end rally. Though there has been nothing normal about 2017, we could definitely see this Market pattern play out. A correction was only a matter of time. It is normal and healthy, but never fun. We will get thru it just fine.

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

Mike

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