SUMMER 2013 NEWSLETTER July 2013
There’s Still Plenty to Like About Stocks by Mike Frazier
Volatility crashed the Spring rally, and jumping interest rates put a choke hold on bonds and stocks to finish out June. We had been anticipating some sort of consolidation for a while, but its arrival was rather abrupt. Rising rates and market corrections are quite healthy, but the speed of the reversal is what has spooked investors. Something important: this four-year rally has never been fully embraced or trusted. Any sign of weakness has sent investors and traders dashing for the exits; but each time it occurred, a great buying opportunity ensued. The Federal Reserve Bank has played a significant role in the financial recovery. Interest rates have been held in check at historic lows since 2008. Through its aggressive quantitative easing campaigns, the Market and our economy received unprecedented injections of liquidity. This had a powerful impact on stocks and bonds, as well as housing. The U.S. economy has responded too, albeit more anemically than expected. But growth is growth. Entering the midpoint of 2013, the Fed began discussions on how and when it will begin unwinding its major stimulus. In essence, the patient who was once on life support... who required constant treatment, has begun to regain consciousness. The patient stood up for the first time in four years on its own power. This is a really good thing. We need to move off the Fed dependence. It certainly has been an ugly and wobbly start. That should be expected. The 7% slide for the S&P was more natural than the 16% rise in 2013. Summer should be volatile. The June sell-off has made purchasing both stocks and bonds attractive again. That doesn’t mean they can’t get cheaper. But the overall backdrop remains quite attractive, as interest rates are still low and demand for American assets is quite high. International markets have been hit quite hard, but are looking really attractive again for long-term growth. They’ve been dealing with hyper inflation while the U.S. and Europe have been focused on asset re-flation. There could be a transition back to global growth, which has been missing this year. Asia and Latin America are on our radar. Bedell Frazier Investment Counselling, LLC Tel: 925-932-0344
We still feel good about the rest of 2013. The Summer cleanse should lead to a continuation of the rally. Our sense is that the more cyclical and “growth” areas, like Tech and Industrials might take the lead in the second half of the year. We are also bullish on certain areas of Health Care, particularly in Biotech. And the American consumer keeps spending. Our favorite market remains the U.S. It is still the safest and most stable. We see plenty of enticing places to invest for growth and income.
Income Investing
by Jude Bedell Stocks are providing investment income like never before. Corporations are raising dividends to reflect their comeback to prosperity. This increases investor cash flow. Interestingly, most stock dividends are “qualified dividends,” resulting in favorable tax treatment. Investors in the 0% tax bracket pay no tax on dividends earned; those in tax brackets above 15%, pay at the 15% bracket. Such a deal… really! Imagine paying 45% tax on your salary or pension but only 15% on the money earned from dividends. This is a compelling reason to rely more on dividend income from stocks than on bond interest. The exception to this rule is Muni Bonds which return investment income TAX FREE. We are seeing munis return to favor as many governmental issuers have begun cleaning up their acts. California is a prime example of this trend, having won back its investment-grade credit rating. Others will follow California. They often do. Income earned inside your IRA or other retirement account is not taxed. Taxes ensue once capital withdrawals begin. However, all the income and gains earned inside the IRA are never taxed. Therefore, higher income investments are well suited for IRAs; examples include Preferred Stocks and Energy Partnerships. These investments won’t add much growth to portfolios, but they can grow money the old-fashioned way through the compounding of interest within a tax-neutral environment. In Trusts and other taxable accounts, the best source of investment income is stock dividends or muni bond tax-free interest.
200 Pringle Avenue, Walnut Creek, CA 94596 www.bedellinvest.com
Chart Readings by Mike Harris
Interest rates have been center stage lately. Much hoopla has been made about the YIELD on the 10-year U.S. Treasury Bond and how it has risen from 1.6% to 2.5% in two short months. Rate gyrations continue to influence bond markets and stock markets alike. Let’s place this recent rise in rates into context: since the financial crisis began in‘07, yields on ten-year Treasuries have risen more than +50 bps on 10 other occurrences. They have risen more than 1% on 3 other occurrences and risen over 2% one other time! We have published on many occasions that this trend lower in interest rates is winding down but is not done yet. We expect interest rates to linger in this lower band for the remainder of the year and most likely a good portion of next year as well. These quick blips up in rates are normal healthy occurrences. As you can see on the chart below, interest rates have been trending lower for the past seven years: from 5% down to 1.5%. This has pushed bond prices higher because they as you recall are inversely related, i.e. when interest rates drop, bond prices rise.
Consumers by Meredith Rosen
It’s officially Summer and consumers are feeling good. They are ready to enjoy life, travel and put a few bucks back into the global economy. Consumers have the soundtrack for all the road trips, beach excursions and cookouts ready. They know Money Can’t Buy Me Love, but it can buy plenty of Material Girls a Pink Cadillac and a Cheeseburger in Paradise! Consumer confidence hit a five-year high last month. These happy shoppers have been more willing to open their wallets and spend, spend, spend! The consumer continues to be the driver of the recovery. Cars are hot as are electronics. Tablet wars began by Apple’s iPad have escalated to Samsung, Google and Microsoft. A casualty of this war was announced this week when Barnes & Noble dropped out, abandoning their NOOK line of tablets. The labor market is improving as is the housing market. Jobless claims are on the decline and new home sales are at a five-year high! Wages are up as is disposable income. These all set the stage for continued consumer spending in the second half of 2013 which we believe will be robust. Summer days tend to melt away too soon. So don’t miss the fun – get out there, enjoy this time of year and do your part to help out the economy!
Tech Talk by J.K. Bedell
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Bedell Frazier Investment Counselling, LLC Tel: 925-932-0344
In the social networking industry, oneupmanship is the name of the game. Facebook’s $500 million acquisition, Instagram, the photo sharing Smartphone app, allows users to add filters and hashtags to their pictures. The editing app (usually used to share pics of one’s lunch), recently introduced the ability to record a 15-second video. This “innovation” is simply a catch-up move to counter Twitter’s recent purchase of the Vine vApp (short for video apps) where you shoot six second videos (reminiscent of Twitter only allowing 125 letter “tweets”), although Instagram offers two creative forms of sharing. Some stand strong in supporting Vine, nonetheless, though ultimately the coolest component of the video trend is mastery of the tool, something made easy for users of Vine and Instagram alike. 200 Pringle Avenue, Walnut Creek, CA 94596 www.bedellinvest.com