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7/31/2019 1st Quarter 2011 Commentary
1/6
economic overview
Sturdy Market Withstands Challenges
As 2011 opened, the stock market continued the
rise that began on July 2nd last year, only to alter on
February 22nd when unrest in the Middle East pushed
oil over $100 a barrel. First Tunisia, then Egypt, Yemen,
Bahrain, Libya, Saudi Arabia and most recently Syria,
have experienced popular uprisings sparked by social
media-coordinated days o rage.
Then on March 9th, Japan was struck by a major earth-
quake and tsunami. Fear sent the Dow Industrials down
600 points in fve days as investors struggled to under-
stand the implications o these related natural disasters.
This is a human tragedy o immense proportions, yet
economically, like past disasters, the repercussions
will be limited to disruptions in the supplies o certain
manuactured goods. Ultimately, there will be economic
stimulus, especially or Japan, as massive reconstruction
gets underway in the next year. Once the market realized
this, it rallied back over the next ten days, closing the
quarter very near its post-2008 crash high.
Political instability and natural disasters are not the only
concerns investors should have. In addition, we see the
ollowing issues:
Stateandlocalbudgetsandbalancesheetshave
both signifcant defcits and ballooning debt.
Politicalleaderscontinuetoallowbloatedand
ineective expenditures without producing viable,
long-term solutions to our countrys biggest problems,
including entitlement spending.
TheFederalReservepersistsinkeepingshort-term
interest rates near 0% and creating money aster than
it ever has beore.
Inationisrising.
F QUArter 2011QUARTERLYCommentary
nsidethis Issue
conomic overview
: Sturdy Market With-
stands Challenges
Asset mAnAGement
: Putting Our Investment
Themes into Practice
eAtUred stocK
: Myriad Genetics
ixed income
: Understanding the
Municipal Bond Market
nvestment themes
: Molecular Diagnostics
Holds Huge Promise
www.nelsonroberts.com | 650.322.4
State and local governments, unlike the Federal govern
ment, cannot run defcits. Declining tax revenues
necessitate real-time cutbacks and the resulting reductio
in expenditures restrains the economy. Many view this
asasourceofcontinueddeationarypressureandth
believe this is osetting the extremely high fscal and
monetary stimulus o the Federal government. With
the current very low long-term interest rates, the bon
market is saying that the Fed will cut the stimulus
beforeinationbecomesaproblem.Ontheotherhan
the US dollars persistent weakness tells us that oreig
investors do not believe this is likely. Who is right? Webelievethatinationwillrisetoofarandtoofastfort
Fed to manage perectly. This will cause bond prices t
all, interest rates to rise and the consequent rise o th
US dollar.
In Congress, the budget-cutting ocus is entirely on
discretionary spending. Medicare, Social Security and
Deense account or over hal o total ederal spending
but no one is debating cutting these, at least yet.
Healthcare reorm will broaden coverage to care or
those currently uninsured but has completely ailed to
index PerFormAnce Q111 Ytd
Dow Jones Industrials 7.06 7.06
Standard & Poors 500 5.92 5.92
EAFE (international stocks) 3.50 3.50
Russell 2000 (small stocks) 7.93 7.93
Barclays Interm. Gov/Credit 0.34 0.34
Barclays Municipal 0.51 0.51
7/31/2019 1st Quarter 2011 Commentary
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
December 31, 1999 February 28, 2INFLATION
CPI YOY Index
CPI Index
Ocial infation statistics shbut those o us who eat
top
FiFteen Holdings
iShareS intl emerging marketS
iShareS S&P Small CaP
Chevron CorP
oraCle CorP
emerging aSia PaCifiC SPDr
royal DutCh Shell
iShareS eafe inDex
SChlumberger
PayChex
linDSay CorP
tJx ComPanieS
texaS inStrumentS
akamai teChnologieS
emerSon eleCtriC
CoStCo
economic overview
Sturdy Market Withstands Challenges (contd)
a standard 5-lb bag to 4 lbs and baby wipes come 72
to a box instead o 80. Retailers seem to think that
consumers will not notice that volumes are dropping
and prices are staying the same. Where size cannotbe adjusted, producers are warning that prices will
be going up. Last week, Hershey
announced a 9.7% price increase
foritsproducts.Ofcialination
statistics show a benign CPI o 2.1%
year-over-year. Excluding ood and
energy, the rate is 1.0%. Forgive ou
sarcasm, but those o us who eat,
drive and heat our homes are just
not buying it.
So what is driving the markets rise?To us, it looks like it is all about
individual company perormance.
Costs have been cut, earnings are improving, actory
orders are up and the economy is slowly, sluggishly, bu
fnally turning around. The steady march o demograph
changes will continue to drive macroeconomic growt
world-wide.
address ever-increasing medical costs. Common sense
dictates that Social Security cannot survive the baby
boomers retirement without signifcant changes. The
question we should all be asking our congressionalrepresentatives is: what are you waiting or?
The Federal Reserve continues on its path o expanding
monetary stimulus. Quantitative Easing Two (QEII) is
underway and will take the assets on the Feds balance
sheet to a record high. Short-term interest rates are still
at 0 or all practical purposes, leading to a alling dollar.
(For more details on this particular
issue, see our May 2010 white paper
Deault or Devaluation.)
Inationiseitherbeginningtospinout
o control or is a non-event, depending
upon which data one chooses. A
March 29th New York Times article
wasentitledFoodinationkepthidden
in tinier bags. Canned vegetables,
pasta and other staple ood items now
come in 13-oz containers rather than
16-oz sizes. Sugar has dropped rom
75.962
2011 Bloomberg Finance L. P.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
70
90
100
110
February 4, 2000 April 4, 2011US DOLLAR
80
120
LAST PRICE 75.962
HIGH ON 12/29/10 119.900
AVERAGE 91.548
LOW ON 07/02/ 71.657
7/31/2019 1st Quarter 2011 Commentary
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benign CPI o 2.1%. Forgive our sarcasm,e and heat our homes are just not buying it.
Asset mAnAGement
Putting Our Investment Themes into Practice
As our confdence in the recovery has increased, we
have ocused on investing our cash while reshaping our
exposure in the healthcare sector and increasing our
weighting in materials. In February, we began to initiateour investments in molecular diagnostics (see Page 6
article on Investment Themes) by buying Gen-Probe,
which ocuses on nucleic acid testing or inectious
agents. That initial purchase was ollowed closely by
related investments in Myriad Genetics (see our Featured
Stock article) and Illumina, Inc. (the leading DNA
sequencing company).
To und these purchases, we sold a proftable position
in Volcano Corp. Though we think the prospects or
the companys products continue to be attractive,
the companys acquisition strategy is being met with
increased litigation, which is oten a distraction or
management. Furthermore, a substantial amount o
company revenues are generated in Japan, which will
likely result in short-term challenges or Volcano as
Japan slowly recovers rom its horriying natural disaster.
We also added a position in REMX, a Rare Earth Material
Exchange Traded Fund (ETF). We introduced the rare
earth material investment theme in our Q4 2010 quarterly
commentary and elected to pursue that investment
using an ETF. The demand or rare earths is on the rise
and companies that may participate span both size
and the geographic spectrum. The ETF enables us to
gain diversifed exposure through a 1% position in our
equity portolios.
The equity markets continue to claw their way back
toward the high water marks set in October 2007. The
appreciation in the market has been supported by a solid
recovery in company earnings and healthier corporatebalance sheets. The Dow Jones Industrial Average ended
the quarter up 7.06%, to 12,319 and 13.0% below its
high o 14,164. The S&P has been on a similar trajectory,
also up 5.92% to 1,326, or 15.3% below its October
2007 high o 1,565.
For Nelson Roberts, the energy sector has ueled a quarter
o solid market gains. The combination o economic
recovery and Middle East unrest has sent oil over $100
a barrel. Our position in Marathon Oil rose 44.7% vs.
an overall energy sector increase o 13.8%. Lindsay
Corp has also beneftted rom rising commodity prices.
As a supplier o irrigation equipment to the agriculture
industry, the demand or Lindsays products rises with
the price o crops. Lindsay is up 35.1% or the frst
quarter o 2011.
Our worst-perorming stocks or the quarter were in
technology, with Cisco (down 11.1%) and Akamai (down
21.5%) both underperorming. Akamai retrenched in
Q1 o 2011 ater the stock doubled in value in 2010.
Ciscos stock has stagnated despite announcing the
companys frst-ever dividend to shareholders. We
believe both companies will continue to beneft rom
the dramatic increase in the amount o video trafc
over the Internet.
7/31/2019 1st Quarter 2011 Commentary
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www.nelsonroberts.com | 650.322.4000
Fau sk
Myriad Genetics
Myriad Genetics (MYGN) is a molecular diagnostics
company ocused on developing and marketing
novel predictive medicine, personalized medicine and
prognostic medicine products. In English, this meansthat the company has or is working on products to
predict the likelihood o a person getting a disease,
products that help determine how a person will
respond to a drug and products that predict how an
individual with a particular disease will likely do in
the uture. The company aims to understand the link
between genes and human disease in order to identiy
important disease-mediating genes, the proteins they
produce and the biological pathways in which they are
involved. MYGN employs 870 people and is headquartered
in Salt Lake City.
Revenues or fscal year 2010 were $363 million. The
majority o revenues come rom the companys breast
cancer analysis (BRACAnalysis) tests. It oers seven
other commercial products, including tests or hereditarycolorectal and uterine cancer, hereditary melanoma,
tests to assess patient response to a particular
chemotherapeutic agent, a prognostic medicine
product or prostate cancer and an immunochemistry
test that looks or loss o a particular gene that suggests
a cancer will be more aggressive. Most tests are covered
by insurance and range in price rom $500 to $3,500.
In addition to researching new tests, MYGN is also
ocused on getting the word out about its current
products. The companys goal is to introduce one new
test a year and to expand rom the United States into
Western Europe over the next two years. Its products
are covered by numerous patents.
i
n t e g r i t y
Where do you fnd integrity?
It emanates rom tradition, endures market cycles, and sustains long-term
partnerships. Trust lies at the heart o what we do, how we serve and who
we employ.
[in tegr te] n. honesty, sincerity, completeness
22
21
20
2011 Bloomber Finance L. P.
OCT 15, 2010 MAR 31, 2010MYRIAD GENETICS
23
OCT 29 NOV 15 NOV 30 DEC 15 DEC 31 JAN 14 JAN 31 FEB 28 MAR 15 MAR 31
LAST PRICE
HIGH ON 12/17/10
AVERAGE
LOW ON 02/23/11
20.15
23.71
20.54%
18.00
19
24
FEB 14
DAY SESSION
18
PURCHASE 2/16/2011 @ $19.4420.15
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www.nelsonroberts.com | 650.322.4000
Fixed income
Understanding the Municipal Bond Market
The municipal bond (muni) market took a big hit during the frst quarter o 2011 as ear o deaults
caused many investors to panic and dump holdings o state and local government debt. Meredith Whitney,
a research analyst who gained notoriety in the all o 2008 by warning o Citigroups downall, predicted
in a December 2010 appearance on 60 Minutes that 50 to 100 local and state governments would deault
on billions o dollars o debt in 2011. Since that interview, record levels o money have exited munis,
causing prices to all and liquidity to dry up.
Bid-wanted activity is a measure o the volume o bonds designated or potential sale by investors. It has
grown and is now above its 12-momth average. Yet trading volumes have remained relatively low, meaning
that there are very ew buyers out there, especially or lower quality bonds. As a result, muni yields have
risen to levels not seen since the late 1990s.
Last all, prior to Meredith Whitneys interview, Nelson Roberts sold several municipal bonds. We were
concerned that liquidity was declining and headline risks were increasing as the 2011 budget discussions
heated up. We view the probability o deault on the bonds our clients currently own as quite low, since
we have adhered to our discipline o buying only high quality issues that are backed by essential service
revenues or general obligations.
Caution is certainly warranted given the current poor fnancial health o state and local governments, but
the selling renzy has been overdone. Many state and local governments have problems that will not be solved
in the immediate uture, but the vast majority will continue to make timely payments on their debt obligations.
How Do Municipal Bonds Trade?
The municipal bond market has very little transparency compared to other capital markets. Unlike the
stock market, muni bonds do not trade on an exchange, but rather through bond dealers at brokerage
frms. The brokers make money by marking bonds up and selling them to investors. The spread
between what a broker buys a bond or and what it is sold or is typically not disclosed. The only way
to know you are receiving a air deal is to shop around.
We recently put a Caliornia Water Revenue bond out or bid to eight dierent brokers (see table
below). The dierence between the high and low bids, all o which were due at the same time o
day, was over 3.5%. Naive sellers could have given up close to one years worth o interest i they had
used only one broker to sell the bond. In order to insure tight spreads and low trading costs, investors
must be knowledgeable about the inner workings o the muni bond market and have access to a
national network o brokers.
Firm Updates: : We are pleased to welcome the clients o Sylvan H. Kline Jr., Inc., who have
consented to Nelson Roberts acquisition o the frm. We are also delighted
to announce the addition o a new employee, Meg York, who came on board
two weeks ago.
Bids from eight different brokers for the same muni bond:
#1 $100.5
#2$102.7
#3$102.0
#4 $99.0
#5 $102.0
#6 $102.2
#7 $101.3
#8 $102.6
7/31/2019 1st Quarter 2011 Commentary
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1950 University Avenue, Suite 202
East Palo Alto, CA 94303
l 650-322-4000
b www.nelsonroberts.com
Past perormance is not necessarily a guide to uture perormance. There are risks involved in investing,
including possible loss o principal. This inormation i s provided or inormational purposes only and does
not constitute a recommendation or any investment strategy, security or product described herein. Please
contact us or a complete list o portolio holdings.
For additional inormation on the services o Nelson Roberts Investment Advisors, or to receive our
Newsletters via e-mail or be removed rom our mailing list, please contact us at 650-322-4000.
2011 Nelson Roberts Investment Advisors
Molecular diagnostics is the use o DNA, RNA and proteins to test or specifc states o health or disease. Genotypes
(someones genetic make-up), mutations (changes in the normal DNA sequence) or biochemical markers can
either indicate the presence o a disease or suggest a predisposition to certain medical conditions. Many industry
observers suggest that the feld can be divided into our main areas: genetic testing, molecular oncology, inectious
disease testing and pharmacogenomics (the ancy name or personalized medicine).
Genetic testing is done to either look or specifc inherited disorders or to look or particular genetic mutations
that make it more likely that an individual with that mutation will develop a certain disease. An example o a
specifc inherited disorder is cystic fbrosis. Over 10 million Americans carry the recessive gene. A child who inherits
two copies o the gene, one rom each parent, will have the disease. Companies now oer carrier screening
to see i someone carries a copy o the gene. Myriad Genetics, our eatured stock, oers tests that predict a
high likelihood o developing certain hereditary orms o breast cancer, ovarian cancer, colon cancer and
malignant melanoma.
Molecular oncology applications include screening high-risk populations or cancer, monitoring or cancer recurrence
during treatment, and predicting prognosis or responses to certain types o cancer therapy.
In inectious disease testing, highly sensitive, rapid assays are used to look or specifc inectious agents, especiallyviruses, by detecting tiny amounts o DNA in blood or tissue samples. There are now tests available or HIV, Hepatitis
B and C, and human papilloma virus. Other tests are directed at identiying bacteria. In general, the sooner an
inectious disease is diagnosed, the sooner treatment can begin and the more likely it is that a positive outcome
will occur.
Finally, there is personalized medicine, the holy grail o drug therapy. The concept is simple: predict which
patient will respond to which medicine. Much o current therapy is based on trial and error; doctors try dierent
drugs or combinations o drugs until they see which ones work or particular people. Pharmacogenomics will
eliminate this inefcient and sometimes dangerous approach to drug therapy by identiying ahead o time who
might have negative side eects or beneft the most rom a certain medication.
This industry is expanding rapidly. Analysts estimate it will grow to $42 billion by 2019. The number o companies
has quintupled rom 100 to 500 in the last fteen years.
investment themes
Molecular Diagnostics Holds Huge Promise
Investment Team
Brooks Nelson, CFA
Brian Roberts, CFA, MBA
Steve Philpott, CFP, MBA
Dennistoun Brown, MD
Ann Oglesby, MD, MBA