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Keynote presentation given by president and chief investment officer, Rob Lutts, of Cabot Money Management at annual conference and luncheon. Rob discusses a changing world and how investors must adapt to this environment. Disclosure: These seminars are for discussion purposes only. It is not an offer to buy or sell individual securities or investments. Investors should consider their own individual investment objectives, risks, charges and expenses of their portfolio carefully before investing. Investments are not FDIC insured and may lose or fluctuate in value. Please request our Form ADV Part II for complete disclosures.
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CABOT’S 21ST ANNUAL INVESTMENT
CONFERENCE & LUNCHEON
Friday, September 24, 2010
STOCKS TODAY…Safer Than You Think?
Presented by:
Robert T. Lutts, President & Chief Investment Officer
A CHANGING WORLD
“It is not the strongest of the species that
survives, nor is it the most intelligent, it is the
one that is the most adaptable to change.”
– Charles Darwin
OUTLINE
Status of Economy and Markets – Do not confuse the two.
They are often out of sync.
How Risky is the Stock Market Today? Adjusting to a new
environment.
Why Should One Take Risk Today?
Alternatives to equities are fading (cash, bonds, real estate)
Long-term conditions excellent (Cycle favors stocks today)
What Sectors of the Economy Offer the Best Opportunities?
What Countries of the World Do We Favor Today – Why?
Optimum Strategy for 2011/2012
STATUS OF WORLD FINANCIAL MARKETS
Governments and consumers (US and some developed
economies) are now overleveraged
Deleveraging cycle – sectors to avoid
Top line growth will be challenging – manage profits
Consumers consuming at lower levels – will persist
Employment growth elusive – may recover slowly
Global growth concerns and deflation concerns
BULLISH FACTORS
Liquidity – Most bullish we have ever seen.
Earnings – have been growing nicely. The next phase will
be more difficult.
Valuations – SP 500 Trades at 11.5 X 2011 earnings
Investor Psychology – Investors have given up on
equities today. This means opportunity.
New World Growth Engines – China, India, and Brazil
Source: www.creditwritedowns.com
Total U.S. debt, including domestic debt and foreign debt (which
includes financial debt, household debt and government debt). Now
three times to GDP what it was in 1952.
WHERE ARE WE TODAY?Long-term Perspective
WHERE ARE WE TODAY?Short-term Perspective
3-Year Chart of 10-Year Treasury Yields
THREE REASONS FOR EQUITIES NOW
DOW JONES INDUSTRIALS AVERAGE 10-YEAR ROLLING RETURNS
REASON #1: Low 10-year Returns = High Expected Returns
Cycle Now Favors Stocks
REASON #2: Dividend Yields > 10-Year Treasury Yield!
DOW JONES INDUSTRIALS AVERAGE DIVIDEND YIELD VS 10-YR BOND
THREE REASONS FOR EQUITIES NOW
REASON #3: Fund Flows Excellent Contra-Indicator!
DOW JONES INDUSTRIALS AVERAGE DIVIDEND YIELD VS 10-YR BOND
THREE REASONS FOR EQUITIES NOW
1/1/09 – 8/31/10 Bonds Net In +$452 Billion
1/1/09 – 8/31/10 Equities Net out -$42 Billion
EARNINGS YIELD VS. 10-YEAR YIELD
6% Spread
Very Unusual
Divergence!
To Narrow Spread: Stocks Prices May
Increase and Bonds Yields Rise
WHERE WE ARE TODAY
POSITIVE CONSIDERATIONS
Economies Adapt in Time – Conservative
economic thinking is spreading like wildfire.
TIME is Important After Crisis – We are healing
and adapting now. Risk taking is slowly coming
back into the markets.
Economic Data – Glass is more than half full
today.
There Are Bull Markets Today – It is not all bad.
BULLISH FACTORS
Investor Psychology – Investors have given up
on equities today. This means opportunity.
One needs to think positively when all others
are fearful.
Markets today are looking forward 12-18 months.
Governments Strategy – Move money to active
risk taking places. This is beginning today.
WHERE ARE THE COMING OPPORTUNITIES?
1. Internet
Networks are changing everything. Internet arrived
about 25 years ago. Email gained popularity in the late
1980s. An internet that links 100 million people is not
worth 10 times one that links 10 million people. In
fact, due to massive connective power, a network that
links 100 million people is really worth much more than
ten times the one that links 10 million. Most of the
productivity benefits in the internet are in the future.
We are anticipating many great investment opportunities
in this space.
1. Internet
Mobile Data – Wireless Proliferation
Cloud Computing
Software – Smart Phones, E-Readers, Migration to
Digital
Search – Application Market, Medical Applications
Networks – Infrastructure
Unique Use of Internet
WHERE ARE THE COMING OPPORTUNITIES?
2. Energy
Energy complex is the single largest sector of our
economic world and has changed only moderately in
the past 50 years. Cars are essentially the same
technology – better, but the same engine. Electricity is
also generated pretty much the same as it was 50 years
ago. We anticipate some very large opportunities to
invest in wealth-creating ideas in the coming
decade. Solar, Wind, Advanced Materials, Battery
Technology, Clean Energy, Climate Change are just a
few of the incredible new developments we expect.
Large fortunes will be created for those who think
big and invest in the winners!
WHERE ARE THE COMING OPPORTUNITIES?
3. Niche Healthcare
Demographics favor this space in the USA
Cardiac Technology
Trends in Diabetes Care
Best-in-Class Medical Devices
Next Generation Drugs
Healthcare Waste Disposal
WHERE ARE COMING OPPORTUNITIES?
WHERE ARE COMING OPPORTUNITIES?
4. Emerging Middle Classes: China, India and
Brazil
Retail & Healthcare
Travel and Transportation
Banks
Insurance & Education
Auto
Internet & Advertising
Infrastructure
CHINA: OPPORTUNITY AND RISK
Companies in China – have double the profit margins of
US companies. Why?
Lower government infrastructure costs
Lower taxes
Lower healthcare expenses
Lower executive salaries
We anticipate outperformance in China for many years.
Volatility – will continue to be high. Markets are immature.
ESTABLISHED BULL MARKETS
TODAY
1. China, India & Brazil – Emerging Middle Class
2. Internet Oriented Companies – New Products and
Services
3. Small & Mid Cap Stocks – Growth Co’s Leading
Change
4. Gold and Precious Metals – Seven-Year Bull Market
Gold Bull Market – Key Drivers
1. Investment Demand– Investors continue to Allocate
new funds to gold. Protection against currency
manipulation.
2. Supply Is Constrained – Industry cannot increase
production easily – easy places to find gold are
already mined. Zero growth in production over last 6-8
years.
3. Central Bankers No Longer a Seller of Gold –
4. Over 2000 Years of History – Gold, Land, &
Diamonds have held their purchasing power –
many other classes including currency have seen their
value distroyed.
ALLOCATION TO ALTERNATIVE ASSETS
1. Currency Protection – Gold and Gold mining Shares
2. International Bonds – High-quality sovereign bonds yield
plus appreciation assuming country finances are stronger
than USA.
3. Fixed-Income Hybrids – High Yield, Preferred,
Convertibles
4. Non-US Currency Securities – Yield plus protection from
weaker dollar
5. Commodities – Energy, grains and other indexes
TO SUCCEED TODAY ONE NEEDS
1. Flexible Thinking. Do not be afraid of change, embrace it!
2. Use Risk Management Techniques
a. Size of positions
b. Loss discipline
c. Diversification strategy
3. Conviction to Invest in the new winners in a world
economy changing at breakneck speed – “Sonic Boom”
4. “It will go well, but it will not be relaxing!” Greg
Esterbrook
IN SUMMARY
This is not an ordinary cycle. It is riskier with different
challenges.
Government solutions and new economic thinking will work
in time. We will adapt and manage.
The Cost: More debt, eventually more inflation, and a
weaker dollar relative to stronger economies.
Conditions will improve in time.
Patience and a conservative strategy will be rewarded.
QUESTIONS
Thank you for joining us
today.
We hope you enjoyed our
presentations.
