Wait For It!
Tragicomic Criminals
A Stock for Your Watch List
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The main characteristic of equity markets right now is
volatility.
If you take a look at a daily chart of the S&P 500
Index since the beginning of 2009, you can see it immediately. The S&P bottomed in March 2009,
then played the bouncing upward game for most of the rest of the year, looking
like a Slinky toy going up the stairs rather than down.
After the January 2010 correction, the Index got back on
track in February and rallied beautifully through the end of April.
At that point, the bears got a grip on the market and
pulled it right back to its February lows.
But the more important thing to see in the S&P chart
is that the intraday swings got much, much bigger, indicating a growing
disagreement between those who think the market will go up more and those who
are betting that it will go down.
Volatility is what you get when you have a devoted group
of market optimists fighting it out with an equally committed group of
pessimists.
I won't go through the competing scenarios that each
group paints to support their vision of the market's future. The scenarios for both a major market
meltdown and another big rally make perfect sense.
But one of them has to be wrong, at least in the short
term.
There are actually three possible ways the market can go
from here. They are up, down and
sideways, which would mean more of this hacking around without a central
tendency.
If you feel yourself drawn to either the bulls or the
bears, the optimists or the pessimists, and if you're moved to put a lot of
money behind your bet, here's my advice.
Don't.
Remember what I keep telling you: The market wants to
take your money.
If we get a new rally in the stock market, it's likely to
be a relatively narrow one, with more and more money pouring into the most
popular names. And for subscribers
to our growth newsletters, Cabot will be happy to tell you what those names
are.
We will also be happy to tell you when to get into cash
if the market heads for the deep end.
So try to be like a good World Cup goalie. Ignore the head fakes and the
temptation to anticipate what's happening. Be patient and wait until the real move becomes clear. Then react with purpose.
And if you want our help in keeping track of things, a
no-risk trial subscription to Cabot Market Letter can be obtained by clicking
below.
http://www.cabot.net/info/cml/cmlkb02.aspx?source=wc01
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My favorite story out of China in recent months has
nothing to do with investments or growth stocks. It's part "dumb criminal" story and part
tragicomedy. And the amazing thing
is that I heard absolutely nothing about the story when it first broke.
It all began when a vault manager in the Handan branch of
the Agricultural Bank of China came up with a bright idea in October 2006. (Handan is an industrial city of 1.4
million in Hebei Province, about 250 miles south of Beijing.) With the "cooperation" of a
couple of security guards, he decided, to "borrow" 200,000 yuan
(about $26,000) from the bank's vault and buy lottery tickets with it. His plan was to win enough that he
could replace the money and keep the excess winnings for himself.
Not a wise plan, you might be thinking, but good enough
for our manager friend.
And the weird thing is that it worked!
The manager replaced the 200,000 yuan, and that might
have been the end of it. (I have
no idea how much his excess winnings were.)
Unfortunately, having successfully confirmed the
viability of his scheme to his own satisfaction, the manager decided to go
after some real money.
He enlisted another manager, and together they walked out
of the bank with nearly 33 million yuan (about $4.3 million), of which they
immediately dropped 31.3 million on more lottery tickets. But this time luck was against them,
and they won basically zilch.
As so often happens when a poorly considered sure thing
goes wrong, the manager and his friend must have panicked. They figured that their only way out of
the mess was ... wait for it! ... to steal more money!
This time they walked out with 18 million yuan (about
$2.3 million), and immediately poured 14 million into lottery tickets in a
single day. And almost needless to
say, their luck stayed bad, resulting in a return of just 98,000 yuan.
When their massive embezzlement was discovered, our
heroes did the only logical thing, which is to buy fake IDs and used cars and
hit the road. Unfortunately, China
isn't a place where desperadoes can take to the open road and disappear into
legend.
The managers were found within two days and charged with
misappropriating public funds (because the Ag Bank of China is a state
institution). And here's where the
tragic note comes into the composition.
The two were executed on April 1, 2008, which may be a
bit of cosmic calendar irony.
I haven't used the men's names because I don't think
non-violent crimes deserve the death penalty, but that's a personal thing. I don't mean to mock people whose real
crime was embarrassing the state.
Is there a moral for this story? I don't know. There's probably a lesson in there
somewhere about not letting a statistical improbability (the first manager's
big lottery win) convince you that statistics don't matter.
But sticking to the topic of crime ...
I have a lawyer friend in Arkansas who switched from
being a defense lawyer to the prosecutor's office. I think he just got tired of defending people who were, for
the most part, guilty as heck. I
love his line about crime, which is, "There are really only two crimes,
misdemeanor stupidity and felony stupidity."
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Big investment companies love consistent revenue and
earnings growth, especially because this consistency allows them to project
future growth with confidence.
When you're trying to predict anything about the future, confidence is a
precious commodity.
Longtop Financial Technology (LFT) is a Chinese provider
of software and IT solutions to the financial sector in China. The company's products help run bank
teller machines (ATMs), control customer relationship management (CRM) and let
financial firms mine customer information for information that will enhance
revenue and increase client satisfaction.
The company also just signed an agreement with Netezza (NZ) to provide
integrated data warehousing services in China.
The bottom line, though, is the bottom line, which has
been growing steadily for a long time.
Both revenue and earnings have each been growing at a 30% or better rate
for the last 11 quarters. (OK, so
Q3 2009 earnings were up only 29%.
Don't get picky!)
The company has no debt to speak of and the forward P/E
of 21 seems entirely reasonable, given the growth of the Chinese financial
sector.
The chart for LFT shows a stock that has been drifting
slowly downward since January, but has caught an upwind since June 9 and is now
trading above its 25- and 50-day moving averages on rising volume.
I had LFT in the Cabot China & Emerging Market Report
portfolio in April, following a short stay on our Watch List. We sold it for a small profit in July
after the stock corrected from 29 to 22.
If this rally continues, it may make another trip to the Watch
List. Then we'll see.
Sincerely,
Paul Goodwin
For Cabot Wealth Advisory
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