The Twilight of Moore's Law
Brazil Bank Buy ... But Not Yet
Like most citizens of the United States, I had always thought of the U.S. stock market as "The Market." And I can remember the efforts we made at the big Boston investment house where I used to work to get people to allocate a small amount of money to non-U.S. equities, which mostly meant Europe at the time.
Now, with exchange-traded funds, Standard & Poor's Depositary Receipts, index funds and American Depositary Receipts offering instant exposure to every imaginable country, region, sector, industry and index, investors have every reason to be much more cosmopolitan.
So are they?
Investment advisors say that about 30% of an individual's equity portfolio should be in international stocks. Yet, research has shown that many individual investors (one out of five) think that they should have 10% or less of their stock portfolios in international (outside the U.S.) equities.
Why is this?
I think that part of the reason is familiarity. In automotive stocks, people in the U.S. know Ford (F) better than they know India's Tata Motors (TTM). (And Ford actually outperformed Tata in 2009.) But people also know Google (GOOG) better than they know China's search giant Baidu (BIDU), and Baidu outperformed Google by a wide margin for the year.
The other reason, I suspect, is a kind of patriotism. U.S. citizens want to invest in U.S. stocks because they feel a kind of loyalty to the U.S. and identify with its companies more completely.
It's a reaction that leads many people to make "Buy American" their first priority, whether they're buying stocks or cars or consumer goods. (And by the way, it's also the same reaction that leads Indian investors to their enormous preference for Indian stocks.)
There's nothing wrong with patriotism, but if taken too far, it can become damaging. Refusing to diversify a stock portfolio can lead to outsized losses. Plus, the opportunity risk of avoiding international and emerging market equities (which have outperformed U.S. stocks in the last couple of years) is substantial.
Of course I'm prejudiced myself because I write Cabot China & Emerging Markets Report, and despite the recent dip in Chinese stocks, the Report is still the top-performing newsletter of all financial newsletters for the past five years.
But part of being a patriotic American is embracing the capitalist ideal that has helped to make the U.S. a world leader. (I recognize that capitalist excesses also caused us to shoot ourselves in the financial foot, but the principle stands.) And the rational capitalist finds the most advantageous investments available, subject to risk tolerance.
Cabot China & Emerging Markets Report is rewarding its subscribers with a 164% total return over the past five years (an average annualized gain of 21.4% every year), compared to the S&P 500's increase of a mere 2.1% (dividends included) over the same period. And I think this is just the beginning, so if you'd like to have my advice on what emerging market stocks to buy, you can get started with a no-risk trial subscription by clicking below.
Back in 1965, Gordon Moore (then working at Fairchild Semiconductor, but soon to help found Intel) published an article called "Cramming More Components Into Integrated Circuits" in Electronics magazine.
Moore predicted that the number of transistors on computer chips would double about every 18 months. Although he later amended the time scale for what would become known as Moore's Law to every two years, it has remained The Law for 45 years.
To put it in concrete terms, when Moore published his paper, the most advanced chips contained about 60 devices, while Intel's hottest new chip, the Itanium, boasts about 1.7 billion (with a "B") transistors.
You can thank Moore's Law for your GPS-capable, picture-taking, video downloading cell phone, your kids' hand-held, 3-D video games and a host of other chock-full-of-chips devices. You can also see it as the basis for the growth of the computer industry; if a device with double the power is going to be available in a couple of years, you're going to need to trade in your old clunker for a new one a lot sooner than you would otherwise.
Moore has also noted that similar advances aren't really possible in other industries. If carmakers had been making parallel strides, cars would get 100,000 miles to the gallon and you could buy a Rolls Royce for less than a Starbucks latté. Unfortunately, cars would also be about a half an inch long.
Chip designers say that they can obey Moore's Law for a few more years, but then they're going to run into some resistance from another set of laws, the laws of physics. Increasing chip density means that smaller chips with more devices will generate more heat but have less surface area to get rid of it. And if the infinitesimal circuits on chips continue to shrink, the thickness of the materials separating them will be so thin that electrons will start leaking through the boundaries!
Of course scientists are working on new ideas for processors and data storage and software. But the computer/handheld-device industry is built around Moore's Law and the rapid turnover that it dictates. Spectacular advances in integrated circuits are so commonplace that the tech sector takes miracles for granted and expects consumers to throw out last year's machines with the trash.
If Moore's Law is going to lose traction, where will The Next Big Thing come from? The bumper stickers that you see in Silicon Valley that say "Please, God, Just One More Bubble" could go on the bumpers of lots of investors, too. The global recession and the surprisingly robust recovery in the stock market that followed seem to be at a crux, and nobody knows where things will go from here. This leaves stock investors looking for the companies that are ready to take the elevator, not the stairs.
I don't have any more idea than you do of what The Next Big Thing is. All I can do is to keep my eyes open and identify the familiar patterns of technical growth, momentum, support, resistance and correction. By staying out of the business of prediction, I can make the most of accurate description and analysis of what's actually happening. It's the essence of what Cabot growth advisories have been doing for many years, and it pays off
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My stock tip for today is Banco Santander (Brasil) (BSBR), a subsidiary of Banco Santander that's based in Sao Paulo. Santander is a big operation, with a market cap of $21.5 billion. This Brazilian bank came public at 13 last October, and after a post-IPO droop, managed to push above 14 in December and early January. But since then, BSBR has been under heavy pressure, falling along with the global finance sector.
My stock recommendations usually follow the traditional Cabot growth disciplines, so it's unusual to shout out a stock that's just fallen back toward its lows this month. But I think it's okay to put a stock on a Watch List even if it's had a brick on its head for a few weeks.
Santander is a full-service bank with over 2,000 locations in southern and southeastern Brazil. It does commercial and wholesale banking as well as asset management and insurance. The company's Q3 earnings were up 100% on an 84% jump in revenues, with an after-tax profit margin of 12.0%--that's registering a multi-year high.
With a trailing P/E ratio of 19 and a forward P/E of 10, it's certainly cheap enough. Plus there's a hint in the chart that the stock might actually find support at 12.
Big solid company, thriving home economy, cheap stock price, small dividend ... that's enough to put an emerging market stock on my Watch List. And when it shows some signs of life ... well, we'll see.
If I decide to put BSBR in the portfolio of the Cabot China & Emerging Markets Report, you can be among the first to know by trying a no-risk introductory subscription (for new subscribers only).
For Cabot Wealth Advisory