May 24, 2010
By Timothy Lutts
Throw the Bums Out
Where's the Market Going?
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I'm a big fan of patterns. They help in understanding the movements of individual stocks. They help in understanding the movements of global events, both economic and political. And the reason they help is that all these things are determined primarily by human behavior, which is governed by fear and greed and the range of emotions in between.
So here's what I've found interesting in recent weeks.
First, Greece nearly went bankrupt. The immediate reason was too much debt. The core reason is that expenses had grown faster than tax receipts for too long, as a result of too much government and too much cheating on taxes.
But Greece was judged "too big to fail," so ended up rescued by its economic partners. Those partners were none too happy about it, but it seemed easier and cheaper than a messy divorce.
Not long after, Gordon Brown's Labour Party lost the general election in the United Kingdom. As in Greece, the big issues were debt and the economy, and the electorate's choice was to throw the bums out, giving a majority of the vote to neither Labour nor their long-time rivals, the Conservatives. As a result, the U.K. will now be governed by a coalition of Conservatives and Liberal Democrats, who are quite different in many ways, but united in their opposition to the incumbent party.
United in Opposition. It's a powerful concept.
And that brings me home to the good old U.S. of A., where we are quite unlikely to have government by coalition but can still achieve change by uniting against the opposition.
But who is the opposition? This year, it's every incumbent politician who's been judged to be immoral or untruthful. It's every incumbent politician who's paid more attention to lobbyists' money than the well-being of his constituents. And it's every incumbent politician who's ignored the ticking time bombs of our ballooning entitlement programs and continued to practice business as usual, caring more about his re-election than the long-term health of the country.
Granted, our economic situation isn't as bad as Greece's or the U.K.'s yet ... but it's on track to get there. In fact, a report by the International Monetary Fund, released just last week, puts the U.S. in the same category as Greece, Ireland, Japan, Spain and the United Kingdom. We all have mature economies, we're all struggling to grow, we all have heavy debt loads, and we're all going to have a difficult time cutting expenses.
These economic challenges are no secret. Numerous experts have told us that we need to reduce our deficits, or someday our creditors are going to start making life tough for us. Yet our so-called representatives in Washington keep on spending, ignoring the fact that the longer they do so, the more difficult the day of reckoning will be.
So now frustrated U.S. voters are acting just like their cousins in the U.K. They're throwing out incumbents. They're demanding a change from a political system that has grown increasingly polarized and dysfunctional. And one of the big unknowns is where we're going after we throw out these incumbents.
Last year, on July 6, I wrote a long and detailed Cabot Wealth Advisory about the history of political parties in the U.S., and the possibility that a new party could arise to challenge our current two-party system. It provides a valuable counterweight to the short-sightedness that inflicts so much of today's political analysis. You can read it if you click below.
The main message from that column was that political parties are in a constant state of evolution, and that the likelihood that our government will continue to be dominated by Democrats and Republicans in the decades ahead is rather slim.
And what's interesting from today's perspective is that when I wrote that column last July, the Tea Party movement was only four months old! In fact, I didn't even mention it. But today the movement--admittedly disorganized and largely leaderless--has become a major force because it's addressing the concerns of a substantial number of voters--mainly Republican--who believe the system has let them down.
In doing so, it's also enabled Democrats as well to vent their frustrations at their own leaders who have failed to deliver the promised prosperity in the past year. And the greater the number of dissatisfied voters in both camps, the greater the potential for real change as we head toward the fall election.
In the U.K., some of the big changes the new coalition government has proposed are creating a fully elected House of Lords, throwing heredity out of the equation; and changing the voting system for the House of Commons, thus making it more difficult to secure what amounts to lifetime employment. Sounds like a step in the right direction to me.
In the U.S., the time is ripe for similar moves, and I welcome your suggestions, as well as your vote for change when the time comes.
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As to the stock market, here's the way I see it.
We remain in the midst of a normal market correction. We hit the 10% pullback level last week, and could go further still. In fact, I tend to think we SHOULD go further, at least in time, simply because this correction is only one month old, and that's awful young for a correction.
But I'm optimistic that the correction won't run excessively long and the reason is this. The news is absolutely TERRIBLE! Between unemployment, trouble in euroland, and the continuing oil spill in the Gulf of Mexico, there's a lot of fear out there. The levels of fear are particularly high considering that we're just one month off the market's recent high, and that gives me hope that it won't be too much longer before all the weak hands have done their selling and the smart money starts buying again.
Also encouraging is the fact that one of the strongest areas of the market is in small, growth-oriented stocks. The most exciting of these are firms that are growing fast by supplying new technologies and services to growth markets. One of my favorites is Acme Packet (APKT), the leading provider of "session border controllers" that connect IP networks. Another is Isilon (ISLN), a leading network attached storage company for file-based data (think videos, images, etc.) that saw revenues shoot up 46% in the latest quarter.
But perhaps my favorite is a little company that's helping to revolutionize the back end of the advertising business, specifically the way content moves from advertising agency to content distributor. This little company, which I'll call "Company X," has a Web-based network that is accessed on one side by more than 5,000 advertisers and advertising agencies, and on the other side by more than 23,000 radio, television, cable and print destinations and more than 5,000 online destinations. It enables access to daily topical advertising, last-minute buys, television sweeps advertising, short-form syndicated programs, political spots and news. It's benefiting tremendously from the popularity of high-definition content (HD advertising in the first quarter was up 80% from the year before. And it's benefiting tremendously from the shift to online (advertising-supported) content. In fact, first-quarter earnings were up 116%!
This company was first recommended by Cabot Top Ten Report on April 27, when it was trading at 23. Today it's at 40, having pulled back from its recent high of 43. The buyers remain firmly in control. The stock made another appearance in Cabot Top Ten Report today and you can get the full story behind this fast-growing company by clicking here.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory