Five Problems and Five Good Things

Nixon Resigns
Five Problems
Five Good Things

On this day in 1974, Richard Nixon resigned as President of the U.S., to be replaced by Gerald Ford, who had replaced Spiro Agnew as Vice President after Agnew resigned amid criminal charges of tax evasion and money laundering.
Thus Ford became the only U.S. President who was elected neither President nor Vice President, while Nixon, who was (and remains) the only person to be elected twice to both offices, became (and remains) the only President to resign!
But at least one of Nixon’s greatest achievements has born wonderful fruit.  When Sino-Soviet relations began to deteriorate, Nixon saw the opportunity to get China on our side, and in 1972 he visited Mao Zedong in Beijing.  Thirty-eight years later, China is a key trading partner of the U.S. as well as the second-largest economy on earth!
Thirty-eight years ago, no one imagined this state of affairs was possible.
Similarly, none of us can know what’s coming 38 years down the road.  But I think it will be good!
Editor’s Note: One effect of Nixon’s visit and the booming Chinese economy is that Cabot China & Emerging Markets Report remains the top-performing investment advisory of the past five years, with a compound annual return of 17.9%
For more details, click here.

When I was in eighth grade, I took third place in the school science fair with an exhibit on Bernoulli’s principle.  Named for Daniel Bernoulli (1700-1782) the principle states that as the speed of a fluid increases, pressure decreases … and thus explains how airplanes fly.  My exhibit included a model airplane wing that lifted when a fan was turned on.  (My father was trained as an aeronautical engineer, so he was a valuable “resource.”)  And my prize was a hardcover copy of the book, The Way Things Work, which was chock full of two-color illustrations and explanations about how things worked.  These things included refrigerators, magnets, sewing machines, forklifts, televisions, X-rays, deadbolts, AM radios, machine guns, submarines, etc.
I loved that book … and I still have it.
But that book is useless at explaining how all the new stuff in my house works, from the Comcast router I have to restart at least once a week, to the Moxi DVR that enables me to avoid watching commercials, to the iPhone that’s much more than a phone.  Happily, the answers to all my questions about them are on the Internet.
And these days I’m less interested in how machines work, and more interested in how people work (or don’t), and in how the institutions made up of people work (or don’t).
So today I present my personal list of five programs that aren’t working, followed by five good things.
Five Programs That Aren’t Working
1. Our national balance sheet is a mess, and destined to get worse unless politicians make some hard choices.  My suggestions include progressively raising the retirement age, as well as the age at which people qualify for Social Security and Medicare; simplifying the tax code; putting the responsibility for health care back on the individual; and reducing spending on foreign military entanglements.  And why can’t our politicians do these things?  Because they care too much about being re-elected, and about pandering to the constituents of their home state.  Thus the country suffers.
2. We continue to consume excessive amounts of oil, both domestic and imported, clinging to the habits of an idealized past while reluctantly being dragged to a future that promises limitless non-polluting energy from the sun and wind.  The impediments to progress include lobbyists from our massive oil and gas complex as well as all who benefit in the short term from their money.
3. Obesity rates are still rising in this country, costing us untold billions in healthcare dollars, yet we’ve been unable to halt the trend.  Why?  Because the power of the corn industry, the soft drink industry, the processed food industry, the fast-food industry and all their lobbyists in Washington are too influential in Congress.  There’s much more wrong with our health care/insurance system but curing the obesity problem would provide the greatest benefit.
4. I’ve been delayed by a lot of stimulus-funded road projects over the past year, but the stimulus isn’t working as promised.  Why?  It’s not simply because those projects themselves have caused untold millions of hours of delays.  It’s because baby boomers have passed their point of peak consumption—not coincidentally at the same time housing prices peaked—and now they’re preparing for retirement.  It’s because the lingering recession and stubbornly high unemployment have increased the sense of uncertainty among consumers, and thus increased their reluctance to spend.  And it’s because businesses recognize this slowing demand—as well as increasingly costly and restrictive regulations—and conserve cash to get through the hard times.  Implementing the suggestions I made in #1 would help.
5. For far too long we’ve allowed our public education system to be controlled by the interests of the employees (the teachers), not the customers, and the results has been substandard achievement compared to other developed countries.  Happily, the Democratic establishment, heretofore the biggest beneficiary of the unions’ money, has begun to recognize the problem, and to see the gains that can be achieved through implementing systems of accountability, but we have along way to go.
Criticizing is easy, and I don’t want to be labeled a crank.  So I’m going to finish today with five good things.  
1. Apple (AAPL) makes great products that make our lives both more productive and more enjoyable.  And that’s great progress.  The stock has been building a base around 260 for nearly four months, which is a positive technical pattern.  Furthermore, editor Roy Ward of Cabot Benjamin Graham Value Letter wrote this last week:  “CEO Steve Jobs and company have a unique ability to identify what customers want, produce easy-to-use products and launch huge marketing campaigns to create demand.  The iPad helped sales soar 88% and EPS more than double in the latest quarter. In addition to gaining market share in the computer, smart phone and tablet sectors, we believe Apple will launch a new subscription-based TV service and a new multi-task mini-computer. We expect Apple’s earnings to grow at a rapid 24% pace during the next five years. At 14.7 times our one-year forward EPS estimate, AAPL shares are clearly undervalued.”
For more, click here.
2. Momentum to undo our national prohibition of marijuana is growing, fueled in part by the hunt by cash-strapped governments for new sources of revenue.  Taxes on the sales of marijuana fit the bill, and as production chains are institutionalized, I look forward to a growing standardization of quality as well as diminished funding of criminal gangs, which will bring marvelous unanticipated benefits in both the U.S. and Mexico.
3. Momentum behind the solar power movement is picking up again, driven not so much by government action as by the actions of forward-looking individuals and institutions who don’t mind paying extra right now to get a clean source of power that will be insulated from higher oil prices in the future.  While there are many attractive companies in the solar cell business, I think one of the smartest plays is a company that makes the electric inverters that efficiently process that power so it’s suitable for the home, business and/or the electric grid.  The company is Power-One (PWER), and here’s what editor Michael Cintolo wrote in a recent issue of Cabot Top Ten Weekly.  “Not long ago, the bulk of its business involved manufacturing AC/DC and DC/AC converters for companies in the telecom, computer and office equipment markets.  But between competition and the great slowdown of 2008, 2009, the company was getting killed.  Then the booming market for alternative energy presented a market opportunity, and management took aim at that market and hit a bull’s-eye!  A year ago, 18% of the company’s business involved making inverters for solar power farms and wind power farms, so that their energy could be distributed to the grid.  Now that percentage is 66%, and rising!  Revenue growth is accelerating, analysts’ earnings estimates are being raised and investors are climbing on board.”
When Power-One was first recommended in Cabot Top Ten Weekly in mid-July, the stock was trading at 9.  Now it’s at 13, but still attractive on normal pullbacks.
For details on Power-One and other top stocks, click here.
4. It took a near-death experience, but the auto industry in this country is finally taking the search for the successor to the internal combustion engine seriously.  And one interesting aspect of this movement is that the Europeans couldn’t do it, even when motivated by years of high gas prices.  Now, good old American Ingenuity is bringing us Tesla, the Chevy Volt, and numerous companies involved in designing and manufacturing batteries and control systems.

One of these young, fast-growing companies is Polypore International (PPO), which is an expert at designing and manufacturing membranes that allow very small particles like ions, gas molecules and fluid components to pass through in a controlled way. These membranes are used to electrically insulate the two sides of batteries (both lead-acid and lithium), and battery-makers are lining up for Polypore’s material.  
The stock (PPO) was recommended by editor Brendan Coffey of Cabot Green Investor back on June 18, when it was trading at 22.  Now it’s at 28.
Details here.
5. Finally, eBay is well known as one of the greatest online retailers, a great resource for both institutional and individual buyers and sellers of everything from old baseballs to new cars.  Far less well known, and with far greater investment potential, is the eBay of Latin America, MercadoLibre (MELI) (the name means free market).
Paul Goodwin, editor of Cabot China & Emerging Markets Report, recently wrote, “MercadoLibre is an Argentinean company that provides the same kind of e-commerce transactions as eBay, including fixed-price and auction sales, dedicated marketplaces for cars, boats, planes, real estate and services, and an online payment platform. The company was founded in 1999 and it’s the largest online trading platform in Latin America. It has operations in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Portugal, Uruguay and Venezuela, with recent expansions bringing Costa Rica, the Dominican Republic and Panama into the mix.  The Marketplace has nearly 43 million registered users and sales are expedited by a very efficient search engine, leading to gross merchandise sales of $2.7 billion in 2009.  MercadoPago, the company’s online payment system, processed over three million payments in 2009 and the division contributed 26% of revenues for the year.  The drivers for future growth are expected to be 1) increasing penetration of Internet access in Latin America as the area’s telecom infrastructure builds out, 2) strong GDP growth in the region, which will increase disposable income for its large population, and 3) the introduction of MercadoShops that offer sellers their own online sales channels, and MercadoClics, a search platform that uses sales of display ads and a program like Google’s AdWords to generate income.”
When Paul recommended the stock, MELI was selling at 64.  Now it’s 68.
Click here for details.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Cabot Wealth Advisory


You must be logged in to post a comment.