The Great Bull Market of 2009

Featuring Lutts’ Logic:

10 Random Thoughts

The Great Bull Market of 2009 … What’s Next?

A Great Growth Stock

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Below are 10 random thoughts you might find interesting.

1) Last weekend’s Boston Globe had a big story on Foxwoods, the Connecticut casino complex that began as a bingo hall in 1986 and has grown into the largest casino in the world.  Owned by the Mashantucket Pequot Tribal Nation (and creditors), the casino is struggling to deal with a $2 billion debt load.  It’s laid off more than 700 employees in the past year (6% of its workforce), but revenues have dropped faster.  When the Native American operation began, part of the logic was that the enterprise would bring economic improvements to a population damaged by centuries of oppression.  It certainly has.  And in an unforeseen bonus to the tribe, should the casino fail to honor its debts, lenders may find that because the casino is on reservation land that is considered, under federal law, part of a sovereign nation, the usual remedies of foreclosing and taking ownership are not available.

2) In an interview with the New York Times last month, when Arlo Guthrie was asked, “Have you ever seen “American Idol?”, he answered, “No, I have never watched it.  But I’m thankful we’re living in a world where we can actually afford to waste your time.  What a great thing that is.”  I’m thankful for that, too, but I often think people should spend a little more time thinking.

3) For example, I sincerely think a tax on soft drinks, and eventually other junk food, is the best way to fix America’s weight problem.  High cigarette taxes, combined with public education, have dramatically reduced smoking and the same tools can work to tackle obesity.  Step # 2 is to eliminate the government corn subsidy.  Today, the Federal government spends $40 billion to subsidize corn growers, so that corn syrup can replace cane sugar.  But because high fructose corn syrup doesn’t satiate hunger, the U.S. ends up obese and diabetic.  And diabetes costs us more than $200 billion a year!  If the movement to tax soft drinks gains momentum, it could spell trouble for Coca-Cola, among others … and KO might be a great short sale.  But I wouldn’t short until the chart confirmed my thinking.  Right now, the chart of KO looks healthy.

4) What does it mean that 75% of drivers in the U.S. say they’re more careful than most other drivers?  Simply that at least 25% of us are delusional.

5) Technologically and economically, I’m excited about the revolutions under way in both the automobile industry and the energy industry.  These are both very large industries, so change will be slow at some levels.  But because these industries are pervasive, much will change in our lives.  And change brings opportunity.  I like American Superconductor (AMSC), Echelon (ELON), Maxwell Technologies (MXWL) and UQM Technologies (UQM) and I’m looking forward to the IPO of A123 Systems.  (But we don’t advise buying IPOs.  We want to see at least a few weeks of trading activity first.)

6) Gold stocks are strong; in fact most natural resource stocks look good.  And traditionally, that argues for inflation.  But I continue to believe that the deflation of the credit bubble has ushered in a sea change in our habits (borrowing less and saving more) and that as a result, inflation will be a thing of the past for a very long time.

7) It’s a darn shame that so many politicians care more about perpetuating the power of their party and less about the truth, and what’s good for America.  Here in Massachusetts, for example, the Democratically controlled state legislature is working to change the law to allow Governor Deval Patrick to appoint someone (it really doesn’t matter who) to fill Ted Kennedy’s Senate seat and vote the party line (especially on health care) until we can have a real election in January.  This power to appoint belonged to the governor just five years ago, but the state legislature took it away when it looked like John Kerry might become the next President and Republican governor Mitt Romney would appoint a Republican to fill his seat.  Apparently, desire for power trumps ethics and the power of shame.  

8) I believe strongly in education … but I think the National Education Association is one factor responsible the low achievement of our elementary and secondary schools.  The union members care more about their jobs than they do about the children.  I believe the best teachers should be paid more (everyone in a school knows who those teachers are) and I believe the worst should be replaced.  Meritocracy works.  (Interestingly, you can’t even discuss this with most teachers because they don’t acknowledge the power and wisdom inherent in market forces.)

9) Here in Massachusetts, this summer brought the warmest ocean water temperatures of my life … and no one can explain why.  The calculations involved in understanding and predicting large-scale weather patterns are infinitely complex.  But the swimming was great!

10) I never got to eat at Tavern on the Green in Manhattan’s Central Park, and now that it’s closed I never will.  But I never had any desire to.  Once places get that famous, their value lies not in the food but in the experience of being in a place that’s famous because it’s famous.  I’d much rather eat at a smaller place where the owners really care about their food.  In the stock market as well, I find the best-known stocks are never the best investments.  For example, everyone knows Google, but a far better investment this year has been Baidu (BIDU), “the Google of China.”

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Now, a confession.  On any given day, I don’t know the level of the Dow, or the level of the Nasdaq or the price of any stock I’m following.  I simply don’t remember prices.  But I do remember trends very clearly, and I can say with great certainty that today’s stock market is as strong as Arnold Schwarzenegger was in 1975, when he won his sixth consecutive Mr. Olympia competition.

All the major indexes are strong.  The Advance-Decline Line is strong.  The number of stocks hitting new lows is minuscule.  And stocks in general do not appear overbought, meaning that while a short-term correction is possible at any time, we do not appear to be at a climax phase.  In short, the charts look great.

As to psychology, the temperature is rising, but there are still doubters, and we are far from euphoria.  So there is plenty of upside left, which means that if you’re still not aggressively invested in this market it’s not too late.

One of my favorite investment areas, because of its growth rate, remains China … and one of my favorite stocks, mentioned above, is “the Google of China,” Baidu (BIDU).

The best coverage of the stock has come from Cabot China & Emerging Markets Report, which back on July 9 said this:

“Baidu is the dominant Chinese-language search engine in China, with a market share that hit 65.8% in 2008.  (Google was second with 22% and Chinese rival Sogou was a distant third with 2.9%.  Yahoo! was an even more distant fourth.)  It is now the third-largest search engine in the world.  For a company incorporated in 2000 and limited almost entirely to operations within a single country, this is a remarkable record. …

“Baidu has built its towering advantage over its powerful competitors by being both imitative and innovative. The imitative part of the Baidu strategy is its total adoption of Google’s paid keyword search as its revenue model.  … The … innovation … has been understanding the Chinese language better than its competition.  According to the language mavens at Baidu, the Chinese language has 38 ways of saying “I,” and an equally bewildering profusion of terms for other topics of interest.  By incorporating a native speaker’s intuitive grasp of the poetry and ambiguity of this rich language, Baidu can deliver the results users want no matter how oddly they may ask for it. …

“Baidu’s future growth is expected to come from the growth of the Internet in China.  Despite the controls and restrictions demanded by the Chinese government–mostly aimed at pornography and politically sensitive topics–the Chinese people are taking rapidly to life online.  China now has more people online than any other country in the world (221 million in early 2008) and estimates put the growth rate at 18% per year, with a target of 490 million users by 2012.  (We note that that’s more Internet users in China than there are people in the U.S.) …

“As usual, don’t let the stock’s high price put you off.  Remember that $1,000 invested in BIDU is exactly the same as $1,000 invested in a stock trading at 10.  It’s the exposure, not the number of shares that matters.”

When that was written, editor Paul Goodwin’s China-Timer, which monitors the health of the Chinese stock market, told him to be cautious, so he rated BIDU a hold.  But just seven days later he wrote to subscribers, “The combination of a new buy signal from the Cabot China-Timer and a breakout on good volume makes this an easy call.  BIDU is now rated buy. The stock failed just above 300 in June, then stalled there again in the first week of July.  A six-day high-volume rally pushing past that old resistance is just what the doctor ordered.  BUY.”

Since then, the stock has soared 24%, and now it’s building a base at 400.  Of course, this seems like a ridiculously high price to some investors, but it’s clear to me that the folks at Baidu have taken another lesson from the Google playbook.  They’ve learned that leaving your stock’s price high (instead of splitting the stock to artificially bring it down to a level attractive to the masses), means that more shareholders will be institutional investors who (hopefully) will treat the stock more wisely.  

BIDU’s 50-day moving average is now at 350 and climbing, and if you wait until the stock and that moving average meet, you could find a decent entry point.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

Editor’s Note: Baidu isn’t the only fast-moving stock Editor Paul Goodwin has recommended. In fact, he’s picked so many great stocks that his investment advisory, Cabot China & Emerging Markets Report was named the #1 newsletter for the last five years! And with his China-Timer flashing BUY, you can be sure there will be more hot stocks coming down the pipeline. Let Paul be your guide to the opportunities in the emerging markets. Click below to get started today!

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