Dow 10,000 … What Next?

Featuring Lutts’ Logic:

The Contrary Opinion Forum

Dow 10,000 … What Next?

What’s A Femtocell?

Today I’m going to give you my two cents on Dow 10,000.

But first, a note on contrary investing, the practice of paying attention to the sentiment of the masses … and leaning the other way.

Twenty-three years ago, I attended my first Contrary Opinion Forum, an annual gathering of independent-minded investors (both individuals and professionals) in Vergennes, Vermont.  I was one of the youngest people in the room, and I took copious notes, intent on capturing the wisdom from the white-haired veterans who spoke.

I’ve returned every year since, with the exception of one, and now some of my own hairs are white.

More important, I now know that those guys up at the podium don’t have all the answers.

So why do I go?  To get ideas, to meet old friends, to get out of the daily routine, to see some beautiful Vermont foliage … and to get a read on the consensus opinion.  More on that below. 

As for those speakers, this year they included Michael Aronstein, David Hale, Alan Shaw, Louise Yamada, Hugh Johnson, Robin Carpenter, Bill McVay, Karel Samsom, Charles Blatteis, Dean LeBaron, Walter Deemer, Mark Ungewitter and Kathryn Welling.

I’m not going to go into the details of their presentations; if you’re really interested, come next year and you can see me, too.  But I will say this–the speakers tend to be of two camps, fundamentalists and technicians.

 The fundamentalists say things like this:

“Back in the 1920s the excess was in stocks; In the 1990s the real excess was in housing and credit.  So the recovery from the latest big crash will be very different from the recovery from the earlier big crash.  In the years ahead, the real estate and housing industries will continue to be troubled, while the stock market will do just fine. …  The trouble is, the Federal government is now assuming an increasing debt load, and people support that.  Eventually, the U.S. will default on its debt … but that’s years away.”

“Over the next five years, your best investment opportunities will come from emerging markets.  There are 8,300 banks in the U.S. and 7,000 of these banks have less than $1 billion in assets … much of it in commercial real estate, which will cause trouble in the year ahead.  In Germany, the majority of banks are owned by the state, and that will cause trouble.  Back in the U.S., states are having trouble; many will begin selling assets to raise cash … airports, highways, state houses.”

“The fact that the U.S. government has failed to put anyone in jail for this financial collapse is troubling.  The FBI has been focused on terrorism.  Our courts are overloaded.  Our prisons are overloaded.  And many of the people responsible for this collapse are expecting to get big bonuses this year.”

“Thirty-five percent of mortgaged property in the U.S. is upside down.  Fifteen million homeowners are at risk.  The average retirement account is down 27%.  As result, people don’t feel wealthy.  And if people don’t feel wealthy, they won’t spend money, which means the recovery will falter.”

And most memorably … “Based on the historical evidence, we are likely to experience either painful debt deflation or highly destructive monetary inflation–and perhaps both at the same time.”

The technicians say things like this:

“I see parallels between the charts of 1907 and 2008.”

“Gold is in a long-term uptrend.  In fact, it’s our favorite asset class.”

“A cyclical bear market has begun. The next bull market will begin in 2018.”

“Most sectors are extended now, but I see a good long-term base in technology stocks.”

And then they all get together for drinks and dinner, discussing what they just heard, offering their own projections/prescriptions for the weeks/months/years ahead and, in general, sharing opinions.

Because when you get right down to it, that’s what these are.  Opinions.

And as the quote on the mantel beside my desk says, “Markets are never wrong; Opinions are.”

Now, I’ll admit, I’ve been guilty of expressing opinions, too.  There’s nothing wrong with sharing ideas.  When it comes to investing, however, I much prefer to simply listen to the market carefully and act accordingly. 

But here’s a funny thing.

The name of the forum, as I said at the start, is the Contrary Opinion Forum.  The gathering was begun 47 years ago by the Vermont Ruminator, Humphrey Neill, an investor/philosopher who honed the craft of Contrary Opinion for decades and wrote “The Art of Contrary Thinking” in 1954.  (My father, Cabot’s founder, was an attendee for decades.)  Humphrey’s disciple Jim Fraser, founder of Fraser Management Associates, carried on the tradition, while publishing “The Contrary Investor Newsletter,” and today the forum continues, hosted by Alex Seagle, the current President of Fraser, who, if not a true contrarian, has the good sense to keep a great tradition going.

But the folks who attend, as a whole, are not contrarians!  And I say this from experience.  At market bottoms, they are pessimistic.  (At last year’s forum they were shell-shocked; no one had foreseen the implosion of the financial sector.)  At market tops, they are optimistic.  And in recessionary times, they foresee difficulties exiting the recession.  They watch the same news stories as most investors, and read the same statistics, and while they can certainly be creative in their thinking, they tend to reside in the same place, sentiment-wise (on average), as the average investor!

So when I go to the forum–and this is a habit my father taught me–I categorize each speaker as a bull or bear, count the totals at the end, and then resolve to act contrarily to their consensus sentiment.

This year, the tally was four bulls to six-and-a-half bears, which makes me feel good. 

Also, I got a good quote.  “You can only see as far as your headlights … but you can make the whole trip that way.” E. L. Doctorow wrote that, but he didn’t attend.

Now on to Dow 10,000.  Last Thursday’s Wall Street Journal headline read, “Dow at 10,000 as Crisis Ebbs.” No doubt the nightly news programs had a field day with that milestone the night before.  And no doubt, a lot of individual investors in the U.S. took that as a sign it was OK to start wading back into the market.


Odds are that in the short term, you’re better off selling now than buying.  The Dow is up 53% over the past seven months, and it needs a rest.  If you’ve been heavily invested in recent months, as Cabot has, you should simply sit tight; you’ve got a nice profit cushion and the long-term technical indicators are still positive.  But if you’re not yet in, don’t be suckered in by these headlines.  Think contrarily.  Wait until the market weakens after some bad news hits.  Remember, the goal is to buy low and sell high.
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Profit From the Bull Market

Last week, you heard from Cabot Market Letter Editor Michael Cintolo and he told you: “We are in a very, very powerful bull market for stocks and the best leading stocks are lifting off now.  And I want you to profit from it!”

And to get you started, we’re offering the rest of the year FREE if you subscribe to Cabot Market Letter by the end of the month. There’s never been a better time to invest.

Summing up, short-term, I’m a little leery that Dow 10,000 marks a temporary high-water mark.  A little profit taking up here is probably not a bad idea.

But long-term, I remain quite bullish, and not just because the folks at the forum were bearish.

No, the main reason for my bullishness is the charts, which remain in strong uptrends.  The second reason is that the number of stocks hitting new lows remains minuscule, and that’s an indicator that we value highly.  Adding to that is the Advance-Decline Line, which is healthy as a horse.

More generally, I remain bullish because in this period of major change, there are some major investment opportunities that make me very excited!

While Detroit and the old-line automakers struggle to rebuild the crashed industry, numerous young companies with innovative new technologies are making early investors rich.  Makers of batteries, ultracapacitors and electric motors are thriving!

While the coal industry fights against emission controls and the oil industry struggles against the power of the Saudis and the long-term fact that the well is slowly running dry, hot young companies are making great strides in solar power, wind power and other non-polluting technologies.

And China continues to boom, growing at an 8% annual rate or better, and increasing the market for U.S. exports.

Meanwhile, in the communications sector, the wireless revolution continues, as more and more users demand increasingly complex content delivered to their wireless devices.

Which brings me to my recommended stock.

It starts with the fact that I’ve got an iPhone.  In fact, my wife and two of my three kids have iPhones.  The iPhone is absolutely wonderful as a portable computer, camera, music player and casual gaming device.  I use it to check on stocks, keep notes, view maps, find where I am, figure currency conversions, send instant messages, play Scrabble and more.  But the iPhone is a disappointment as a phone.  And the main reason–to use a technical term–is that AT&T’s network stinks!  In short, dropped calls are more common than corn in Iowa and Democrats in Massachusetts.

And the problem is getting worse, because every new iPhone user (Apple sells roughly 80,000 iPhones a day) puts greater demands on AT&T’s network.

The problem may ease a little when AT&T gets its LTE (4G) network deployed in the years ahead.  And it may ease a little more in 2011, when Verizon starts carrying iPhone traffic.

But I can’t wait, which is why at the top of my Christmas wish list it says, “One femtocell.”

What’s a femtocell?

In short, it’s an in-home cellular tower that covers up to 5,000 square feet, and that connects to your cable or DSL connection, so that your cell phone activity (voice and data) travels on the Internet and not on those crowded airwaves.

It’s not really a tower.  It’s really just another plastic box.

Sprint and Verizon are already marketing similar devices, under the names Airave and Network Extender, but they only work with 2G handsets, and only for voice calls.

The device AT&T is just beginning to sell, however, is designed specifically for 3G smartphones, so it carries both voice and data.  2G phones can’t use it.  Dubbed Microcell, it’s branded with a Cisco logo, but in fact the innards are probably from ip.access, a non-public company Cisco invested in last year.  When you set it up, you can authorize up to 10 phones to use it (so your neighbors can’t piggyback on the signal), and up to four of those authorized phones can use it at any one time.  Voice quality is crystal clear.  And if you leave the femtocell’s range in the middle of a call, it hands off seamlessly to the regular cellular network.  There’s more information on the AT&T Web site.

But I can’t buy one yet.  AT&T began selling the Microcell less than a month ago in select markets: Atlanta, San Antonio, Seattle and North Carolina.  There’s no word on when it will come to the Boston area, but I’m keeping an eye out.

And I’m betting that when word gets out, demand will be terrific … especially as the AT&T network gets worse with every new iPhone sold.

Plus, I’m not the only one.  Over at, David Chalmers says, “The state of the femtocell market today can be compared to a scene in an action movie, where the large dam has been blown up, the audience is holding its breath waiting for the enormous wall of water to descend, but only a trickle is so far seen to appear.”

Another researcher predicts that femtocells will be a $12 billion market by 2012.

So what’s my stock recommendation?  It’s not AT&T (T) and it’s not Cisco (CSCO).  They’re big old slow-growing companies.  Their best days as investments ended long ago.

And it’s not Apple (AAPL), though there’s nothing wrong with that idea.  One look at the charts of competitors Research in Motion (RIMM) and Nokia (NOK) tells you those guys are hurting while Apple is smelling like a rose.

My recommendation is an attempted home-run swing with an unknown little player in the femtocell market, a company whose revenues were just $4.9 million in the second quarter … mainly from non-femtocell electronics.

The company, located here in Massachusetts, has been working with Alcatel-Lucent, Motorola, Hitachi, Nokia Siemens, Thompson Electronics and Pirelli … and most of all, Nortel.  But Nortel filed for bankruptcy back in January, which not only slowed business down but also made the stock pretty cheap.  Since then, Nortel’s relevant intellectual assets have been acquired by Ericsson (for $1.13 billion), and I have little doubt that Ericsson will be a big player in the femtocell market using this company’s technology.

In the meantime, the company has been recently buying its stock back, a clear indication of how cheap management thinks it is.  (It’s currently trading around 7.)  Another fan of the stock is Tom Garrity, editor of Cabot Small Cap Confidential, who recommended the stock back in July, when it was trading at 6. 

Here’s a little of what he wrote:

“The average operator’s core traffic, measured in terabytes, is up some 35 times in the past year. Data is flooding the network and carriers are struggling to stay afloat. [Company X] is here to teach them how to swim.

“[Company X’s] established relationships with the biggest players in the telecom industry have us imagining a day when its superior technology is not only dominant, but ubiquitous. In other words, we think this company is setting a new industry standard. [Company X’s] wireless technologies and its network management software are second to none. Investors have an opportunity here to get in at the beginning of a period of industry-transforming growth of a kind that’s not seen every day.”

I’d love to tell you name of this high-potential company, but it just wouldn’t be fair to paying subscribers of Cabot Small Cap Confidential.

But if you follow the link below and order a subscription to Cabot Small Cap Confidential now, you’ll have access to the original report along with your first issue.  I think this little stock is going places!

Finally, if you’ve had any experience with a femtocell, I’d love to hear from you.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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