Featuring Lutts’ Logic:
Beautiful Philadelphia
Six Big Trends You Can Profit From (or, Beware the Boiling Frog)
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Everyone knows that Philadelphia is “The City of Brotherly Love.” What I should have known, but just learned (or perhaps re-learned), is that the phrase is simply a translation of the city’s name from the Greek, as coined by William Penn. Philos means love, while adelphos means brother.
I was in Philadelphia recently, for the first time since I was child, and had a lovely time. The main reason for the trip was art: my wife and I visited the Cezanne show at the Philadelphia Museum of Art and then the Barnes Foundation, in suburban Merion. I recommend both highly, especially the Barnes. Created by Doctor Albert C. Barnes, who made a fortune by co-developing an early antimicrobial drug marketed as Argyrol, the foundation has 181 paintings by Renoir, 69 by Cezanne, 59 by Matisse and much, much more. The presentation is absolutely stunning.
Now, my mother didn’t raise a complainer, but I do want to mention one pet peeve, and that’s the pervasive use of audio guides (free at the Philadelphia Museum of Art and $7 at the Barnes). The audio guides tend to turn people into sheep, who look only at the art being explained by the guide. These sheep tend to cluster in front of these select pieces, focusing on the words in their ears and standing there as long as the voice keeps talking. Many of them are oblivious to their fellow patrons, making the delicate art of navigation in a gallery more challenging for the rest of us.
The sounds that leak out through their headphones create a chorus of whispers, distracting to non-headphone wearers. When the headphone wearers do speak, it is frequently at a greater volume than necessary, to compensate for the barrier of the headphones. And worst of all, by viewing the art through the prism of a guide’s words rather than through their own eyes, I fear that they lose out on the best part of the artistic experience, the opportunity to receive art as an individual, with one’s own set of biases, for better or worse.
Just this weekend, I spoke with a friend who’s a curator at Salem’s own Peabody Essex Museum, and he agreed with all my points. But he pointed out that in the competitive modern world of museum management, audio guides are both a revenue source (important for under-endowed institutions like the Barnes) and an expected feature, part of the trend to digital enhancements ... and that there’s no turning back. Too bad.
And that’s enough complaining.
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We’re all familiar with the story about the frog. If you drop him in boiling water, he’ll jump right out. But if you put him in cold water and then heat it to boiling, he’ll adjust gradually to the increasing temperature, be lulled into inaction, and die.
It’s not true; the frog will eventually jump out. But as a cautionary tale, it reminds us that we should be wary of inaction in response to gradual changes in our environment. In other words, as change happens--and it happens every day--you must adapt. If not, you’ll fail to thrive ... and you might die.
So today I want to mention six major changes in our own environments, and discuss how we might adapt to them, and profit from them. These are big factors, messy and complicated--nothing as simple as rising water temperature. But if you are alert to the existence of these trends, I believe you’ll be more able to detect investment opportunities--and pitfalls--in the years ahead. So here we go.
Six Big Trends
1.) The Improvement of American Balance Sheets
I was alerted to a major factor of this trend over a decade ago by Harry Dent, who noted that as Baby-Boomers aged, they would pay off their mortgages and focus more on saving. But I thought the change would come gradually; instead it began with an 18-month fall off a cliff. Now that the trend is in place, expectations for future prosperity have been reduced, and credit has been demonized, I think the trend will continue. In fact, that’s a concept we believe in strongly at Cabot. “A trend, once in place, tends to persist longer and go farther than people expect.”
So what does America look like if our appetite for credit continues to shrink, if we pay off our debts and build our savings accounts? Interest rates stay very low. Consumption falls. And the GDP growth rate stalls. I’ve long thought we should focus more on balance sheets as a measure of our financial health and not just incomes, and I believe my wish may now be coming true.
I like Visa (V), which is a dominant force in the debit-card processing business.
2.) The Slimming of American Bodies
With three-fourths of Americans overweight, the trend to obesity has peaked. Now it’s time to go the other way. Looking ahead, I expect reduced subsidies for agribusiness, particularly those responsible for high-fructose corn syrup. It looks like taxes on soft drinks are on the way. I expect a gradual retreat from junk food and calories and growing support of healthier food.
I like Whole Foods Market (WFMI) and United Natural Foods (UNFI) the biggest organic foods distributor. If you’re brave, short Coca-Cola (KO).
3.) Growing Government Involvement in Everything
The past century has brought the birth of the income tax, Social Security, Medicaid, Medicare, the Department of Education, the Department of Energy, the Department of Health and Human Services, the Environmental Protection Agency, the Department of Housing and Urban Development, the Department of Transportation and the Department of Veterans Affairs. The past decade alone has brought the USA PATRIOT Act, the Department of Homeland Security (including the beloved Transportation Security Administration), the Troubled Asset Relief Program, the Housing and Economic Recovery Act and more. The trend will continue.
I like Orion Marine (ORN), a leading marine contractor primed to benefit from stimulus spending.
4.) The Slimming of American Vehicles
The U.S. Government’s new Corporate Average Fuel Economy (CAFÉ) requirements will be phased in from 2012 to 2016, resulting in vehicles that are smaller, lighter and more aerodynamic. You’ll see fewer eight-cylinder engines and more turbochargers. And you’ll see more hybrids ... and eventually electric vehicles.
On a related note, gasoline will slowly become less plentiful, as the cost of extraction of this limited resource continues to rise. Prices may eventually return to $4 per gallon. On the other hand, if the growth in demand is sufficiently offset by growing use of new high-MPG vehicles, the price increases will be slower.
I like Tata Motors (TTM), the Indian automaker of the $2,500 Nano.
5.) The Rise of Alternative Energy
Solar power and wind power will continue to take market share, as government subsidies increase and economies of scale reduce production costs. Alternative energy will remain a drop in the bucket compared to the vast fossil fuel-based energy infrastructure, but the upside of that is enormous long-term growth potential.
I like First Solar (FSLR), the leading making of photovoltaic power systems.
6.) Growing Government Influence on Healthcare
Over the course of my life, insurance companies have replaced doctors as the deciders in the healthcare system. Now it appears that the federal government will replace the insurance companies. The upside will be better coverage for the underprivileged. The downside will be less profit for insurance companies and rationing of healthcare for most Americans. There will, however, be higher-quality care if you’re spending your own money, just as in the education system today.
I like Quality Systems (QSII), a leading provider of computer-based practice management systems and medical records applications for doctors and dentists.
In conclusion, look forward. Think big. Less than a century ago, investors who hung on to the stocks of buggy whip makers suffered when the world fell for the automobile. Ask yourself, “In 2009, which industries are prone to long-term shrinkage, and which are primed for explosive growth?”
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Publisher
Cabot Wealth Advisory
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