The New Normal and an Old Mistake
It’s Tough to be Really, Really Rich
A Stock Ready to Break Out
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There’s a new buzzword making the rounds on financial cable shows, Web sites and blogs. It’s “The New Normal,” a phrase that’s supposed to reflect the changed economic landscape following last year’s epic meltdown.
Here’s the basic argument. First, you have a crisis that deep-sixes house prices and saddles financial institutions with mountains of smelly, indigestible mortgage-backed securities and other derivatives. The result is a recession that’s both wide and deep.
Second, you have huge job losses, with official unemployment levels approaching 10% (and probably higher if you add in those who have stopped looking).
Third, employment woes cause consumers to zip their wallets shut, causing tumbleweeds to roll through retail establishments, restaurants and auto dealerships.
This results in a kind of stalemate with consumers not buying because they don’t have jobs and employers not hiring because they don’t have sales.
Thus, according to this line of analysis, even though the global economy has pulled itself out of recession, it doesn’t have the strength to get back on its feet and resume growing.
So “The New Normal” is a state of tepid growth for a prolonged period where neither producers nor distributors nor consumers are able to provide the kick to move things along more quickly.
(Even China, although it’s the fastest-growing large economy in the world, can’t get its growth back into double digits because its export-dependent economy is languishing due to a lack of appetite for its goods in the developed West.)
As with all economic predictions, all I can say is: “Maybe so.” It may be that we’re in for an agonizing period of glacial growth, and that “The New Normal” will indeed be an economic landscape dominated by dead flowers and dried-up lawns.
But I doubt it.
I don’t know where the impetus for the next economic surge will come from or how long it will take to arrive.
It’s just that every time (EVERY TIME!) I’ve heard market commentators say “things are different this time,” they have been wrong. In the late 1990s, it wasn’t true that the Nasdaq was going to rise forever; three years ago it wasn’t true that housing prices could rise forever. And I don’t think it’s true that things are that different now. That’s likely what the booming global stock markets are predicting!
There is a very large amount of capital in the world, and it’s looking for a way to grow. Just because we don’t see how it will happen doesn’t mean it won’t. If I had to put money on it--and, in a way, I do--I would bet that within a year, economies will escape from the doldrums the commentators fear.
It won’t make any difference to the way I pick stocks anyway. I’ll still be looking for fast-growing companies with high rates of revenue and earnings growth, attractive market propositions and strong charts.
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Forbes Magazine seems to be addicted to the making of lists, and I have to admit that many of them make pretty good reading.
Lots of them are just conversation starters about topics that can’t really be quantified, like “The 20 Most Important Tools Ever,” “The Top 100 Celebrities” and “The Most Livable Cities.”
But the annual listing of the Forbes 400 Richest Americans is light on opinions and heavy on data, which means it’s right up my alley.
I haven’t delved very deeply into the list beyond the featured Top 20, but there are lots of interesting insights just in that small group. Here are a few.
1. It’s always good to be rich, but this wasn’t a great year for rich people. The collective net worth of the fortunate 400 fell by $300 billion in the past year. The top 10 folks on the list saw their assets shrink by an average of 14%, scrubbing $39.2 billion off their hoard.
2. Money can buy lots of things, but immortality isn’t one of them. Six people on last year’s list cashed in their chips in the ensuing 12 months.
3. If you want to be really, really rich, there are two preferred methods (at least if you go by the examples of the top 20 richest folks).
a. First, you can start your own business. That’s what Bill Gates (#1 on the list for the 16th straight year with a net worth of $50 billion) and Paul Allen (tied for #17, $11.5b) of Microsoft did. You can also sign on early with the company and grow along with it, which is how Steve Ballmer (#14)--Microsoft employee #30--did it. Larry Ellison (#3) founded Oracle; Sergey Brin and Larry Page (tied for #11 with $15.3b each) invented Google; Michael Dell (#13) is obvious, George Soros (#15, $13b) set up a little investment fund; Donald Bren (#16 $12b) developed real estate in southern California.
b. Alternatively, you can arrange to be one a descendant of someone who had the foresight to found a successful business. The offspring of Sam Walton take up four of the top 20 spots on the list. Those fortunate enough to have Fred C. Koch (the man who figured out how to turn heavy oil into gasoline) as a father now take up two spots. And three grandchildren of Tacoma, Washington, chocolate tycoon Frank Mars enjoy three spots. (There’s gold in them thar Snickers, even in a recession.)
4. While there are lots of success stories on the list, only two of the enormous fortunes represented there are a direct result of investing in capital markets, and those belong to Warren Buffett (#2, $40b) and George Soros (#15, $13b), who ran his own hedge fund (then retired and is now back at it.) Abigail Johnson (tied for #17, $11.5b), the daughter of Edward C. Johnson III and co-controller of Fidelity Investments is on the list, too, but running an investment house isn’t the same as actually investing.
Full disclosure here: Even though you needed only $950 million to make the list this year (last year the bar was set at $1.3 billion), neither I nor anyone else at Cabot came close to making the list.
But if you want to suit up and start putting some money to work, I think the Cabot China & Emerging Markets Report--which I edit--would make a great place to start. Cabot China & Emerging Markets Report is still the top-performing newsletter over a five-year period out of all newsletters followed by the Hulbert Financial Digest. You can take the first step on your road to wealth by clicking on the link below.
http://www.cabot.net/info/cem/cemjd04.aspx?source=wc01
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Cell phones and wireless value-added services (VAS) have taken China by storm, leaving wire line telephone service in the dust. China’s major wireless companies are healthy and growing. We have great affection for China Mobile, which was a huge winner for the Cabot China & Emerging Markets Report back in 2007.
But the big telecoms are old news now, and a better place to look for growth is in Asiainfo Holdings (ASIA), a Chinese company that offers software solutions and software protection for the big phone companies.
AsiaInfo’s software suite allows customers to build, manage and enhance their communications infrastructure. The company’s Lenovo-AsiaInfo alliance offers IT security products such as firewall and virtual private network services.
The numbers for AsiaInfo look especially goods, with a 92% gain in earnings on a 39% bump in revenues for the latest quarter. After-tax profit margins reached 19.4%, their highest level since Q4 2008. Institutional investors are signing on at an accelerating rate--56 two quarter ago; 80 now.
The chart is volatile, but strong, with a much smaller dip during last year’s storm of losses. After a long period of tightening action centering on 19, the stock may be ready to break out.
And that’s what you need to look for. When ASIA breaks above 21 on good volume, it will be a good buy. It will take a little patience, but it will be worth it.
Sincerely,
Paul Goodwin
For Cabot Wealth Advisory
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