the bull market turned 5... is the party over?
DESCRIPTION
President and chief investment officer, Robert Lutts, of Cabot Wealth Management presents a luncheon keynote where he discusses a bull market, four signs of trouble ahead in the economy, and Cabot's top three investment themes.TRANSCRIPT
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WELCOME TO CABOT’S25TH ANNUAL INVESTMENT & WEALTH MANAGEMENT CONFERENCE
Your interests and goals always come first.
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Cabot Wealth Management, Inc.
25th Annual Investment and Wealth Management Conference
Rob Lutts President and Chief Investment Officer
September 26, 2014
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Outline
• ECONOMICS
• MARKETS
• RISKS
• STRATEGY
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Global Economic Recovery:
Slow but Steady Central Bank Intervention:
New Exit Phase Beginning Great Reallocation Beginning:
Out of fixed income and alternative space to
risk-based asset investing
Key Factors Today
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Energy Innovation: U.S. is Expanding Energy Production Rapidly –
82% over 7 years. Impact – Lower Inflation and interest rates Driving manufacturing in USA – cost advantage to USA – amazing
positive factor (not well appreciated) Driving Profits Higher for many U.S. Companies
U.S. Innovation Pace is Expanding: Silent Innovation Revolution – Like Industrial Revolution in 1900s U.S. Leading World Innovation: Google, Apple, Facebook,
Linked In, Salesforce.com, Illumina, SolarCity, Tesla, Biogen
Unexpected Changes Having Key Impact
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Interest Rate Trends Favorable for Equities: Bear Market in Bonds Not Far Off
U.S. Manufacturing Costs: U.S. NOW Competitive
Global Economics Changing: Capital Investment Accelerating
Deferred Capital Spending: Indications Trend Accelerating
Equity Valuations Higher, Yet Attractive Today: P/E Expansion
International Dependency: Global Cooperation Key – Conflicts Rising
Stocks on Solid Foundation Today
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Core Belief: The “Good” in Man Always Overcomes the “Evil”
George Bailey – The Bailey Building & LoanMr. Henry F. Potter
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Core Belief: Knowledge Creates Progress and Value
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More information has been produced in the last 20 years than the previous 5,000. If the increase of knowledge from the dawn of history to the 1800s is given a value of one, then knowledge has doubled 16 times within the last 10 years. Today the amount of information and knowledge in the world is doubling every 18 months.
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Core Belief: Innovation Leads to Great Value Creation
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Benefits of information technologycan take us a long way!I believe Internet and IT will have much larger impact on productivity than electricity.
Speed of productivity increased dramatically
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“Investment management” is one of the (important) components within “wealth management”
Wealth Management:◦ Investment management
◦ Asset allocation (equities, fixed income, international securities, alternative assets, etc.)
◦ Investment choices within each asset class◦ Retirement planning◦ Tax planning◦ Estate planning◦ Risk management (planning for catastrophic risks including disability,
death, long-term care, personal liability, personal property)
Core Belief: Wealth Management - Process is Critical
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Expect More Growth and a Better Economy in the coming years
Disruption to established industries high – Value Erosion
Opportunities for value creation very high in next decade
U.S. Economy – The Most Resilient, Adaptable, Creative and Innovative Economy on our PlanetWhy? Free Markets, Capital Markets, Legal System, Educational System, Entrepreneurs Who Drive Ideas, Culture of Growth and Progress
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U.S. Economics
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Growth is Slower. Reason: Debt Levels High Globally?
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Consumers Coming Back! Still Lower than Normal Confidence
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Debt Obligations of HouseholdsNow Dramatically Lower
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Businesses Now Starting To Increase Capital Spending
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Back To 1995-2000 Levels
Depressed
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Could Inflation Stay Low Longer? Yes – Time Will Tell
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Unimaginable Energy Revolution!
Never Underestimate American Ingenuity and Innovation
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New Cost Paradigm in USA - Very Favorable
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New Baby Boom – Next Seven Years – Sharp Increase in Number of 30 Year Olds.
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Business Efficiency Driving Corporate Profitability Higher
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Business Loan Demand Strong and Growing!
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U.S. Economy Growth – Stronger soon
U.S. is Strongest Large Developed Economy on planet today – U.S. Shines Today
Expect Inflation and Interest rates to remain lower for a longer period of time - Watch Trends
Corporate Productivity and Profits will continue to be higher than many expect
Overall: Very Positive U.S. Economic Situation
Economic Summary
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Markets
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Markets Are Very Healthy TodaySignificant Upside over the coming 12 -24 months
Today Entering Expansion Phase Cycle
Earnings Solid and Growing
Markup In Valuations Phase coming Monetary, Earnings, Valuations and Psychology all Positive
Equity Markets Today
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14 Year Trading Range 1999 – 2013 Now Ended – BREAKOUT Positive
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Markets Have Upward Bias –2013 Breakout – Very Positive
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Cycle Still Positive – Looks To Be Positive for a Few More Years
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2015 P/E Ratio Average
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Earnings Growth Very Healthy
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2.0 percent Dividend Yield Plus 2-3% Buybacks = 5% Total Return
Equities Providing Solid Total Return
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How High Can Stocks Go? The Bullish Projections By Some Analysts
Earnings Multiple*** Target Upside2014 $119.50 18.5 X 2,211 11%
2015 $130.00 18.5 X 2,405 20%
As of 9/6/14 SP 500 is 1995*** Between 1-3 % inflation Ave. P/E is 19X
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Long-Term US Interest Rates
1800 - 2014
1800 7.1% 1900 3.9% 2000 5.6%1810 6.0% 1910 4.0% 2010 4.9%1820 6.0% 1920 5.3% 2014 3.4%1830 5.1% 1930 4.3%1840 5.3% 1940 2.8%1850 5.4% 1950 3.0%1860 5.8% 1960 4.1%1870 5.3% 1970 8.0%1880 4.0% 1980 11.5%1890 3.9% 1990 7.9%
The 200-year Average = 5.2%
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30 Year Treas. Bond 3.2% 9/9/14
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EEM Discount: 25-35%
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Growing Markets: India / Africa
Retail & Healthcare
Travel and Transportation (Auto)
Banks
Insurance & Education
Internet & Advertising
Infrastructure
India – New Leadership may help drive growth higher – much room to improve
Africa – Much room for improvement – those risk takers /high reward
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Cape Town, Africa
Rob Lutts Feb, 2014 Attending Indaba Mining Conference
Tabletop Mountain, 4000 ft. peak within 15 minutes of downtown Cape Town
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Summary
- US Stocks Overweight- Foreign Stocks - Developed Markets Neutral- Foreign Stocks - Emerging Markets/Frontier Markets Neutral/ Over- Domestic and Foreign Bonds Underweight- Precious Metals Underweight- REITS Neutral- Alternative Assets Neutral
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Risks
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Global – Geopolitical – Wars, Conflicts
Central Bank Error – Debts still large in Governments
Interest Rate Shock – Inflation Trend
Currency Devaluation – Money Printing is Inflationary
Protectionism – China, Russia – Trading Barriers –
Hostile to Trade
Key Risk Factors Today
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Fed Intervention: Delaying Inflation
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U.S. Government Spending Gap Closing – Washington Gridlock – Positive ST – LT Trend problematic
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15%6%
Government Debt – A potential disaster if rates rise dramatically – could grow deficits quickly
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Source: BloombergNOTE: The S&P 500 Index is a widely recognized, unmanaged Index of common stock prices.
“Normal” Market Volatility:3 Corrections per year > 5%1 Correction per year > 10%1 Correction every 3+ years > 20%
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IPO Market – Starting to Heat Up (Alibaba)
Secondary Issue Market Strengthening as well
Investors Appetite for Risk Products is building
Equity Flow of Funds Positive now – but still modest
Client Risk Indicator - moderate
Signs of Risk Building
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Solar Power Energy:
Residential and Commercial solar now at critical
cost level that is driving growth
Health Diagnostic Innovation:
Biotechnology and Genomic Breakthroughs
Transportation:
Electric Vehicles
Cabot’s Top Three Growth Themes
“Innovation is the specific instrument of entrepreneurship...the act that endows resources with a new capacity to create wealth.”
- Peter F. Drucker
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Threefold Increase in Three Years!
Economics of Solar are Driving Growth Now
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Medicine now entering dramatic phase of change in next ten years – invest today
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The Electric Vehicle Industry - Innovation
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Strategy
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Shorter Term: 1-2 years Very Positive on Economy and Equities
Mid Term: 2-4 years Yes …We See Troubles Brewing… New Bubbles in
Economy. Eventually valuations will become excessive.
Long Term – Coming Decade: U.S. is well positioned to benefit from innovation
Is Five-Year Bull Market Over?
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Economy in U.S. and Globally will be much stronger Inflation will be accelerating and will be viewed as a concern Interest Rates will be rising steadily Federal Reserves and Central Banks will have substantially reduced
their stimulus programs Valuations bubbles will be more evident – stock prices (P/Es at upper
range levels), real estate or other asset classes unknown today. You Will Feel Better About Our Economy
What Trouble Will Look Like In a Few Years
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Cycle Factors:Signs of Investor Risk Taking is Building Central Banks - Soon Raising Rates 10 months? Equity Valuations Higher Today Economy Is Closer to “Blue Sky” Today
Geopolitical Issues: Middle East - Conflict, Russia
(Ukraine), China (Protectionism)
Four Signs of Trouble Building:
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Diversify
Find a mix that makes sense for you based on risk tolerance, goals, short/long-term income needs.
- US Stocks Overweight- Foreign Stocks - Developed Markets Neutral- Foreign Stocks - Emerging Markets/Frontier Markets Neutral/ Over- Domestic and Foreign Bonds Underweight- Precious Metals Underweight- REITS Neutral- Alternative Assets Neutral
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Expect More Growth and a Better Economy in the coming years
Disruption to established industries high – Value Erosion
Opportunities for value creation very high in next decade
U.S. Economy – The Most Resilient, Adaptable, Creative and Innovative Economy on our Planet
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QUESTIONS
Thank you for joining us today.
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State of Cabot Cabot’s 31th Year – Great Opportunities Ahead
Cabot Technology Platform Expanding – Best Practices Digital Phone System - Thinking Phones – Always Available
Software Integration with Schwab – Salesforce.com and Custodians
Hosted Networks – Cloud Computing
Hardware Upgrades – Security
Backup Generator Installed – All Tested
Green Energy Efficiency Efforts – Roof Solar Project (216 Essex and 30 Federal)
Staff Education – High Investment – Expanding Conferences, Seminars, World Travel
Continue to Seek To Upgrade our Skills and Abilities
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Core Belief: The “Good” in Man Always Overcomes the “Evil”
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Core Belief: Knowledge Creates Progress and Value
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Core Belief: Innovation Leads to Great Value Creation
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“Investment management” is one of the (important) components within “wealth management”
Wealth Management:◦ Investment management
◦ Asset allocation (equities, fixed income, international securities, alternative assets, etc.)
◦ Investment choices within each asset class◦ Retirement planning◦ Tax planning◦ Estate planning◦ Risk management (planning for catastrophic risks including disability,
death, long-term care, personal liability, personal property)
Core Belief: Wealth Management - Process is Critical
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State of Cabot
Cabot Investment Management
Equity Research – Team Effort
Cabot’s knowledge and Use of New ETFs Expanding/Equity Sectors
Fixed Income – Use of New Fixed-Income products expanding
Wealth Management Team – Best Practices Seminars and further education
Advanced Skills– Taxes, Estate Planning and Insurance work
Staff Culture of emphasizing education and growth
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