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
WELCOME TO CABOT’S25TH ANNUAL INVESTMENT & WEALTH MANAGEMENT CONFERENCE
Your interests and goals always come first.
Cabot Wealth Management, Inc.
25th Annual Investment and Wealth Management Conference
Rob Lutts President and Chief Investment Officer
September 26, 2014
Outline
• ECONOMICS
• MARKETS
• RISKS
• STRATEGY
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
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
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
Core Belief: The “Good” in Man Always Overcomes the “Evil”
George Bailey – The Bailey Building & LoanMr. Henry F. Potter
Core Belief: Knowledge Creates Progress and Value
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.
Core Belief: Innovation Leads to Great Value Creation
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
“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
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
U.S. Economics
Growth is Slower. Reason: Debt Levels High Globally?
Consumers Coming Back! Still Lower than Normal Confidence
Debt Obligations of HouseholdsNow Dramatically Lower
Businesses Now Starting To Increase Capital Spending
Back To 1995-2000 Levels
Depressed
Could Inflation Stay Low Longer? Yes – Time Will Tell
Unimaginable Energy Revolution!
Never Underestimate American Ingenuity and Innovation
New Cost Paradigm in USA - Very Favorable
New Baby Boom – Next Seven Years – Sharp Increase in Number of 30 Year Olds.
Business Efficiency Driving Corporate Profitability Higher
Business Loan Demand Strong and Growing!
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
Markets
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
14 Year Trading Range 1999 – 2013 Now Ended – BREAKOUT Positive
Markets Have Upward Bias –2013 Breakout – Very Positive
Cycle Still Positive – Looks To Be Positive for a Few More Years
2015 P/E Ratio Average
Earnings Growth Very Healthy
2.0 percent Dividend Yield Plus 2-3% Buybacks = 5% Total Return
Equities Providing Solid Total Return
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
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%
30 Year Treas. Bond 3.2% 9/9/14
EEM Discount: 25-35%
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
Cape Town, Africa
Rob Lutts Feb, 2014 Attending Indaba Mining Conference
Tabletop Mountain, 4000 ft. peak within 15 minutes of downtown Cape Town
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
Risks
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
Fed Intervention: Delaying Inflation
U.S. Government Spending Gap Closing – Washington Gridlock – Positive ST – LT Trend problematic
15%6%
Government Debt – A potential disaster if rates rise dramatically – could grow deficits quickly
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%
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
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
Threefold Increase in Three Years!
Economics of Solar are Driving Growth Now
Medicine now entering dramatic phase of change in next ten years – invest today
The Electric Vehicle Industry - Innovation
Strategy
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?
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
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:
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
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
QUESTIONS
Thank you for joining us today.
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
Core Belief: The “Good” in Man Always Overcomes the “Evil”
Core Belief: Knowledge Creates Progress and Value
Core Belief: Innovation Leads to Great Value Creation
“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
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