2. Will Economic Growth Return in 2013?
Cabot’s Top Three Investment Themes
Rob Lutts
President & CIO
Cabot Money Management, Inc.
216 Essex Street
Salem, Massachusetts 01970
800-888-6468
eCabot.com
3. A Dynamic Global World
“We continue to be faced with a series of great opportunities
brilliantly disguised as unsolvable problems.”
– John W. Gardner
4. Outline
I. Economics - Slowly Improving
II. Governments – Status of Fiscal Crisis
Currency and Interest Rates – Temperature of patient
Gold and Precious Metals
III. Corporate Conditions –Steady and Fairly Strong
Why One Should Take Risk Today?
IV. Money Flows – Have Been Directed at Low Risk
V. Valuations – Attractive for Most Equities
VI. International Opportunities – Unusually Good Today
5. I. Global Economy: Deleveraging in Developed
Economies
Three phases of the deleveraging process:
Business – largely completed
Consumers – now underway
Governments – just getting started
Emerging markets have room to increase borrowing
Strategies
Underweight developed markets sovereign bonds; diversify bonds
Invest in sector that may benefit from M&A, such as technology
Consider complementary strategies that may mitigate the impact of global financial
market volatility stemming from the deleveraging process
Some complementary strategies may be available to pre-qualified investors only.
Source: Wells Fargo Wealth Management, 7/12
6. U.S. economic data has been less positive in recent months,
creating a third soft patch in as many years.
7. $535 billion fiscal drag is a combination of expiring tax
cuts, automatic spending cuts, and tax increases.
8. The Eurozone economy contracted -0.4 percent in the second
quarter; we expect a mild recession in the Eurozone in 2012.
3.00
Eurozone GDP Growth Estimates
2.4
2.2 2.2 2.2
2.00 1.7
1.3
1 1
1.00 0.7
0.3
0
0.00
-0.3 -0.2
-0.4
-1.00 -0.8
-2.00
-2.3 Shallow
-3.00 Recession
Expected in
-4.00 2012
-4.4
-5.00
-5.3
-6.00
2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13
Source: Bloomberg Financial, LLP, Quarterly Consensus Estimates, 8/12
9. The U.S. economy has replaced about half of the jobs lost since
the beginning of 2008 – more if open positions are considered.
10000000
U.S. Replacing Lost Jobs
9000000
8000000
Total jobs
gained and
7000000 open = 7,545,000
or 86% of lost jobs
U.S. Jobs
6000000
5000000
Lost
4000000
8,779,000
3000000
Gained
Open
4,345,000
2000000
1000000 3,200,000
0
Jobs
Source: FactSet, 8/12
10.
11. II. Governments – Solutions To Sovereign Financial
Crisis
Reform Financial Management of Government – This will take decades
and will not likely have positive impact for many years. It is possible we
will not really reform at all.
Inflate Economy To Create Growth – This is the path the Federal Reserve
is taking. Today FED and other Global Central Bankers are creating
money to give governments the ability to invest and create a new wave of
growth. Problem: The cost is high – currency debasement leading to
inflation. Not understood by average citizen.
Most Likely Outcome – A watered-down version of Reform that looks
more like the same as the last few years. In this case we are confident
gold goes higher and currency values decline further relative to real assets.
12. Governments – Solutions To Sovereign Financial Crisis
Quantitative Easing – A Fancy Term – For Running The Printing Presses
Governments – Federal Level - Benefit Most – from Low Interest Rates.
Do Governments Believe in Balanced Budgets? – NO – We (You and I)
have allowed them to deficit spend. States and Local Government are not
allowed this behavior.
There is an amazing Distributed Responsibility Factor – None of us
individually are responsible – therefore we allow irresponsible fiscal
behavior. You would not take on debt like this personally.
13. Governments – Far Too Important Today – They
Control The Debt Pile
Currency Debasement – Has Been Carried out By Central
Bankers Since Beginning of Time. Printing of money – more
money chasing the same amount of goods and services. This
eventually leads to inflation!
Roman Empire – Gold Coins, Silver Coins, Base Metals
Central Bankers – No central banker has ever had the
opportunity to debase without doing so.
Government Strategy – Financial Repression
14. What is Currency Debasement?
1. More Dollars Chasing The Same Goods – Classic Definition
of Inflation
2. Fed - Bernanke has Chosen The Inflation Route – The Cost –
Your Dollar’s Value is fading in value fast (UK, Europe are
taking this path as well)
3. Debt Burden Large and Growing - $16 Trillion Official Debt–
Value Destruction – Burden on Future Generations – A
Debasement Factor ($2 trillion was added to this figure this
year - unbelievable!)
4. Gold and Precious Metals – A Real Asset Impervious To
Currency Debasement.
15.
16. At current deficit spending rates, U.S. Public Debt will
exceed the debt ceiling limits in November.
18. What Can You Do To Protect
Against Currency Debasement?
1. To Understand Currency Debasement – Gold – Once and
Future Money - Nathan Lewis (A history of central bankers over 2000
years – all have debased the currency) Empire of Debt – The Rise of an
Epic Financial Crisis – Bill Bonner and Addison Wiggin
2. Real Asset Strategy – Precious Metals –
Gold, Silver, Platinum, Diamonds, Land. Stocks – represents real assets –
although it is difficult to manage profits in inflationary periods. Protect
wealth with a health dose of these asset classes.
3. Gold – A Very Difficult Asset Class to Analyze – For a White
Paper – see www.eCabot.com white paper section of web site or
www.gold.org World Gold Council web site. Hard Money, Shayne
McGuire, 2010 Wiley (the single best gold book ever written).
19. Allocation to Alternative Assets
1. Currency Protection – Gold and Gold mining
Shares, Silver, Diamonds, Platinum other precious metals
2. International Bonds – High-quality sovereign bonds
3. Fixed Income Hybrids – High
Yield, Preferred, Convertibles, Floating Rate Notes
4. Non-US Currency Securities – Yield plus protection from
weaker dollar
5. Commodities – Energy, grains and other indexes
20. We Should Expect Inflation to Increase
in Next 2-3 Years
Risks Today- bond market is in a very large bubble. It is larger than
technology bubble of 1999!
10-Year Treasury Yield 1.8% - Not compensating you for interest
rate risk or credit risk.
Manipulation of Interest Rates or Real Recession Fears? Both –
Federal Reserve is buying about $20 Billion per week to keep
interest rates low! QEIII just announced will add another $40
Billion per month of mortgage purchases.
We Believe The Fed Will Gets its Wish – Reflation Will be
Successful. Side Effect -2-5 years will create higher levels of
inflation
21. How Do You Achieve Respectable Yield Today?
Global Fixed-Income
EEM Debt
Local Currency Strategies
Foreign Corporate Bonds
` International Government Inflation-Protected Bonds
Domestic Fixed-Income
High Yield Bonds
Short-Intermediate Corporate Debt
Floating Rate Securities
Step-up Bonds
Unrestrained Strategies (best relative value)
Alternatives
Fixed-Rate Preferred Securities
Convertible Securities
Real Estate Investment Trust Securities (REITs)
22. Gold Bull Market - Primary Drivers:
1. Central Bankers Debasement Activity – Printing $$$
2. Investment Demand is Accelerating – Three Phases of A Bull
Market – We are now in Phase Two. Three is The Most
Interesting and Most Profitable!
3. Wealth & Power Building in China and India – These
Investors Love Gold
4. We Believe Institutions (Pension and Profit Sharing $) Are
Just Discovering Gold – Evidence of This Just Beginning
23. What Happens If Institutional Investors
Start To Buy Gold?
It would be like an elephant jumping into a bathtub!
1% of World Wealth - $1.3 Trillion. This
equates to 20 Times the amount now invested
in GLD (ETF) or 20 Times Annual mine
Production globally.
24. What Is Public Doing Today With Gold?
1. They Are Selling Jewelry – Ask A Local Jeweler
2. Public Is Buying Gold Coins and Bullion
3. How Does Cabot Buy Gold? – Gold Bullion
(GLD), Gold Miners (GDX) and Gold Companies
like Barrick Gold (ABX)
25. III. Corporate Conditions
Corporate Balance Sheets are Excellent – Best in Decades
Profitability Ratins – Very high – many reasons – driven by
technology improvements – PRODUCTIVITY
Top Line – Revenue – Slowing consumer Income Growth
Slow or non-existant
Corporate M&A is Strong – An Indication of value and
strength in Corporate Board Rooms
Contrarily – Corporate Boards Today are very Conservative –
keeping powder dry – lack of confidence among government
policies. – This is holding back growth in normal recovery.
26. IV. Money Flows – Unprecedented
Four Years of Flows From Equities To Bonds
Institutional Allocations to Equities at 25-year lows –
Approximately 42% of assets
Last Peak was 75% 13 years ago in 1999
We Expect These Flows To Reverse in Time
27.
28. Lots of “Dry Powder” on the Sidelines
Ample liquidity remains available to support financial market growth
as risk appetites improve.
Fuel for Next Bull Market - $1.2 Trillion on sidelines
29. are More Expensive Relative To Stocks than at any time in Last 60 years!
30.
31. Where Are We Today?
Long-term Perspective
Thirty-Year Chart of Ten-Year Treasury Yields
Thirty Year Chart of
Ten Year Treasury
This Trend
Yields Will
Eventually
This Trend Will Eventually End – When?
End
32. Where Are We Today?
Short-term Perspective
Five-Year Chart of Ten-Year Treasury Yields
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Double-Dip
Fears Again Bottoming
Process
33. V. Valuation – Not an Obstacle Today
Institutional Allocations to Equities at 25-year lows –
Approximately 42% of assets
Last Equity Peak was 75% 13 years ago in 1999
Money FLOWS will reverse in time.
Retail and Institutional Investors Are Overexposed to bonds
today – just as bull market in bonds is coming to an end.
34. Why Not Just Give Up on Stocks Until The Dust Clears
and Economies Improve?
Four Solid Reasons:
If you wait for clear signs of economic improvement – markets will
already be much higher – Stock market discounts 12-18 months ahead
Time is on your side: Once you have ten years of close to zero
performance in broad-based equity indexes – Large opportunity is just
ahead
Money flows are ultra bullish and monetary conditions are ultra
bullish – Contrary indicators here are helpful
Classic Bullish Signs: Corporate Buybacks, Insider Buying by
CEOs and Corp Officers are both at very high levels – These buyers
usually know value better than most.
35. 3 Reasons for Equities Now
Reason #1: Low 10-year Returns = High Expected Returns
DOW JONES INDUSTRIALS AVERAGE 10-YEAR ROLLING RETURNS
20%
15%
10%
5%
0%
Dec-19
Dec-39
Dec-44
Dec-64
Dec-69
Dec-89
Dec-94
Dec-24
Dec-29
Dec-34
Dec-49
Dec-54
Dec-59
Dec-74
Dec-79
Dec-84
Dec-99
Dec-04
Dec-09
-5%
-10%
NOW!
-15%
40. International Opportunities Are Exceptional
Leading Companies in Emerging Markets – have double the
profit margins of US Companies: Why?
Lower government infrastructure costs
Lower taxes
Lower healthcare expenses
Lower executive salaries
We expect Outperformance for Emerging Markets many
years.
Volatility – Will Continue to Be High. Markets are Immature.
41. New Growth Engines in the Global Economy
Innovation will be crucial to global businesses as emerging countries add
hundreds of millions to the global middle class
Global trade has helped to create 450 million jobs in the past 10 years
Attractive global corporations are headquartered all over the world
Strategies
Seek exposure to global consumer staples corporations
Invest in information technology; a “fuel for the global economy”
Upweight emerging market equities and debt
Source: Wells Fargo Wealth Management, 7/12
42. Middle class consumers are increasing at a rapid pace,
especially in emerging economies, adding spending power
to the global markets.
More Global Middle Class1 Consumers
6,000,000,000
5,000,000,000
5,000,000,000
Middle Class Consumer
4,000,000,000
3,000,000,000
2,000,000,000 1,800,000,000
1,100,000,000
1,000,000,000
-
1980 2009 2030
Data Source: McKinsey Quarterly, 1/12
1 Defined as having daily per capita spending o f$10 to $100 in purchasing-power-parity terms
43. By some measures, emerging economies are set to surpass
the developed economies in terms of total GDP.
70
Emerging Economies Overtaking
Developed
65
Percent Share of Global GDP (PPP)
60
Emerging
Economies
55 2017 54% e
50
45 Developed
Economies
40 2017 46% e
35
30
2000 2002 2004 2006 2008 2010 2012 2014 2016
The Purchasing Power Parity (PPP) exchange rate is defined as the amount of currency that would be needed to purchase the
same basket of goods and services as one unit of the reference currency, usually the US dollar. Source: IMF, 4/2012
44. Equity dividend yields are attractive relative to cash
and sovereign bond yields.
6 Key Yields
4.8 4.9
5
3.9
4
3.6
3.4
Yield
2.9
3
2.2
2
1.5
1
0.44
0
3-Mo LIBOR 10-Yr TSY U.S. MSCI AC World China Germany U.K. Brazil Australia
Past Performance is no guarantee of future results
Data Source: FactSet, MSCI All Country World Index, 7/31/12.
45. Emerging Markets Superior Long Term Return
Ten Year Returns (Including Dividends) 8/31/2002 – 8/31/2012
S&P 500 6.4%
Emerging Market Index / MSCI 15.3%
India – Sensex Index 20.1%
Brazil 18.5%
Hong Kong Index 10.5%
Shanghai Composite (China) 3.8%
50. Mumbai India February 2012
India is one of the youngest populations on the planet with high savings rate and
strong Government finances. India Sensex: +16% annual return over last ten years!
51. Beijing, China
Millions of Chinese and Indians are buying their first car –
a modest small vehicle: $5,000
52. Cabot’s Top Three Themes:
I. Mobile Data and Cloud Computing:
Networks are changing everything. Internet arrived about
25 years ago. Email gained popularity in the late 1980s.
An internet that links 100 million people is not worth 10
times one that links 10 million people. In fact, due to
massive connective power, a network that links 100
million people is really worth much more than ten times
the one that links 10 million. Most of the productivity
benefits in the internet are in the future. We are expecting
many great investment opportunities in this space.
53. Internet-Oriented Themes
Mobile Data – Wireless Proliferation
Cloud Computing
Software – Smart Phones, E- Readers, Migration to
Digital
Search – Application Market, Medical Applications
Networks – Infrastructure
Unique Use of Internet
54. II. Productivity-Oriented Companies
Creating More Output with Same or fewer Resources
Software – Data Flow and Connectivity
Energy Efficiency – Alternative Energy
Robotics/ Advanced Materials – Lighter Weight
Advanced Electrical and Technology – iPhone
55. III. Global Emerging Middle Class:
Primarily China, India and Brazil:
Capital Can Grow at Twice The Rate in Emerging Markets
as USA and Europe
Retail & Healthcare
Travel and Transportation (Auto)
Banks
Insurance & Education
Internet & Advertising
Infrastructure
56. To Succeed Today One Needs:
1. Flexible Thinking. Do not be afraid of change – Embrace it!
2. Use Risk Management Techniques
1. Size of positions
2. Loss discipline
3. Diversification strategy
3. “It Will Go Well” – “But It Will Not Be Relaxing!”
Greg Esterbrook
57. IN SUMMARY
Longer term we are constructive and bullish, but shorter term
we are somewhat more cautious
Government solutions and the new economic order will work
in time. We will adapt and manage. Currencies will be
depreciated.
Overall economic conditions will improve in time.
Capitalism will not disappear – economic growth will again
reassert itself.
Patience and a conservative strategy will be rewarded.
58. Thank you for the opportunity
to share our ideas with you.
