Cabot Wealth Advisory

A Misallocation of Assets

elyse@cabot.net (Elyse Andrews) — Fri, 20 Nov 2009 20:14:00 GMT

A Misallocation of Assets

Fuel Systems Solutions Redux

In Case You Missed It

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This week brought news that some of the U.S. government's stimulus package funding has been delegated to some very unique places in Massachusetts: $1.5 million to fix a lighthouse on an uninhabited island, $123,000 to terrorist-attack-proof the Spirit of Boston party cruise ship and $95,000 for the University of Massachusetts at Boston to study pollen samples from the Viking Era.

With millions of people out of work nationwide (thousands here in Massachusetts, although our unemployment rate improved recently), it seems that there are dozens of better uses for the stimulus money.

The first one that comes to my mind is the Greater Boston Food Bank. When people lose their jobs, demand at food banks increases dramatically while supply plummets because people have less to spare, creating a tension between what's available and what's needed.

The Boston Food Bank feeds more than 320,000 people annually in nine counties in eastern Massachusetts (a number that likely increased as the recession worsened). It distributes more than 30 million pounds of food and grocery products annually to a network of nearly 600 member hunger-relief agencies, like soup kitchens.

The Boston Food Bank recently sent out a request for people to donate $12 to buy one very large turkey for needy families. I donated and hope that the turkey provides a nice Thanksgiving feast for a family who otherwise would not have had one.

Imagine if instead of making sure the Spirit of Boston was terrorist-attack-proof, the money had gone to providing turkeys and other food items for hungry families in the Boston area. The Boston Food Bank could have provided 10,250 turkeys with the $123,000 that was spent on this seemingly frivolous project.

The Entertainment Cruises (the parent company of the Spirit of Boston) vice president of marine operations Gary Frommelt was even quoted by the Boston Globe as saying, "We feel that we're really a low threat for a terrorist incident. But the stimulus was a nice perk.''

Giving the money to the food bank wouldn't have created any jobs, but it certainly would have benefited those who had lost theirs and were struggling to get by.

When Congress approved the enormous stimulus package, the primary concern was for creating jobs and helping the unemployed.

I just don't see how spending $1.5 million to restore the Monomoy Point Lighthouse on an uninhabited island is to going to strengthen our local economy. Located off of Cape Cod, the lighthouse will be opened to the public once the restoration is complete. But again, how is that helping to create jobs for the thousands of unemployed Bay Staters?

I have seen evidence of money going to so-called "shovel-ready projects" along the highways in and around Boston. I'm glad that many of the roads damaged by our harsh winters will have fewer potholes and that people are gaining employment through this channel.

But not even these projects, which do create jobs and directly benefit the tens of thousands of people who commute each day, are immune from waste. Most of these roadwork projects have large signs near them announcing that the funding came from the U.S. stimulus plan.

The cost of the 66 signs the state of Massachusetts has erected so far? More than $100,000.

Some of the funding has gone to appropriate channels, as many Massachusetts school districts were able to purchase necessary supplies, but most medical and science grants were handed out based on agencies' usual criteria that do not account for the economic potential of the projects.

David Williams, vice president of policy for Citizens Against Government Waste, was quoted by the Boston Globe as saying, "People are scratching their heads because some of this doesn't make sense. Studying pollen during the Viking Age isn't going to create a lot of jobs and help the economy."

I couldn't have said it better myself.

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I received an email from a reader this week after Brendan Coffey's Cabot Wealth Advisory on Tuesday that mentioned Fuel Systems Solutions (FSYS), asking where he could find more information about the company and stock.

The reader isn't a Cabot Green Investor subscriber, although I hope he becomes one since he has a clear interest in the Green sector, so I couldn't point him to Brendan's original recommendation.

But fortunately enough, Timothy Lutts also wrote about Fuel Systems recently, so I sent him that write-up instead. I'm guessing that other readers might have also missed Tim's discussion last week (when I worked at a newspaper, we used to say that if one person wrote or called in to say something, there were 1,000 people out there thinking the same thing). So I'm re-printing Tim's recommendation here today so you can get a better picture of Fuel Systems:

"If you're in the mood for buying, you should take a good hard look at growth stocks hitting new highs.

"One I like a lot is Fuel Systems Solutions (FSYS), which was recommended back in August by Cabot Green Investor. In that issue, editor Brendan Coffey wrote the following.

"Fuel Systems Solutions makes the equipment and systems that convert a traditional engine to one that can use CNG, LNG or propane or to an engine that has the option to use either CNG, LNG, propane, diesel or gasoline on demand.

"Fuel Systems grew out of a 50-year-old California company called Impco, which focused on industrial equipment and stationary power, and combined last decade with Italian competitor BRC, which focused on light vehicles.

"Fuel Systems sells to the aftermarket for individuals or companies that want to convert existing engines to use natural gas, and to the original equipment market (OEM), tweaking automakers' cars and trucks to use CNG or LNG before they are delivered to dealers. ... Whether OEM or aftermarket, conversion work involves adding equipment under the hood and replacing or installing additional fuel canisters that store the alternative fuel. Fuel Systems customers include Fiat, Opel, Ford and many other major automakers, none of which account for more than 10% of revenue.

"The company has manufacturing facilities in California and northern Italy, and maintains sales offices in the major CNG and LNG consumer regions, Europe, Australia, India and Pakistan chief among them. In Pakistan, for instance, the relative cheapness of natural gas versus oil means only the elite have cars running on gasoline. In Europe, a desire to reduce air pollution steers consumers to natural gas, as does the European union mandate to get 20% of all vehicles running on fuels other than petrol or diesel.

"The big story for Fuel Systems is the potential of the American market. About 80% of revenues each of the past three years have come from outside the United States ... a potential boon is a bill introduced by Senate majority leader Harry Reid of Nevada to provide tax incentives to buyers of natural gas vehicles, a plan that has gotten a lot of vocal support from oilman T. Boone Pickens, who owns the majority of natural gas fueling station chain Clean Energy Fuels.

"The bill would boost the tax incentive to natural gas vehicles to as much as $12,500 per vehicle and to $100,000 for natural gas fueling stations. The bill is certain to pass, if the number of its co-sponsors (77) is a reliable indicator, although it may not be addressed until after health care in September. The House of Representatives passed a bill earlier this summer authorizing $150 million to research natural gas vehicles."

"Well, today the bill has not yet passed; the House has been busy with the health care bill and other matters. But Brendan's subscribers don't mind. When he recommended the stock back in August, it was trading at 30. It hit 37 in September, and then marked time for a while, letting its 50-day moving average catch up.

"Late October brought a sharp dip below that moving average, shaking out weak holders, and then last Thursday the company announced excellent third quarter earnings results and the stock gapped up to new highs on seven times average volume, hitting 45. And since then it's kept climbing!

"We know from experience that stocks that gap up on earnings on heavy volume tend to keep running and that's what FSYS has done. You could still buy it here, though downside risk is clearly bigger than it was a week ago. Or you could take a no-risk trial subscription to Cabot Green Investor and buy Brendan's NEXT recommendation, which came out last week."

http://www.cabot.net/info/cgi/cgiji03.aspx?source=wc01

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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.

Cabot Wealth Advisory 11/16/09 - The Future of the Auto and Oil Industries

On Monday, Timothy Lutts wrote about the future of the auto and oil industries and how they will be affected by four big trends. Tim discussed the opportunities in the Green sector and a company that is developing a technology that would get electricity from ocean waves. Tim didn't reveal the name of the stock because it's low-priced and volatile, but he did leave readers with a clue, an alphagram: ACEENOOPWR.

http://www.cabot.net/Issues/CWA/Archives/2009/11/Auto-Oil-Industries.aspx

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Cabot Wealth Advisory 11/17/09 - The "Home Run" Sector of the Coming Decade

On Tuesday, Brendan Coffey wrote about the "home run" sectors of the last four decades and how Green could be the next "home run" sector. Brendan also discussed the future of compressed natural gas and two stocks that could benefit from a shift to use of CNG. Featured stocks: Clean Energy Fuels (CLNE) and Fuel Systems Solutions (FSYS).

http://www.cabot.net/Issues/CWA/Archives/2009/11/Next-Home-Run-Sector.aspx

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Cabot Wealth Advisory 11/19/09 - Why Investing is Fun

On Thursday, Paul Goodwin wrote about why investing is fun and the many reasons that he thinks young people should get in on this "cage-match sport." Paul also discussed the various portrayals of Wall Street in the movies, from Oliver Stone's "Wall Street" to "Working Girl" starring Melanie Griffith and Harrison Ford. Paul finished by discussing a Chinese company that builds distributed power-generating systems but is moving quickly into the Green energy sector. Featured stock: A-Power Energy Generation (APWR).

http://www.cabot.net/Issues/CWA/Archives/2009/11/Investing-is-Fun.aspx

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Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

Editor's Note: Cabot Stock of the Month Report selects the top stock each month from across the spectrum of Cabot's publications. It may be a Green stock, growth stock, value stock, emerging markets stock or momentum stock, but you can trust that it will always be the best for current market conditions, like these past picks: Intuitive Surgical: UP 500%, Broadvision: UP 670% and Amazon.com: UP 1,290%. And Editor Timothy Lutts is using his decade of investment experience to navigate the market's volatile waters to bring subscribers the best stock each month. Don't miss his latest pick, which comes out next week. Subscribe today!

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Why Investing is Fun

elyse@cabot.net (Elyse Andrews) — Thu, 19 Nov 2009 18:49:00 GMT

Are We Having Fun Yet?

Investors in the Movies

Connecting to the Power

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I want to speak up for one big benefit of stock investing that doesn't get a lot of publicity.

I think it's fun!

Yes, fun. And I don't just mean that making a big killing on a hot stock is fun.

I think the daily drama and the brain work and the blood, sweat and tears of researching, buying and selling stocks is totally engaging. (It may even be as immersive as playing World of Warcraft or diving into Grand Theft Auto, but I wouldn't know from first-hand experience.)

I know it's a fact that the ranks of investors are filled with older people, and I think that's a good thing. I'm positive that analyzing stocks and the discipline of following market movements and making the agonizing decisions about buying and selling helps many of our subscribers keep their brains nimble. And, of course, older people have had more time to accumulate investable capital, without which you can't get into the game.

But I can't help wishing that we could get more young people to see stock investing for the kick-ass, full-on cage-match sport that it is. If young people want to match themselves against a worthy opponent, it would seem to me that taking on The Market, which wants to take your money and is totally merciless, would make for a great contest.

I have no idea how to get around young people's lack of capital. But the price of entry isn't prohibitive. With online brokers, you can start a trading account for as little as $500, which is the stock market equivalent of a learner's permit.

Are young people impatient and headstrong? Sure. But the market is more than willing to beat those qualities out of them. The market, with its big beats and huge wins, is a lot like the drama of Texas Hold 'Em poker; it tests first and teaches afterward.

I may be wrong, but I think lots of young people would find the market fascinating. It can be anything from a hobby to a lifelong obsession. It's interactive, happens in real time, has a huge fan base and can even reward its players with wealth if they follow the rules. If that's not fun, I don't know what is.

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I'm a deeply committed devotee of the movies. I taught film criticism at the University of New Hampshire, wrote film reviews for a seacoast New Hampshire arts weekly for years and had a film review show on the radio for many more. And I've been leading film discussions at The Music Hall in Portsmouth for going on 17 years.

But in the years I've been watching movies, I can think of only a few in which investors come off as anything other than villains and sleazes.

The biggest sleaze of all, of course, would have to be Gordon Gekko, the ultimate power-shirt, power-tie, power-suspenders villain of Oliver Stone's movie "Wall Street." Gekko, with his slicked-back hair and imperious attitude, was (and may still be) a role model for aspiring Wall Street moguls in the same way that Tony Montana, Al Pacino's drug lord in "Scarface," has been taken as a model by drug pushers.

There's actually one movie in which big-time investing looks pretty good, and that's "Working Girl," in which a secretary played by Melanie Griffith teams up with an investment banker (Harrison Ford) to pull off a high-stakes deal to fend off a takeover bid.

Generally speaking, the movies favor the little people and those who've lost it all schemes over moguls and those who have it all.

But if I'm not mistaken, there has been a recent, high-profile appearance by a tremendously successful investor in a hugely popular movie, although it's a stealthy one. If you put a picture of Carl Frederickson, the 78-year-old hero of Pixar's animated feature "Up" next to a picture of Warren Buffett, I think you'll see what I mean.

The movies may not like rich people in general, and investors in particular, but everyone like Warren. I'm cool with that.

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My stock idea for today is a company that's working in the cracks in the Chinese power grid. A-Power Energy Generation (APWR) is a small company that builds distributed power generating systems but is moving quickly into the Green energy sector.

A typical A-Power project might be a small (less than $50 million) coal-fired power plant that's adjacent to a factory or industrial park and provides power to the local area. The plant may or may not be connected to the national power grid, but for its local users, it will certainly eliminate the brownouts and outages that plague China's national larger grid.

A-Power has a nice backlog of orders in China, and is working to broaden its geographic footprint (soliciting contracts in India) and its product line (making wind turbine components from licensed technologies).

Demand for power in China is virtually boundless, and the government is also working hard to get a handle on pollution, which puts A-Power at a very favorable intersection.

The stock has just broken out of a long, rising base that began forming in June when it was trading at 7. After tightening up in October, the stock broke out on November 17 on news of a big secondary order for wind turbine components. And news of plans to build a plant in the U.S. to serve turbine customers in North and South America only add to the stock's potential.

The Chinese market seems to be spawning muscular issues like APWR every month, and Cabot China & Emerging Markets Report is a market-leading way to keep up with them. The newsletter also covers the whole spectrum of emerging markets stocks.

I write it. I think you'll like it. Give a trial subscription a try. Click the link below to get started today.

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Sincerely,

Paul Goodwin
For Cabot Wealth Advisory

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The Next "Home Run" Sector

elyse@cabot.net (Elyse Andrews) — Tue, 17 Nov 2009 19:23:00 GMT

What's the "Home Run" Sector of the Coming Decade?

Recent Carbon Mandates Around the World

Chrysler, Italy and a Great Stock to Buy Now

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Looking back at each of the past four decades, there was one sector that would have been the "home run" sector to be invested in. Other areas provided good returns to be sure, but these were the most profitable:

1970s: Gold, up 1,250%. The price of gold was fixed until 1971. Once it was left to float, it proceeded to run from around $50 an ounce to $681 just after the start of 1980 as inflation reared its ugly head.

1980s: Nikkei Index, up 1,000%. The decade of the Japanese market turned out to be largely a bubble, but not before the smart money got very, very rich.

1990s: Nasdaq, up 1,000%. A proxy for technology stocks, the Nasdaq Composite started the decade just over 400 and finished the go-go '90s just over 4,000.

2000s. Real Estate, up 200%. Even with real estate cratering the past few years, REITs have still doubled this decade, far outpacing every other asset class.

So that begs the question: What will be the home run in the coming decade?

This was one of the more interesting topics being knocked around by hedge fund managers and Wall Street executives at the Global Financial Leadership Conference, a Davos-like confab I attended at the start of the month in Naples, Florida.

I give credit to University of Notre Dame chief investment officer Scott Malpass for pointing out this run of big winning sectors listed above. As the investment strategist for the $8 billion Notre Dame endowment, Malpass has posted annualized 14% returns during the past 10 years. One of his priorities for the fund now, he told the GFLC conference, is making sure he gets Notre Dame good exposure to the home run sector of the 2010s. Malpass is focusing on three areas to find the next big winning sector: gold, real estate and Green.

Gold could be it if you believe inflation and a weak dollar are in the offing. Place your bets on real estate if you believe the fundamentals that sparked the original bull market are still basically in place and that the sell-off of the past few years is overdone. Go for Green if you recognize the dual need to respond to the global warming crisis along with the energy crunch. Both are converging to create a very firm fundamental push for alternative energy and energy efficiency stocks.

Now, as a student of the market, I know history shows bull moves rarely repeat themselves in specific stocks or sectors, so I'd say odds are against gold and real estate posting triple-digit gains again. Plus, with tighter individual and corporate credit, easy capital won't be the norm for real estate like it was in the past. I also believe the Fed sees inflation as its worst enemy and will fight it tooth and nail for the long-term, damping widespread desire for gold. That leaves Green as the logical candidate to be the home run sector of 2010 and beyond.

But don't just take my word for it. The International Energy Agency, the analysts paid by Western oil-consuming nations to provide accurate pictures of energy needs and outlook, believes that $2 trillion could be spent globally between 2010 and 2020 on end-use and power plant efficiency measures to help the world reach a stable carbon output level. Yes that's trillion, with a T.

It's worth noting, too, that President Barack Obama's advisor Paul Volcker (the stagflation-slaying former Fed president) said at the GFLC that the president seems focused on energy efficiency and Green technology as the basis of U.S. economic growth, in contrast to the past 25 years of administrations that focused on boosting consumer spending for growth.

The world shift to Green is already starting, of course. China is mandating that 120 gigawatts of energy come from renewable resources like wind and solar by 2020, while here in the U.S. we are working toward our own carbon reduction program that will target reductions of between 17% and 25% by 2020, depending on how the Senate and House reconcile their bills on the matter.

Deutsche Banc Asset Management in October compiled a list of recent Green mandates implemented by major world governments since July and I thought it would be beneficial to reproduce them here:

Brazil: 54 GW new grid capacity including 1.1 GW wind, 3.3 GW biomass and 3.9 GW small

China: Reduce energy intensity by a notable margin by 2020

India: 20 GW solar by 2020

Indonesia: 26% reduction in emissions by 2020

Mexico: 8% emissions below 2009 levels by 2012; Increase renewable energy capacity from 3.3% in 2008 to 7.6% in 2012

New Zealand: 10% emissions below 1990 levels by 2020 and 50% below 1990 levels by 2050

Norway: 40% reduction in emissions from 1990 levels by 2020

Russia: 10% reduction in emissions below 1990 levels by 2020 and 50% by 2050

Scotland: 42% cut in emissions by 2020 from 1990 levels

South Korea: 4% reduction in emissions from 2005 levels by 2020

Switzerland: 20% reduction in emissions by 2020 from 1990 levels

Ukraine: 20% reduction in emissions by 2020 from 1990 levels

United States: 20% reduction in emissions by 2020 and 80% by 2050 from 2005 levels (Clean Energy Jobs and American Power Act, still pending final passage).

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Shifting gears a little, I was mulling the desire to reduce our carbon footprint as a nation and the part-ownership we all have in two of Detroit's Big Three. Specifically, I was thinking about Chrysler and why it just ended its electric car program ENVI.

Technically, the program was absorbed into mainstream vehicle development being run by Fiat, the Italian automaker that owns a large minority chunk and controls the management of Chrysler.

I don't suspect that Chrysler is walking away from electric as a possible vehicle platform, but I can speculate as to where I think Chrysler, led by Fiat, is heading: compressed natural gas or CNG.

Now, I don't believe CNG will replace gasoline, but I think it could be the major alternative vehicle option for Chrysler.

Why do I think this?

For one, Italians love natural gas powered vehicles. One recent report estimated that 25% of the vehicles sold in Italy last quarter run on compressed natural gas (or methane).

That's an astonishing amount. And that doesn't include the large number of after-market CNG conversions that are done to cars in Italy, too. As the largest automaker in Italy, Fiat is sending CNG-powered cars into the market. This spring, it announced six models for the Italian market that are able to run on either gasoline or natural gas. Here is a quote from a statement Fiat gave to AutoChannel.com at the time:

"Fiat believes that methane propulsion systems are currently the most appropriate and readily-available technology for resolving pollution problems in urban areas. This is because the use of methane has positive implications in terms of environmental benefits (reduction of approximately 23% in CO2 emissions and reduction of PM emissions to practically zero). Furthermore, methane proves itself to be a valid financial alternative to traditional fuels (diesel and petrol), which are increasingly subject to rising prices."

Pretty straightforward commitment, right? CNG at the nation's 800 filling stations is also as low as half the price of petrol in Italy.

Now consider this: the U.S. has the world's largest reserves of natural gas.

U.S. compressed natural gas filling station company Clean Energy Fuels (CLNE) can bring the gasoline gallon-equivalent to a filling station for $2.50 a gallon wholesale.

The U.S. government is mandating automakers get cleaner vehicles on the road and is a near lock by mid-2010--if not sooner--to pass a law extending significant tax credits to build CNG filling stations and convert gas engines in trucks and cars to use CNG.

The final piece of the puzzle? The leading engine conversion company, both for automakers fitting the conversions on the assembly line and for the aftermarket, is an American company, Fuel Systems Solutions (FSYS). Fuel Systems' U.S. arm is called Impco and it's based in California. Fuel Systems also has a major arm called BRC, which is based in Milan and supplies conversion kits to, among others, Fiat.

As I said, this is speculation on my part about the direction of Chrysler. And regardless, FSYS is proving to be a big winner in the market: I got Cabot Green Investor subscribers into the stock in August at 31 and shares have already climbed 55% to 48 thanks to strong European conversion business and an EPA regulation on truck emissions going into effect in 2010 that will make using CNG for truck engines much more attractive.

Consider how well FSYS could perform when gasoline prices inevitably push well over $3 as the economy improves (and as the dollar, in which oil is priced on the international market, remains weak). If Chrysler takes what I see as the logical path to producing a low-emissions car in the near-future, Fuel Systems could be an early leader in the home run sector of the decade before us.

Sincerely,

Brendan Coffey
For Cabot Wealth Advisory

Editor's Note:

Editor's Note: Only one sector has the same potential that the Internet did in the 1990s ... and it's starting to take off right now. Smart investors are already taking positions ... don't miss this opportunity to profit from the next big thing. Cabot Green Investor Editor Brendan Coffey has just released his newest Special Report, "5 Stocks Wall Street Visionaries are Buying Now," to help you start profiting from the enormous opportunities in the Green sector today! And the latest issue of Cabot Green Investor was published just last week and in it you'll find Brendan's full write-up on the stock mentioned above. Click now to get started today!

http://www.cabot.net/info/cgi/cgiji03.aspx?source=wc01

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Electricity from the Ocean

elyse@cabot.net (Elyse Andrews) — Mon, 16 Nov 2009 19:24:00 GMT

Featuring Lutts' Logic:

The Future of the Auto and Oil Industries

Green Investing

Electricity from the Ocean

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I was talking with my 17-year-old son recently, and he mentioned that Google must be one of the largest companies in the world. His reasoning, of course, stemmed from the fact that Google has all the answers on the Internet, and is now making a big splash in cell phones, too ... and to teenagers, the Internet and cell phones are the center of the world.

So I pointed out that many people never use the Internet or cell phones, and I mentioned, off the top of my head, a number of mass-market companies that had been around far longer than Google and that were far larger.

ExxonMobil, Walmart, Johnson & Johnson, Kraft and CVS were the names that sprang to mind; as a consumer, he knows their names but he has no emotional connection to them.

And then I did the research ... and shared it with him.

Ranked by 2008 revenues, Google was 213th among publicly traded companies.

At the top of the list was ExxonMobil, with revenues of $477 billion. It was followed by Royal Dutch, Walmart, BP (the old British Petroleum), Chevron, ConocoPhillips, Total (French oil company) and China Petroleum. Of these top eight companies, seven are in the oil business.

They're followed by Toyota, General Electric, Volkswagen, Eni (Italian oil company), PetroChina, Motors Liquidation (the old General Motors), Daimler and Ford. Of these second eight, all but one are in the oil business or the automotive business.

In short, of the sixteen largest publicly traded companies in the world, all but two are in either the oil business or the automotive business, and I think this presents a profit opportunity to farsighted investors ... which I'll get to in a minute.

First, though, I want to quote something from Momentum 1000, the "bible" of momentum analysis that my father wrote several decades ago. It's about change, and change, of course, is what investing is all about.

"All living things have life cycles. They grow, mature and then finally die. We see this all around us in many different forms: in flowers, animals, trees and people ... but we also see it in organizations. Organizations are born, they grow and mature. They develop strengths and weaknesses for a variety of reasons. Some change so much it's difficult to recognize them as the original organizations.

If you look at organizations in which you are active, you will recognize that some are growing vigorously, some less so, while others are contracting in various ways. The time cycles for these changes may differ greatly from one organization to another. Some, like political organizations, metamorphose slowly from year to year. Sports teams often evolve faster, their strengths and weaknesses dependent on key players. Even countries go through life cycles, and we now formally recognize emerging countries as a distinct category. But any organization, even a country, can die if it's not managed properly!"

As originally written, these paragraphs were a prelude to the explanation of the use of momentum analysis as a technical tool for analyzing stocks, because stocks are the best indication of the health of companies. But as the paragraph above so clearly states, life cycles apply to all organizations, from companies to countries ... and that certainly includes industrial sectors.

So my question today is this, "Recognizing that the biggest oil and automotive companies are outsized giants today, having achieved their status through a century of growth and consolidation, is it possible that they've peaked and entered into a long declining phase?"

Fresh in our minds, of course, are the bankruptcy of General Motors and the absorption of Chrysler by Fiat.

Also fresh is the memory of gasoline selling for $4 a gallon, in a price spike that hurt consumers but not oil companies.

Now, you can choose to view G.M.'s bankruptcy as just one more fallen domino in the great credit crunch of 2008. You can view it as the result of mismanagement. You can claim that the unions were to blame, for holding wages too high. You can say that the company was spread too thin, not just manufacturing but also sponsoring dealerships and running a finance arm. You can even tie G.M.'s bankruptcy into the national healthcare debate, reasoning that without gold-plated healthcare plans, the company's costs would have been much more competitive.

There is no single reason for G.M.'s failure. Yet if you stand back, and view all these items as the RESULT of a century of growth, you might conclude that the growth of General Motors in that form had reached the point of unsustainability. You might even extrapolate that conclusion to reach similar conclusions about the other big automobile companies, Chrysler being the perfect second example. And you might conclude that the industry is ripe for big, big change.

I think it is, which is why I've recommended the stocks of several companies supplying components for the NEXT generation of vehicles, all of which use substantially less gasoline (sometimes none) and pollute less, too.

For the record, the top seven publicly traded auto companies had combined revenues of $994 billion last year, yet have a market capitalization of just $344 billion. By comparison, the four companies at the top of my list in the alternative transportation market have a combined market capitalization of $3.1 billion. That's a ratio of a more than 100-to-1.

And that brings me to a Cabot saying that I haven't used for a while, but that is perfectly appropriate here, "Money goes where it's treated best."

If you were a money manager (perhaps you are) who was required to keep a certain percentage of your assets in automotive stocks, don't you think you'd start shifting some money out of those old giants and into those high-potential stocks that are just getting off the ground?

And if you were an investor with a long time horizon, wouldn't you be putting money in the little companies that are poised to fill the needs of a fast-growing market that wants fuel-efficient vehicles?

We're still in the very early stages of this shift, but I have no doubt that as the years go by, those new companies will thrive, and they'll attract a lot more of investors' assets. And the thing to understand about this situation is that just moving one percent of the money in the big old car pool into my tiny little "new automotive" pool would cause those stocks to more than double. Understanding money flow is important!

(For example, back on October 26, I wrote, "Last Friday brought an awesome 23% jump in Amazon.com (AMZN), the result of a crackerjack earnings report. In short, Amazon.com is selling an enormous (but secret) number of Kindle e-book readers, and they're very profitable.

"What gets my attention is this number, $11 billion. That's the amount of value that Amazon.com's stock gained in the market on Friday, thanks to the buying of major investors. At the market close on Thursday, AMZN was judged to be worth $40 billion. Twenty-four hours later, the market said it was worth $51 billion!

"This big number tells me that some very serious investors, are projecting some terrific earnings power for Amazon.com, through both its main retail operation and its proprietary Kindle unit. Both are revolutionary. The Amazon.com Web site has already changed the world and is still increasing in its influence. And the era of the Kindle is just beginning. With newspapers and magazines shrinking and dying, Amazon.com has an enormous opportunity to become a preferred information/entertainment medium. ...

"If you want to make money, I suggest you be aware of these trends. Get ... into growth stocks like AMZN and NFLX."

Since I wrote that, AMZN is up 7% while NFLX is up 9%. The big money is flowing in.)

Moving on to oil, and recognizing that giant oil companies sit at the top of the world today, I ask you to consider what will happen as four big trends unfold.

1.) Demand for gasoline in the developed world will decline, as we drive more fuel-efficient cars.

2.) Demand for gasoline will increase in developing countries, especially China, where auto sales, thanks in part to government stimulus, have grown more than 70% from the year before in each of the past three months.

3.) The global supply of oil will continue to diminish, as we pass the point of peak oil.

4.) The frictions between the Muslim countries that sit on much of the world's oil and the non-Muslim countries that consume it will continue to increase.

How these trends play out in the long run remains to be seen, but it appears to me that those giant oil companies are at risk. And I know that the bigger they are, the harder they fall.

Furthermore, I know that when I can buy a car that meets my needs that can be charged by plugging into my garage at night, I'll buy it ... and I'll stop patronizing my neighborhood gas station. And when enough people do this, those gas stations will close (not all at once, but one by one) ... leaving a lot of contaminated vacant lots, not a desirable asset. There are a lot of dominos in the oil business, just as in the automotive business, and when they start to fall it might get ugly.

The top nine publicly traded oil companies had revenues of $2.6 trillion last year, and have a market capitalization of $1.2 trillion, and I have no doubt that as alternative energy investments become progressively more attractive, some of that money will move out of those big old energy companies and into the clean and nimble new ones.

Granted, those big old companies wield a ton of power in Washington, and if it ever gets to that point, ExxonMobil will be judged "too big to fail." But the trends are in place.

(In fact, Warren Buffett's recent purchase of Burlington Northern makes perfect sense in a world where fuel-efficiency matters; the only transportation mode more efficient than trains are ships, and they're rather limited in where they can go.)

So, I'm not saying you should go out and short any of those big old oil and auto companies. (Shorting is difficult, and I would never recommend it in a bull market.) But I do think there's a lot of profit potential in the young companies in the new energy sector, which includes solar panels, wind power, smart grids, battery powered vehicles (and the numerous new components in these cars) and much, much more, and I hope I can persuade you to invest in some of them.

Ten years from now, we'll all be burning compact fluorescent light bulbs or light-emitting diodes--unless we've squirreled away incandescent bulbs or smuggled them in from a foreign country.

Ten years from now, you'll see far fewer pickup trucks and SUVs on our highways and far more small crossover vehicles and fuel-efficient hybrid and battery powered vehicles.

Ten years from now, the U.S. will be getting substantially more power from non-polluting renewable energy sources, mainly solar and wind.

And 10 years from now, people who looked ahead to this future and invested in the companies on the leading edge of this change will be sitting on big profits.

One place to find them is Cabot Green Investor, our newsletter that ferrets out up-and-coming Green companies all over the world, and recommends the stocks with the highest profit potential to a dedicated group of far-sighted investors.

You can read more about it here.

http://www.cabot.net/info/cgi/cgiji03.aspx?source=wc01

--

One of the stocks recommended in the latest issue of Cabot Green Investor (which just came out last week) is in the business of developing technology that generates electricity from the movement of ocean waves, one of the most plentiful sources of energy on the planet.

The difficulties involve the fact that the environment is challenging. The positives involve the fact that the majority of people on the planet live close to oceans, so transporting the electricity would not be difficult.

In his report, editor Brendan Coffey writes, "Harnessing the power of the ocean sits as one of the great opportunities of the renewable energy industry. All of the power potentially developable from the ocean equates to more than 5,000 times current global demand, according to the World Energy Council. Of course, estimating the power and coming anywhere close to tapping it are two very different things.

"People have been trying to develop ocean power since the oil price shocks of the 1970s. Early efforts revolved around trying to transfer some of the ocean's thermal heat to land ... More recent efforts have focused on turning turbine blades against the tide or current with some modest success. Ocean-derived power is still largely in developmental stages. As entrepreneurs look for the right formula, they face technical challenges of capturing, converting and transmitting energy through a difficult salt water environment. They also face protests from environmentalists who worry that underwater turbines could kill fish and upset the delicate sensibilities of whales.

"Still, with ocean power having the advantage of being generated close to the vast majority of people (four-fifths of the world's population live within an easy drive of the ocean) and being limitless, there are some exciting opportunities to be aware of."

I look at the company and I see that the technology is promising, and that it actually has several development projects, including a big one in Australia. Best of all, I see that the stock is strong, telling me that investors are climbing on board and that this could grow into something big.

But what's the name of the company?

I was tempted not to tell you, because this is a high-risk stock, and I want to encourage you to listen to Brendan's advice. The stock is currently trading around 10. It could be 11 tomorrow, but it could also easily fall below 7, where its 50-day moving average is found, and I don't want you to get hurt.

On the other hand you're reading this precisely because you do want to know the stock's name.

So I'll compromise. And because I spent the past weekend playing 15 games of competitive Scrabble, I'll give you the name of the company in the form of an alphagram ... the letters in alphabetical order.

It's ACEENOOPWR.

That's not so hard, is it?

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

Editor's Note: Only one sector has the same potential that the Internet did in the 1990s ... and it's starting to take off right now. Smart investors are already taking positions ... don't miss this opportunity to profit from the next big thing. Cabot Green Investor Editor Brendan Coffey has just released his newest Special Report, "5 Stocks Wall Street Visionaries are Buying Now," to help you start profiting from the enormous opportunities in the Green sector today! And the latest issue of Cabot Green Investor was published just last week and in it you’ll find Brendan’s full write-up on the stock mentioned above. Click now to get started today!

http://www.cabot.net/info/cgi/cgiji03.aspx?source=wc01

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The Value of Education

elyse@cabot.net (Elyse Andrews) — Sat, 14 Nov 2009 20:30:00 GMT

The Value of Education

A Strong Retail Stock

In Case You Miss It

---

As you probably know, we at Cabot value education very highly. Just last week, Editor Timothy Lutts implored you to read the Education section of our Web site. And in that spirit, I’ve been at a conference in Las Vegas this week learning how to be a better editor and more effectively communicate with you, our readers.

Since I wasn’t in the office, I dipped into the archives to find a Cabot Wealth Advisory worth repeating. I picked the one below (from August 21) because it contains a timeless investing lesson and the stock recommended in it is still doing well today. Enjoy!

The lesson itself comes from a Cabot Wealth Advisory written by Editor Brendan Coffey in August of last year. In it, he discussed the concept of buying stocks based on what you know ... and what you like. Here's what he said:

“Throughout the 13 years he was steering the Magellan Fund, Peter Lynch became known for his philosophy that you should invest in what you know. In his 1993 book, "Beating the Street," he discussed how he built Magellan from a $200 million fund to a $14 billion fund in a little more than a decade. The philosophy Lynch wanted to drive home to individual investors was that you should buy companies that you are familiar with. In Lynch's case, he liked the "tasty tacos of Taco Bell," so he added the then-unknown chain into the portfolio; his wife loved the convenience of L'eggs hosiery, so he bought shares of Hanes.

“Buying what you know has long since become a bit of Gospel among a large segment of investors--after all, if it worked for Peter Lynch, it should work for you. It's not a bad idea--certainly if you feel strongly about a company and have what you think is pretty decent insight into its products and market, then you can do all right. I know a few creative types who did quite well buying Apple Computer stock when it was well under 20 in the late 1990s."

I took this advice to heart after reading the June 1 issue of Cabot Top Ten Report, which featured one of my favorite stores: J. Crew (JCG). In that issue, Editor Michael Cintolo wrote:

"J. Crew is one of the market's strongest stocks because its bottom line is coming in much better than expected, and analysts are tripping over themselves to hike earnings estimates. J. Crew reported earnings last week, and while the year-over-year numbers were nothing to shout about (it squeaked out a small revenue gain but earnings fell 29%), the bottom line was more than triple what analysts had expected. The reason: Solid margins, which we believe is because of top-notch management--the company has a history of outperforming its peers, and while that didn't mean much during the last year, it will as the economy picks up. Analysts hiked their 2009 earnings estimates from $0.47 to $0.82 a share after last week's report, and considering J. Crew has beat expectations the past three quarters, we believe even these newer estimates are conservative. It's an interesting turnaround situation."

Mike put the suggested buy range at 24 to 27 and I picked it up at 26 for my Paper Portfolio at work (not real money, just a little office competition) and as of press time, I'm sitting on a 58% profit. JCG isn't your typical growth stock, but I like the company and the clothes, so I'm going to hold on a little bit longer.

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---

However, I also have a word of caution from Brendan's write-up last year about Lynch's philosophy and I'll share it with you here:

"It's possible to take buying what you know too far. It's one thing to rely on your gut feeling, but another to let it overwhelm your intellect. Peter Lynch, after all, wasn't a Forrest Gump-like fund manager, blindly lucking into gold because he liked the taste of nacho cheese. He liked the underlying business of Taco Bell, the balance sheet, the management and the growth plan. It certainly helps that the company had a simple story to tell--it prompted Lynch to take a deeper look at the business structure and the stock valuation.

"But a lot of other food chains have had simple stories, even better food, but everything from poor management to a too-high debt burden to unrealistic growth plans did them in. That's a lesson Peter Lynch also discusses in his book, but because it isn't so pithy, it doesn't get repeated very often. There is a difference between a good company and a good stock. One can be the first, but that doesn't mean it's the second."

Recently, Cabot Market Letter Editor Michael Cintolo had this to say about J. Crew:

“The retail clothing business can be a tough way to make money during a recession, but J. Crew Group's management seems to have the right touch. Founded in 1983 as a catalog-only operation, J. Crew now has over 225 retail outlets, plus the Crewcuts line for kids, a weddings-and-parties division and a high-end line of exclusive, limited edition and couture pieces. This successful build-out of the brand is the work of Millard Mickey Drexler, who took the helm in 2003. JCG has been a rocket, blasting off from 9 in March to over 40 in recent trading, with a big boost on October 22 when the company raised its Q3 earnings forecast.”

And if you didn’t visit the education section of our Web site last week when Tim recommended it to you, I urge you to do it now. We have information outlining the basic strategies of growth investing and value investing as well as more timeless investing lessons. You can read more by clicking here: http://www.cabot.net/Content/Education.aspx

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Only one sector has the same potential that the Internet did in the 1990s … and it’s starting to take off right now. Smart investors are already taking positions … don’t miss this opportunity to profit from the next big thing.

Cabot Green Investor Editor Brendan Coffey has just released his newest Special Report, “5 Stocks Wall Street Visionaries are Buying Now,” to help you start profiting from the enormous opportunities in the Green sector today!

http://www.cabot.net/info/cgi/cgiji03.aspx?source=wc01

---

In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.

Cabot Wealth Advisory 11/9/09 – What's Wrong with the U.S. Dollar?

On Monday, Timothy Lutts dipped into our mailbag and answered questions from readers on what's wrong with the U.S. dollar and how to know who you can trust. Tim also discussed what he thinks of the current stock market and a high-potential growth stock. Featured stock: Fuel Systems Solutions (FSYS).

http://www.cabot.net/Issues/CWA/Archives/2009/11/US-Dollar.aspx

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Cabot Wealth Advisory 11/12/09 – A Smorgasbord of Investment Knowledge

On Thursday, Michael Cintolo discussed one of the Cabot Market Letter's market timing indicators, the Two-Second Indicator, and two important investment lessons that can be learned from applying it to the market. Mike also wrote about a stock in the up-and-coming LED market. Featured stock: Cree Inc. (CREE).

http://www.cabot.net/Issues/CWA/Archives/2009/11/Stick-with-the-Evidence.aspx

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Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

Editor’s Note: From the market's bottom in March 2003 to the recent low in March 2009, the S&P 500 lost 18% in total and the Nasdaq lost 3.5%. Cabot Market Letter, however, left them in the dust: Advancing a total of 94% during the past six years (nearly 12% per year). Cabot Market Letter has called every bull market since 1970. And this time is no different. In fact, the Letter was just ranked one of Timer Digest's top market timers. Click here now for more.

http://www.cabot.net/info/cml/cmljb03.aspx?source=wc01

A Smorgasbord of Investment Knowledge

elyse@cabot.net (Elyse Andrews) — Thu, 12 Nov 2009 20:30:00 GMT

Have a System with a Few Branches

Stick with the Evidence; Ignore the Logic

LEDs: An Idea Whose Time has Come?

---

It's not often I get a question that actually leads me into two good lessons, but I got one last week that did just that. The specific answer to the question isn't the major takeaway--but I want to use it as an example of why, in the stock market, you should go with evidence, instead of so-called "logic."

Before we get started, let me briefly explain our Two-Second Indicator, which is one of the key market timing indicators I use in Cabot Market Letter. The indicator measures the broad market by taking one simple reading per day (so simple that it takes just two seconds to get)--the number of stocks hitting new 52-week lows on the NYSE.

We've studied the new low data going back to the early 1960s, and as it turns out, when the number of new lows is fewer than 40 day in and day out, the broad market is in generally good shape. Thus, to oversimplify it a bit, fewer than 40 is good, greater than 40 is bad.

Taking it a step further, new lows have always expanded prior to the start of major market declines. The reason: As bull markets mature, fewer and fewer stocks participate on the upside. And by the time the bull is near death, there are just a couple hundred stocks heading higher; the generals leave the troops behind!

Anyway, having studied decades of data, that's what we've found. Now let's get to a good question a subscriber emailed to me a little more than a week ago:

Question: "Mike, because the market's had such a big advance from its March low, with (as you say) most every stock and sector participating, won't your Two-Second Indicator naturally take a long time to turn negative (i.e., have new lows greater than 40)? And, thus, if the market falls from here, you might be stuck being bullish most of the way down?"

My answer: "First off, realize that the Two-Second Indicator isn't the be-all and end-all of our market timing system. In fact, the trend-following Cabot Tides are just as, if not more, important.

"However, specifically when it comes to the Two-Second Indicator, we're just going with evidence--we've had big bear markets before (think 1987, 1974, 2001-2002, etc.) and through them all, when you get a market decline that gets underway for a week or two, yet the new lows are tiny, it tells you that there hasn't been the type of marked divergence that always precedes major market tops.

"In fact, almost every time, that pullback arrests itself fairly quickly. Not always, but very often.

"That's why we think the evidence shows that what we have today is a pullback within an ongoing bull trend. This pullback could end very soon, or might take a few weeks. But we don't think it's a major top.

"Again, maybe this time is the exception, and that's why we have the Cabot Tides, and why we've raised cash. There can always be exceptions to any rule, but you can't invest based on the 5% (or less) chance that it could come true."

So what lessons are hidden in this answer?

Lesson one: Your system should be a tree with a few branches.

In other words, you should never solely rely on one indicator, no matter how much you (or anyone else) believe in it. There is no indicator that's going to be 100% correct, and that means everything will mislead you at one time or another.

That's why I also use the Cabot Tides, our intermediate-term trend following indicator. In fact, the Tides is the reason Cabot Market Letter is ranked among the top five newsletters in market timing performance during the last six months, one year, and two year periods-the only newsletter that can make that claim.

Thus, in case the Two-Second Indicator is mistaken this time around, I don't put all my eggs in that basket.

Lesson two: Go with evidence, not logic. I know that sounds weird, so I'll explain.

In real life, logic is the key to solving most problems. It's amazing what a little common sense can do.

However, in the stock market, logic often does not work. Why? Because the market, in its devious way, acts in a manner that's completely the opposite of logic! Strong stocks tend to get stronger, weak stocks tend to get weaker, and you're better off quickly taking losses while holding your winners. All of these go against human intuition.

Similarly, the subscribers' question made perfect, logical sense-since most stocks have rallied so much since March, they're naturally miles away from their 52-week lows. So this time around, the readings might not mean as much (i.e., they might be artificially low). I can't really disagree with what he said.

Yet, as I explained in my response, the historical evidence (which covers several prior recoveries from steep bear markets) tells me that, whenever the number of new lows is fewer than 40, the market is not in danger of a serious, prolonged correction.

In fact, the subscribers' worry (that new lows are low because the market has rallied so much in recent months) is probably the exact reason why the indicator works! Think about it-bull markets do not up and die right away, they take time to gradually lose momentum. So if the market is coming off a stupendous upmove, the odds are low that things are going to fall apart.

But moving beyond the specifics of the Two-Second Indicator, the main point I want to make is one that I've written about frequently, both in these Cabot Wealth Advisories and in Cabot Market Letter and Cabot Top Ten Report: You should stick with the EVIDENCE the market has presented.

Really, anyone with a brain can come up with a logical reason why the market or a stock should go up or down. But it's only by having a system that's based on how the market actually works that you can gain an edge.

In this case, that means going with the historical evidence of the Two-Second Indicator's readings as opposed to second-guessing that evidence because of a personal opinion ... even if it is logical.

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Regal-Beloit (RBC): UP 25% … and more!

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---

As it turns out, the Two-Second Indicator has been vindicated, at least for now, as the sharp retreat in the market was reversed during the past few days. All the major indexes are back above their 50-day moving averages, and thus, the Cabot Tides have rejoined the Two-Second Indicator in bullish territory.

With that said, I am not a raging bull right this second. Far fewer stocks are looking good today compared to just a couple of weeks ago-a minor divergence that, while not totally unexpected (leadership narrows as bull markets progress), does tell you that buying power is slowly drying up.

Plus, I'm seeing a ton of sloppy charts-stocks that fell hard one week, rallied sharply the next, with every day showing the stock up or down a few points. Usually it's better to see stocks tighten up, which tells you big investors are in control, accumulating shares in a small price zone.

Still, I am a trend follower, so you're not going to catch me arguing with the market ... but I'll likely be more discerning with my buys than I was a few months ago, when nearly everything was heading higher.

Thus, in today's environment, I'm looking for companies with great prospects, and with stocks that are not only strong but also liquid (they trade plenty of volume every day) and have great institutional sponsorship.

One name that's attractive is Cree Inc. (CREE). The company is technically listed as a semiconductor company, however, its claim to fame has little to do with the chip sector and its notorious booms and busts. Instead, Cree is really something of an alternative energy story-it's the leader in the production of light emitting diodes (LEDs), which are far more energy efficient than both standard bulbs and compact fluorescent lights (CFLs).

Here's what I wrote about Cree two weeks ago in Cabot Top Ten Report:

"Cree Inc. is a leader in the production of light emitting diodes (LEDs), which are the next wave in energy efficient lighting. They consume as little as 10% of the electricity that incandescent bulbs use, generate low heat, last far longer (estimates of 20 to 40 times as long) and, unlike newer compact fluorescent light bulbs, contain no mercury and require no special handling. LEDs have been popular for years in laptops and cell phones, but as the demand for electricity rises and the efficiency of LEDs soars, their applications are expanding, especially for outdoor lighting; for instance, Cree is supplying Anchorage, Alaska, with 16,000 LEDs. With 80% of the firm's revenues coming from outside the U.S., there's a good chance countries like China, which already makes up a big chunk of business, could replace millions of bulbs in the years ahead."

I like that revenue growth is starting to accelerate (up 5%, 9% and 20% the past three quarters) while earnings are booming (up 38% and 100% the past two quarters, with a 45% gain expected in the fourth quarter). And I love the fact that the story is simple and compelling-cost savings for lights makes sense, and demand for its LEDs should soar in the years ahead.

The stock popped on its earnings report on October 21, and has been bobbing and weaving with the market ever since. Right now, I think it's a bit extended to the upside, as the 50-day moving average is down around 40. But I think it's worth a shot at buying on any controlled pullback of two or three points.

Until next time,

Mike Cintolo
For Cabot Wealth Advisory

Editor's Note: More of Michael Cintolo's expert advice can be found in Cabot Market Letter, our flagship publication, which has been steering growth investors to big profits for 39 years. Mike combines Cabot's proven market timing and growth stock picking strategies to find the stock market's biggest winners for his subscribers. In fact, Cabot Market Letter was recently named one of Timer Digest's Top 10 Long Term Timers for two years. Don't miss out on the leaders of the bull market. There's never been a better time to invest.

http://www.cabot.net/info/cml/cmljb03.aspx?source=wc01

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What's Wrong with the U.S. Dollar?

elyse@cabot.net (Elyse Andrews) — Mon, 09 Nov 2009 19:15:00 GMT

Featuring Lutts' Logic:

Concerns About the Dollar

Who Can You Trust?

A High-Potential Growth Stock

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Today's letter begins by answering recent questions from several readers, questions that you might have been wondering about as well.

Timothy,

I have been noticing that the market has been moving opposite the U.S. dollar. As the dollar's value increases the market's value decreases. I would expect both the market and the value of the dollar to rise in tandem when the U.S. economy is perceived as strengthening, and decrease in tandem when the U.S. economy is seen as weakening. Why would the market be moving opposite the value of the dollar?

Thanks,
Ken

Ken,

Thanks for asking. One of my frequent topics of discussion concerns the fact that the stock market is ALWAYS looking ahead, and that people who try to use TODAY's fundamental data to invest are doomed to failure. In short, therefore, the market is not moving in tandem with the dollar's actions of today because the market is looking ahead.

To get into it deeper, the global economy is enormously complicated. In addition to the value of the dollar versus something (the something you're looking at), there's also the value of the dollar versus other things (other currencies and hard assets like copper and gold). Then there's our federal debt, the perceived intentions of the Federal Reserve, corporate earnings, the likelihood that consumers will resume spending, swine flu, the growth of China, the cost of the in-process health care bill etc., etc.

To sum up, you shouldn't focus on just one metric ... but if you do focus on one metric, it should be a stock's price chart because THAT reflects all those other factors, as perceived by the actual investors with skin in the game ... and they're the ones who matter.

Sincerely,
Timothy Lutts

---

Mr. Lutts,

Why are the vast majority of your Cabot Stock of the Month Report picks in a currency that is gradually losing value? It does not make good business sense.

Example: Since the early 1970s, the U.S. dollar has declined from buying 4.32 Swiss Francs. Today it buys 1 Swiss Franc. More recent example. Just a few years ago, 85 U.S. cents would buy 1 Euro. Today you need $1.50 to buy a Euro. You get my point?

It would make more sense to look for stocks of the month in countries with strong currencies and exceptional growth. The USA does not fit the bill. Otherwise, it appears that you are playing to the home crowd.

Helge

Helge,

Thank you for writing. I get your point. But there are far more factors involved in selecting attractive stocks than the strength of a country's currency. The U.S., despite all its well-publicized troubles, remains the most entrepreneurial major economy in the world. Thus many of the best growth stories in the world are found here. For companies growing at double and triple-digit annual rates, a little currency loss is no big deal.

You will, of course, note that Cabot Stock of the Month Report also has recommended a number of Chinese stocks, and if you'd like more of these, I recommend Cabot China & Emerging Markets Report, which also features stocks from Brazil, India and Russia.

But back to the question of the dollar. In my experience, when everyone thinks alike, everyone is likely to be wrong. It seems to me that we may be nearing the point where everyone assumes the value of the U.S. dollar will keep declining. When we reach that point of perception, the downtrend will end.

Sincerely,
Timothy Lutts

---

Hi,

There are many, many e-letters like yours. I've been told by the "smart people" that picking stocks that are recommended in letters and newsletters sent through email is a bad idea. They say it's done to bring a stock up in price beyond what it's worth so you can sell shares that you already have. I really would love to trust you guys. Would you comment on that?

Unsigned

Dear Unsigned,

Certainly. Many small operators do indeed like to use press releases and pseudo recommendations in an attempt to push up stocks that they own ... or that their clients own. In fact, if you get these promotions in the postal mail, I recommend that you look at the fine print; postal regulations require that the mailer disclose how much they were paid by the promoter to push the stock.

We don't do that. Never have, and have no reason to.

Our core products are the nine investment advisory services that we sell to tens of thousands of individual (and professional) investors all over the world. The oldest is the Cabot Market Letter, published continuously since 1970. (I just calculated that I've had a hand in more than 700 issues of the Cabot Market Letter.) Subscribers who find value in these newsletters renew their subscriptions, and I'm very happy to serve them.

This Cabot Wealth Advisory, contrarily, is free, and you're smart to be concerned about the value of something free. Free often implies a "catch," or an ulterior motive. Well, my ulterior motive is simply this; I'd like you to become a paying subscriber to at least one of our newsletters. To persuade you to consider that, I offer valuable content in this free letter and then promise that you'll get much more in the paid newsletters.

Now, you don't have to buy anything. You can keep on reading these Cabot Wealth Advisories just as long as we keep sending them, and I won't mind. I happen to think the content in them is valuable, especially considering the price.

But I will point out that there is a certain lack of continuity to the recommendations found here in Cabot Wealth Advisory. For example, last week I recommended Dr. Reddy's Laboratories (RDY), a big Indian pharmaceutical company focused on the global generic drug market. The stock is acting well, and I'm optimistic that efforts to control health care costs will lead to a bigger market share for generic drugs.

But I may not mention Dr. Reddy's Laboratories here again, so if you bought based on that recommendation, you're on your own ... and knowing when to sell can be even more important than knowing what to buy. So if you want to be kept up to date on the stock, I recommend that you take a subscription to the newsletter that originally recommended it, Cabot Top Ten Report.

Subscribers to Cabot Top Ten Report not only get a recommended buying range for each of the 10 stocks that appears in every Monday's issue, they also get follow-up tracking in every issue, so they know whether to buy, sell or hold.

Note: These Top Ten stocks are hot! For all Cabot Top Ten recommendations from January 1 through September 28, the average one-month return works out to a 38.9% compounded annual return.

For all Cabot Top Ten Report recommendations from March 1 (the market bottom) through Sept 28, the average one-month return works out to 76.3% compounded annual return.

http://www.cabot.net/info/ctt/cttjb07.aspx?source=wc01

Sincerely,
Timothy Lutts

---

Moving on to today's market, the long-term trend remains up, and it appears as though the intermediate-term correction of the past month MAY be over. Yes, I know the Dow hit a new high today, but the Dow's not the market. I wrote last week about the DIVERGENCE that develops as bull markets mature, and today's market behavior is textbook. Don't be fooled.

But don't be dissuaded either. If you're in the mood for buying, you should take a good hard look at growth stocks hitting new highs.

One I like a lot is Fuel Systems Solutions (FSYS), which was recommended back in August by Cabot Green Investor. In that issue, editor Brendan Coffey wrote the following.

"Fuel Systems Solutions makes the equipment and systems that convert a traditional engine to one that can use CNG, LNG or propane or to an engine that has the option to use either CNG, LNG, propane, diesel or gasoline on demand.

"Fuel Systems grew out of a 50-year-old California company called Impco, which focused on industrial equipment and stationary power, and combined last decade with Italian competitor BRC, which focused on light vehicles.

"Fuel Systems sells to the aftermarket for individuals or companies that want to convert existing engines to use natural gas, and to the original equipment market (OEM), tweaking automakers' cars and trucks to use CNG or LNG before they are delivered to dealers. ... Whether OEM or aftermarket, conversion work involves adding equipment under the hood and replacing or installing additional fuel canisters that store the alternative fuel. Fuel Systems customers include Fiat, Opel, Ford and many other major automakers, none of which account for more than 10% of revenue.

"The company has manufacturing facilities in California and northern Italy, and maintains sales offices in the major CNG and LNG consumer regions, Europe, Australia, India and Pakistan chief among them. In Pakistan, for instance, the relative cheapness of natural gas versus oil means only the elite have cars running on gasoline. In Europe, a desire to reduce air pollution steers consumers to natural gas, as does the European union mandate to get 20% of all vehicles running on fuels other than petrol or diesel.

"The big story for Fuel Systems is the potential of the American market. About 80% of revenues each of the past three years have come from outside the United States ... a potential boon is a bill introduced by Senate majority leader Harry Reid of Nevada to provide tax incentives to buyers of natural gas vehicles, a plan that has gotten a lot of vocal support from oilman T. Boone Pickens, who owns the majority of natural gas fueling station chain Clean Energy Fuels.

"The bill would boost the tax incentive to natural gas vehicles to as much as $12,500 per vehicle and to $100,000 for natural gas fueling stations. The bill is certain to pass, if the number of its co-sponsors (77) is a reliable indicator, although it may not be addressed until after health care in September. The House of Representatives passed a bill earlier this summer authorizing $150 million to research natural gas vehicles."

Well, today the bill has not yet passed; the House has been busy with the health care bill and other matters. But Brendan's subscribers don't mind. When he recommended the stock back in August, it was trading at 30. It hit 37 in September, and then marked time for a while, letting its 50-day moving average catch up.

Late October brought a sharp dip below that moving average, shaking out weak holders, and then last Thursday the company announced excellent third quarter earnings results and the stock gapped up to new highs on seven times average volume, hitting 45. And since then it's kept climbing!

We know from experience that stocks that gap up on earnings on heavy volume tend to keep running and that's what FSYS has done. You could still buy it here, though downside risk is clearly bigger than it was a week ago. Or you could take a no-risk trial subscription to Cabot Green Investor and buy Brendan's NEXT recommendation, which comes out this week.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

Editor's Note: One of the keys to successful growth stock investing is this: You must be early, before the crowd. So now I'm telling you, Green investing is just heating up, and if you want the best advice on investing in Green growth stocks, you should listen to Brendan Coffey. His latest issue, published just this week, recommends two stocks. I'll wager most of my readers have never heard of either one of them. But while the mass media is running headlines about big old has-beens like General Motors, Bank of America and Conde Nast, investors in these up-and-coming growth companies are getting rich. And I want you to get rich with them. Click below to get started now.

http://www.cabot.net/info/cgi/cgiji03.aspx?source=wc01

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The Reading Revolution

elyse@cabot.net (Elyse Andrews) — Sat, 07 Nov 2009 19:52:00 GMT

The E-Reader Revolution

A Bookless Library

In Case You Missed It

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Every day on my lunch break, I push away from the computer and crack open a book. It's one of my favorite parts of the day because I get to travel to another time and place without ever leaving my office.

(To date, I've traveled to William Faulker's Yoknapatawpha County, Jane Austen's England and aboard Herman Melville's Pequod, among many others.)

As you can probably tell, I love books. My grandmother once described me as a voracious reader and as I was very young at the time, I misunderstood her characterization and thought she called me a ferocious reader. I think that term applies as well.

So I was excited to learn last spring that Boston was hosting a book festival. My friend had the job of designing and developing the organization's Web site and I eagerly watched as it came to life.

The actual festival took place on October 24, a rainy fall day that was not able to dampen the spirits of the book lovers in attendance. I was fortunate enough to attend a pre-festival party at the Boston Public Library where I mingled with authors and other members of he literary elite. But the real highlight of the weekend was the next day when the actual discussion sessions began.

(Interesting fact: Opened to the public in 1854, the Boston Public Library is the oldest free public city library supported by taxation in the world and the first to allow its patrons to borrow books and other materials.)

The Boston Book Festival played host to such diverse authors as John Hodgman (better known as the PC in the Mac commercials), Nobel Laureate Orhan Pamuk, "Clueless" actress Alicia Silverstone, Princeton professor Cornel West, Nicholas Negroponte (founder of MIT's Media Lab, "Wired" magazine and One Laptop Per Child), documentarian Ken Burns and the New York Times' David Pogue, among others.

According to the news release that the Boston Book Festival put out after the event, "12,000 people took part in the panel discussions, readings, music performances and street fair, most of which were free. The event featured 90 authors and presenters, including some of the biggest names in the literary world, 40 outdoor exhibitors, 30 indoor events, children's activities and live music."

Besides the more traditional topics that you'd expect to find at a book festival, a major topic of the weekend was the future of reading. No matter how much I (or anyone else) may love the printed word, there's no denying that big changes are afoot in the publishing world.

You only need to look at the deterioration of the newspaper industry to see the effects that digital and online media have had on print-based industries. Fortunately, it seems that book lovers are trying to adapt to the changes instead of fighting them--a good strategy if they want to find a profitable and functional way to survive this revolution.

And a discussion on the future of reading would not be complete without a few words on the Kindle, Amazon.com's (AMZN) electronic-reader.

The Kindle allows readers to purchase books from the comfort of their homes and read them instantly on this small, lightweight handheld device. It can hold over 200 titles and access several newspapers and popular blogs. The Kindle doesn't use WiFi, but instead uses the same high-speed data network as advanced cell phones, so you never have to locate a hotspot to pick up the signal.
Editor Timothy Lutts wrote about Amazon in Cabot Wealth Advisory on October 26, saying this:

"Last Friday, for example, brought an awesome 27% jump in Amazon.com (AMZN), the result of a crackerjack earnings report. In short, Amazon.com is selling an enormous (but secret) number of Kindle e-book readers, and they're very profitable.

"What gets my attention is this number, $11 billion. That's the amount of value that Amazon.com's stock gained in the market on Friday, thanks to the buying of major investors. At the market close on Thursday, AMZN was judged to be worth $40 billion. Twenty-four hours later, the market said it was worth $51 billion!

"This big number tells me that some very serious investors, are projecting some terrific earnings power for Amazon.com, through both its main retail operation and its proprietary Kindle unit. Both are revolutionary. The Amazon.com Web site has already changed the world and is still increasing in its influence. And the era of the Kindle is just beginning. With newspapers and magazines shrinking and dying, Amazon.com has an enormous opportunity to become a preferred information/entertainment medium."

And that week, Editor Michael Cintolo added Amazon to the Cabot Market Letter Model Portfolio. He recently wrote this about the company:

"In 10 years, how many people do you think will be reading some of their books, newspapers, magazines and even textbooks electronically? The answer is probably in the millions or even more, and that makes Amazon's Kindle e-reader a potential blockbuster product. Plus, management has deftly positioned the company as the Walmart of the Internet, and all of this has led to accelerating growth--revenues rose 28% in the third quarter, earnings boomed 67% and, most importantly, the stock exploded 27% to new all-time highs on eight times its average volume. You don't see many earnings gaps this powerful from institutional-quality stocks, and we think it's a sign of higher prices to come."

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Locally, we've had a taste of what could happen if e-readers really do take off: a bookless library.

Readers of the Boston Globe may remember a story from two months ago about Cushing Academy, a picturesque private school located here in Massachusetts. After decades of collecting thousands of books, the school decided to go paperless.

In lieu of a library, Cushing will now have a learning center complete with cappuccino machines, giant televisions and 18 e-readers made by Amazon and Sony.

James Tracy, headmaster of Cushing and chief promoter of the bookless campus, was quoted by the Boston Globe as saying, "When I look at books, I see an outdated technology, like scrolls before books. ... This isn't 'Fahrenheit 451' [the 1953 Ray Bradbury novel in which books are banned]. We're not discouraging students from reading. We see this as a natural way to shape emerging trends and optimize technology.''

While the plan had many detractors, their arguments couldn't match this fact: School officials said when they checked library records one day last spring only 48 books had been checked out, and 30 of those were children's books.

I personally love books and visit my local library all the time, but I also applaud the school for trying to better meet its students' needs. Perhaps this will even become a model for schools around the country if it is successful. In the meantime, Amazon seems sure to benefit from the move away from paper and toward digital media.

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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.

Cabot Wealth Advisory 11/2/09 - Cold Beer at Akron

On Monday, Timothy Lutts wrote about the movie "Harvey" and what it can teach us about finding peace of mind in life ... and investing. Tim also discussed the importance of educating yourself as an investor. Tim finished by writing about an India-based stock with high potential. Featured stock: Dr. Reddy's Laboratories.

http://www.cabot.net/Issues/CWA/Archives/2009/11/Indian-Growth-Stock.aspx

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Cabot Wealth Advisory 11/5/09 - A Tale of Two Chinese Game Stocks

On Thursday, Paul Goodwin wrote about Baby Boomers and how unprepared they are for retirement. He also discussed two Chinese game stocks; one that got hit after some bad news from the Chinese government and another that is a hot IPO. Featured stocks: NetEase.com (NTES) and Shanda Games (GAME).

http://www.cabot.net/Issues/CWA/Archives/2009/11/Two-Chinese-Game-Stocks.aspx

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Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

Editor's Note: From the market's bottom in March 2003 to the recent low in March 2009, the S&P 500 lost 18% in total and the Nasdaq lost 3.5%. Cabot Market Letter, however, left them in the dust: Advancing a total of 94% during the past six years (nearly 12% per year). Cabot Market Letter has called every bull market since 1970. And this time is no different. In fact, the Letter was just ranked one of Timer Digest's top market timers. Click here now for more.

http://www.cabot.net/info/cml/cmljb03.aspx?source=wc01

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A Tale of Two Chinese Game Stocks

elyse@cabot.net (Elyse Andrews) — Thu, 05 Nov 2009 20:57:00 GMT

Booming and Busting

Government Interference

Not Just a GAME

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In 2005, as if by magic, Web sites, TV talk and news shows, newspapers and magazines were filled with stories about how the Baby Boom Generation was going to be turning 60. In 2008, further illustrating the continuing association of the Boomers and the Beatles, the cute features were about the song "When I'm 64," Paul's jaunty little ditty that asked: "Will you still need me/Will you still feed me/When I'm 64?"

And there's not much risk in predicting that when the first Boomers reach full Social Security retirement age--now 66 for those born between 1943 and 1954--there will be another spate of stories.

The Boomers have always been a source of great interest to lots of people (especially themselves) and attitudes toward them vary a lot.

Comedians love to roast Boomers for getting old while never growing up. I thought the first joke I heard about a group of Sixties Survivors attending a Rolling Stones concert wearing Depends was pretty funny. The next 15 times, not so much. Same for the lists of Then and Now jokes (Then: Looking for some good acid. Now: Looking for some good antacid.)

Conservatives have never forgiven the Boomers--who were college (and draft) age in the late 1960s--for sex, drugs, rock 'n' roll and protests against the Vietnam War. That's when things started to fall apart, according to this line of thinking.

Progressives give the generation a hard time for losing revolutionary zeal and relaxing into disco madness and cocaine use in the '70s, then settling down to buy houses, make a living, and raise kids. Too much work left undone by these lights.

Gen X, Gen Y and subsequent generations are just plain sick of hearing about them.

But say what you may about the Baby Boom Generation--and since there are 77 million of them, almost everyone has something to say--their age cohort still has the highest earning power and the highest voting power and represents the biggest challenge to the medical and social services industries in the history of the U.S. What they don't seem to have is enough money to retire on.

Unfortunately, if financial publications are to be believed, Boomers are the least prepared for retirement of any generation before them. Citing a fall in home prices and stock prices, a study by the McKinsey Global Institute laments that "more than two-thirds of early Baby Boomer households, meaning those between the ages of 50 and 63, are financially unprepared for retirement."

In 2007, one study showed that 53% of households with at least one retirement account had combined balances of just $45,000. Households of those closest to retirement (head of household between 55 and 64) had median account values of just $100,000. And those dollar amounts were harvested before the Stock Market Crash of 2008. Using the interest rates from May 2009, that $100,000 would buy an annuity of just $700 a month for life. Where I live, that's just enough to pay my property taxes and subscribe to a newspaper.

A more recent study by the U.S. Census Bureau shows that only 41% of workers between the ages of 25 and 64 have any kind of retirement account at all. And those who had them had average balances of less than $33,000.

Whatever your attitude toward Boomers, you have to admit that the potential problem is enormous.

Some retirement planners advise that you should have 70% of your current annual income in the bank for every year you think you may have of retirement.

My response: How the heck am I supposed to know how many years of retirement I might have? As a connoisseur of the obituary writer's art, I see lots of people shuffling off at ages lower than mine. And at the other extreme I have my father-in-law who is now 93 and doing fine.

I know that I find the idea of making lots of money and then not making more money for the rest of my life a little creepy. It's like having a period of your life when you fill the bucket and then a period in your life when you empty the bucket. Just be sure to put in more than you need to and take out less than you want to. Better safe than broke.

I'm not a Boomer myself. I'm one of the last of the War Babies. So I'll keep breaking trail for the Boomers as long as I can. And I'll watch with interest as reality catches up with the generation that thought it would change the world. Should be fascinating.

Whether you're a retiree, a Boomer or a Generation whatever, you might want to consider getting more active in working toward retirement. 401(k)s are fine, but they're way too passive to achieve real gains against inflation and predatory markets. Cabot's newsletters are specifically designed to help individual investors invest successfully.

I write the Cabot China & Emerging Markets Report, which has been helping investors make money and protect gains in the hottest markets in the world. Over the past five years, it's the top-performing newsletter of all the newsletters covered by the Hulbert Financial Digest. It's the perfect way to break out of the passive approach to your retirement. A no-risk trial subscription is just a click away.

http://www.cabot.net/info/cem/cemjd05.aspx?source=wc01

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It's one thing to talk about government interference with business in the abstract. In the U.S. this is usually a matter of massive paperwork, taxes, red tape and restrictions on employment, environmental impact, worker safety and health care.

In China, things can get significantly weirder.

Take the Chinese Web portal and online game company Netease.com (NTES). NetEase is a competent, thriving enterprise with lots of online services and lots of subscribers. But the big story for people holding the company's stock was its acquisition of the franchise for World of Warcraft, a massively multiplayer online role-playing game with a huge following.

Netease had been operating the game in a private beta version (free-to-play) and anticipating the good times when it got full government approval to go commercial. There were just a few objections that the General Administration of Press and Publication (GAPP) had to some content. It was all going to work out.

Then GAPP found out that NetEase had received an OK from the Ministry of Culture to begin operating the game, which it was doing. GAPP had a hissy fit and denied the application to run World or Warcraft and terminated the approval process.

The Ministry of Culture has responded that GAPP has no jurisdiction over the World of Warcraft application and that the game is being legally run.

Now the whole brouhaha has been kicked upstairs to the State Council. That should go well.

This is further proof that, if there's anything worse than getting crossways with a government agency, it's getting caught in the middle of a pissing match between two of them.

The Cabot publications that owned NTES have long since advised selling. (We made good money, too, having bought back in April.) As usual, identifying abnormal weakness in a stock allowed us to get out before the bad news hit. Chart reading remains one of the more vital skills needed for successful growth investing.

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---

Today's stock pick is a new initial public offering from China that has a great pedigree. It's Shanda Games (GAME), the revenue-producing portion of Shanda Interactive Entertainment (SNDA) that was spun off from the parent company on September 27.

Shanda has been around for a while, offering a growing lineup of online games, all the way from casual time-wasters to immersive MMORPGs like Dungeons and Dragons Online. It's not clear why Shanda Interactive wanted to kick Shanda Games out the door.

But after a post-IPO droop that pulled the stock down from 12 to 9, GAME has shown some life, jumping back on top of its 25-day moving average.

Like a racehorse with good breeding, GAME is an interesting bet on the popularity of online games in China because it has the experience of Shanda's long history behind it. It will bear watching.

And if you want to know more about the strong stocks of China and the rest of the emerging markets, you might want to check out the Cabot China & Emerging Markets Report.

http://www.cabot.net/info/cem/cemjd05.aspx?source=wc01

Sincerely,

Paul Goodwin
For Cabot Wealth Advisory

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A Great Indian Growth Stock

elyse@cabot.net (Elyse Andrews) — Mon, 02 Nov 2009 19:53:00 GMT

Featuring Lutts' Logic:

Cold Beer at Akron

Finding Peace of Mind

A Great Indian Growth Stock

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Back in 1944, journalist and playwright Mary Coyle Chase wrote the play "Harvey," which ran on Broadway from 1944 until 1949 and then was adapted into a movie that starred Josephine Hull and James Stewart.

The play won a Pulitzer Prize; Jimmy Stewart scored an Oscar nomination for Best Actor (but didn't win), while Ms. Hull took home the Oscar for Best Supporting Actress.

What this has to do with investing, we shall see.

It starts with the phrase "cold beer at Akron," which pops up in the following scene, where Elwood P. Dowd (Jimmy Stewart) has just explained about his best friend Harvey, an invisible six-foot, three-and-a-half-inch-tall rabbit, to Dr. Chumley, the director of the mental institution to which he has just been committed. Elwood has explained that Harvey (technically a pooka) is able to overcome both time and space and take you anywhere in the world for as long as you want. Hearing this, Dr. Chumley explains what he would do with this power.

CHUMLEY: I know where I'd go.
ELWOOD: Where?
CHUMLEY: I'd go to Akron.
ELWOOD: Akron?
CHUMLEY: There's a cottage camp outside Akron in a grove of maple trees, cool, green, beautiful.
ELWOOD: My favorite tree.
CHUMLEY: I would go there with a pretty young woman, a strange woman, a quiet woman.
ELWOOD: Under a tree?
CHUMLEY: I wouldn't even want to know her name. I would be--just Mr. Brown.
ELWOOD: Why wouldn't you want to know her name? You might be acquainted with the same people.
CHUMLEY: I would send out for cold beer. I would talk to her. I would tell her things I have never told anyone--things that are locked in here. (Beats his breast. ELWOOD looks over at his chest with interest.) And then I would send out for more cold beer.
ELWOOD: No whiskey?
CHUMLEY: Beer is better.
ELWOOD: Maybe under a tree. But she might like a highball.
CHUMLEY: I wouldn't let her talk to me, but as I talked I would want her to reach out a soft white hand and stroke my head and say, "Poor thing! Oh, you poor, poor thing!"
ELWOOD: How long would you like that to go on?
CHUMLEY: Two weeks.
ELWOOD: Wouldn't that get monotonous? Just Akron, beer and "poor, poor thing" for two weeks?
CHUMLEY: No. No, it would not. It would be wonderful.
ELWOOD: I can't help but feel you're making a mistake in not allowing that woman to talk. If she gets around at all, she may have picked up some very interesting little news items. And I'm sure you're making a mistake with all that beer and no whiskey. But it's your two weeks.
CHUMLEY: (Dreamily.) Cold beer at Akron and one last fling! God, man!
ELWOOD: Do you think you'd like to lie down for a while?
CHUMLEY: No. No. Tell me Mr. Dowd, could he--would he do this for me?
ELWOOD. : He could and he might. I have never heard Harvey say a word against Akron.

Traditionally, a pooka (or puca) is a mythical creature of Celtic folklore, encountered in Ireland, the west of Scotland and Wales. Appearing in a variety of forms, from a sleek dark horse with yellow eyes to a small, deformed goblin to a huge hairy bogeyman, it enjoys confusing and often terrifying humans, but it is considered to be more mysterious than dangerous. By coincidence, November Day (November 1, yesterday) is the pooka's day, and the one day of the year when it can be expected to behave civilly.

If you believe in pookas, you can conclude that Elwood P. Dowd is fortunate to have fallen into the graces of a particularly benevolent representative of the species.

More likely, however, is that he is crazy or alcoholic or both, and that can be debated until the cows come home. What is not debatable is that the man is at peace with himself. While other characters in the story anguish over what to do and what not to do in a variety of social and personal situations, Elwood P. Dowd remains above the fray, pleasant, unflappable, unhurried, and a friend to all, willing to lend an ear.

Dr. Chumley, meanwhile, finds real hope in the thought that Harvey might be his ticket to the peace of mind that Elwood so clearly enjoys.

And that's the main point of today's column ... peace of mind, in particular as it relates to successful investing.

Peace of mind helps you to calmly and objectively evaluate the market environment and the opportunities for action ... or inaction.

Peace of mind allows you to remember your long-term goals in investing, and not be sidetracked by peripheral temptations.

Peace of mind allows you to accept failures with equanimity, and then carry on knowing that your system will triumph in the long run.

Peace of mind enables you to look beyond today's headline news and focus on what's really important.

Peace of mind, in short, enables you to stay calm and centered while you employ the tools that make your chosen investing system work.

But how do you find peace of mind?

Some people (perhaps Elwood P. Dowd) find it in alcohol, though there are obvious risks to that route. Some people find it in meditation. Others find it in prayer, therapy, conversation with close friends, walking the dog, helping others, cooking or simply enjoying a cup of fresh-brewed coffee.

Live long enough and you'll likely find peace of mind in the knowledge that your past experiences will help you get through future challenges. After all, history doesn't repeat itself, but it rhymes, so what you survived before you will survive again. And the mistakes you make once can teach you what not to do next time.

To make fewer mistakes, however, and to achieve peace of mind through more rapid mastery of the material, I recommend education. In recent months, the bull market has brought us a stream of new readers, many of them inexperienced investors who are simply looking for someone to trust, something to believe in, a route to honest successful investing. If they ask, I tell them I think that we can help, but I tell them they'll succeed sooner and better if they spend some serious time reading and absorbing the lessons found on our Web site under the Education section.

If you suspect a little more education could help you achieve investment success, and in the process bring you the peace of mind that comes from mastery of a subject, I recommend it to you, too.

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Hulbert Financial Digest recently named Cabot China & Emerging Markets Report the #1 investment newsletter for the last five years out of 140 advisories! And editor Paul Goodwin is working to stay on top for another five years.

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Currently, the market is in a correction; last week it began to inflict some pain on some players. But I have peace of mind because I've been here before.

I note the headlines about job losses, the health care bill, pollution controls, GMAC's cash shortage, the H1N1 flu and the corresponding vaccine shortage, our national debt, the continuing credit crunch, the weak dollar (until last week), Barack Obama's falling approval ratings and the continuing trouble in Afghanistan, Iran, Iraq and--of course--Israel.

I even read with interest a Wall Street veteran's comparison of the current period to 1938 on Wall Street, as well as the similarities to Japan in the 1990s ... the lost decade for the Land on the Rising Sun.

And I say to myself, I've been here before. I know that in time these troubles will either be resolved or fade from view to be replaced by new troubles. And I know that the economy is not the market, and the market is not the stocks I own. I know that I have a choice of what stocks to own. And I know that when nothing is attractive, I can hold cash.

In other words, when it comes to investing, my fate is in my hands.

So, the current market correction means it's time for some caution. It's time to cut losses short and sell weak stocks, working, as always to maintain a portfolio of healthy stocks. You want to own winners, not losers.

It's also time to build a watch list ... of stocks you might want to buy when the correction ends and the main uptrend resumes. That it will resume I have no doubt, and that's because our long-term market timing indicators remain solidly bullish.

So last Friday, while the Dow was dropping 250 points, I took a look at the new highs list. I found 34 stocks, many of them too illiquid and some too stodgy, but one in particular that interests me.

It's Dr. Reddy's Laboratories (RDY), a major Indian pharmaceutical maker whose biggest market is the U.S., which accounts for 35% of revenues. After that comes Western Europe with 26%, India with 17%, Russia and Eastern Europe with 11% and others with 11%.

This is not a hot stock; it's too big and too mature to be a fast grower. But I think Dr. Reddy's focus on generic drugs, which account for 72% of revenues, will pay off big in the years ahead as the health care business pays more attention to cost control. And I think the company's established connections all over Europe and Russia will bring rewards, too. Ideally, it will get more business in China and other Asian countries, but that will be a harder sell.

The stock earned an appearance in Cabot Top Ten Report back on September 28, when it was trading at 20, and here's some of what editor Michael Cintolo wrote.

"The big potential here comes from a very long launching pad. RDY peaked at 19 in April 2006, and was stopped there again in 2007 and 2008. It bottomed at 7 in the bear market, and then climbed back up to 17, where it built a tidy little base. But it blasted out of that base two weeks ago, and walked right through the old resistance level of 19, so now there's no upside limit to its potential. The buyers are in complete control. You could join them now ... or wait for a pullback."

At the time, Mike recommended buying between 18 and 21, and there have been plenty of opportunities to do that over the past month. But last Thursday the stock broke out to a new high, and then on Friday, as I was conducting my search, it ran higher still.

Technically, you could buy it here; the chart is positive. But ideally, you'll want to wait for a lower-risk entry point, particularly since the broad market is now less supportive.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

Editor's Note: The average one-month annualized return of stocks featured in Cabot Top Ten Report through September 28 is a cool 38.9%. And the one-month annualized return of stocks featured in Cabot Top Ten Report from the March market bottom through September 28 is a stunning 76.3%. And there's more where that came from! Cabot Top Ten Report recommends the top stocks each week, ensuring that you're getting into the market's big winners, like Dr. Reddy's Laboratories. Click below to see how you can start profiting today.

http://www.cabot.net/info/ctt/cttjb07.aspx?source=wc01

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