Cabot Wealth Advisory

Vote on Our Essay Contest

Thu, 02 Jul 2009 13:26:52 GMT

Happy Fourth of July

Vote on Our Essay Contest

In Case You Missed It

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How to Profit From the New Bull Market

Join us for our upcoming Internet Seminar! Learn how to profit from the new bull market from growth stock and market timing expert Michael Cintolo. In the one-hour presentation, he'll show you where the market is going and what stocks you can buy NOW to profit. Plus, you'll have the opportunity to ask him questions during the LIVE presentation. Join us today!

https://www.cabot.net/orderforms/web/webji08.aspx?source=wc01

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Happy Fourth of July! I hope you're having a safe, fun-filled holiday.

Instead of writing a regular issue today, I'm bringing you the top four essays from our recent contest, "How I Lost Money in the Bear Market and What I Would Do if I Had Another Chance." Our thanks to all our readers who submitted entries -- I thoroughly enjoyed reading your reflections.

We had planned to select three essays but the entries were so good that we had a tie for third place, so I'll ask you to vote for your favorite among our top four. So read the essays below and then vote for your favorite in the poll at the end. The winner will receive a FREE subscription to a Cabot publication.

Thanks to everyone who participated. I enjoyed reading about your experiences in the bear market and hope that you'll continue to turn to Cabot to help you weather future market storms. Enjoy!

ESSAY #1 I did everything right -- everything! Well, except for one small thing, but I'll come back to that later.

I only chose stocks of companies that had a great product or products. I chose stocks of companies that were playing in large, worldwide markets or in emerging technological or green markets. I chose stocks of companies that were making money, many at an exceptional rate and had a history of doing so. I chose stocks of companies that appeared to have strong management with relevant experience. I bought in rising, bullish markets and in countries with exciting future prospects. I sat back and looked at the way the world seemed to be going and made intuitive plays based on obvious trends. I bought some Cabot recommendations that I liked the sound of. I backed it all up with some solid mutual funds with no loads and good track records. I kept some cash in the impossibly unlikely event that the bull market underwent a protracted pullback or a leveling off. I even had some bonds but kept my investments low because I could make more money in stocks (did I say that I just made ONE error - ha!). I was smug. I was happy. I thought I was the bee's knees. I had made good money for a couple of years and was confident in my ability to recognize a star in the making and also a falling star.

Then the market changed and suddenly it no longer seemed so easy. But I had good, solid companies with great products -- right? I loved those companies! They were my babies, my growing children and like all parents I thought they could do no wrong. Not my babies. Someone else's maybe, but not mine. So I failed to spot the downside, failed to use a systematic system of stop losses, believed my companies would always bounce back (they were GOOD companies!) and I watched them slide into obscurity, even buying a few more shares on the way down because these good companies seemed so cheap. When the dust finally settled many of my stocks had lost 80% or more. The good ones lost 50%.

Next time I'll be stronger. Next time I will NOT fall in love with the companies. Next time I will grit my teeth and sell at a 15% or 20% stop loss even though my heart tells me otherwise. It's hard to throw the cake away when it goes bad and the mold is spreading. The idea of its taste overwhelms our hatred of an upset stomach. But next time I WILL use those stop losses. I may have said the same thing back in 2000. Who can see that far back?

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ESSAY #2 I am 54 years old, have an MBA, and several years of personal investing experience. Despite my age, education, and experience, I managed to throw away a good chunk of my portfolio during the bear market. How? Well, first of all I subscribed to the invest-and-hold mentality believing that time was my investment friend. Well, I was wrong. Second, I believed that professional managers of stock and bond funds had an edge and insight that I didn't, and therefore would steer me clear of any serious downturn in the markets. Again I was wrong. Finally, feeling that the remainder of my portfolio was securely managed in these funds, I used the final portion to invest directly in stocks that I believed were capable of a higher than market return.

One of these investments was in Wachovia. Just as the whole sub prime mortgage debacle was beginning I had read an article in Barron's about Wachovia and the upward potential of this stock. The article specifically addressed the fact that Wachovia had diversified investments and shouldn't be seriously affected by the sub prime mortgage fiasco that was just beginning to show its ugly face. After carefully examining the financials of Wachovia, I decided to jump in with both legs. The stock soon began to slide backward, and as it did I seized the opportunity to buy more. Being a smart and confident investor I did this a couple of more times on the way down. Bad, bad move. By the time it was bought out by Wells Fargo, the stock was worth a small fraction of what I had invested. I think that I finally got a dollar out for every six that I had invested.

Now, what I learned was, first of all, that professional fund managers may, or may not, have my best interest at heart. And, that they cannot protect me from a downturn in the market. Second, that the buy and hold mentality benefits the companies that manage the funds, not me. Third, that despite my best efforts to investigate and analyze a stock, that I need to protect my downside risk by employing trailing stop losses on each stock the moment that I invest in them. Had I done this with Wachovia I may have lost only 10% to 20% on that investment. The really sad thing is that previous to the Wachovia investment I knew that I should have such a selling discipline in place but believed that Wachovia was secure enough not to need to protect the downside. Wrong again.

Finally, through these expensive lessons I learned that I need several disciplines in place to improve my long term investing performance. Managing downside risk is one important discipline that I am hoping will help, but came to realize that I needed much more. I also needed to manage the upside. It was then that I found the Cabot Market Letter and became a subscriber. Following the macro trends of the market, as provided by the newsletter, has helped me to better understand when the timing may or may not be right. Furthermore, insight into specific stocks that hold the potential for better than market growth has helped me to look at and analyze stocks differently. Certainly not every stock has been a home run, but my investment performance on individual stocks is far better than it has been in the past and I can see that, in the longer term, it will only improve. Thanks Cabot.

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ESSAY #3 How did I lose 40% of my portfolio from May 08 to March 09? I didn't listen to my gut in August '08, or to my brother, who is a longtime subscriber to the Cabot Newsletters.

My husband and I were too focused on the wedding of our older daughter. She was married in early September 2008. "Simple elegance" our wedding motto kept us from going overboard, a direction largely influenced by my late father's advice: "Don't touch your nest egg" and "Spare" (German for "save your money").

I am grateful that the wedding expenses were paid for before the November crash when we finally realized we had lost 40% of our portfolios. At least we have a son in law and lovely memories to show for that wedding investment, money which didn't just disappear on paper.

After my father passed in 1992, I considered myself a steward to what he bequeathed. If I had another chance to relive last summer, I would not be a passive steward, content that someone else was watching out for my best interest. Instead, I would be a proactive steward, educate myself, and be obedient to time tested advice, like the Cabot services. Come to think of it, I do have another chance, and I took it today. I joined my brother and am now a fellow Cabot subscriber.

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ESSAY #4 I would think that I'd have a sell-discipline by now. Sheesh, I've been investing for over 25 years-but too much time I was lolling, fat and sassy, in bull markets. Oh, I'd been burned in the past, but only mildly, and that due to stock selection. Being well diversified, I didn't fret much over market fluctuations.

Then came 2008, and the bull market turned into a huge and steaming cow pattie!... Argggh!

YES! Let's start anew.

I need a sell discipline...emphasizing the word "discipline." Any rule would do that involved a specific number, that's all I'd need, just a specific number.

Like, 10.

Or, even 20.

Any specific percentage that would stop me out of a losing position.

Out. Machine-like in its predictability...exit here, exit now. Period.

If I'd had a sell discipline, I would have sidelined much more money, and would not have joined the whining masses with a 40-plus percent loss.

That's my lesson. Two words: Sell. Discipline. But, like many personal investors, I'd been clinging to fleeting hope rather than simply taking my beating now and being done with it.

I hereby resolve, I shall set a fixed number, at whatever threshold I can stand-perhaps 10 or 12 or 15% would be good. Golly, with that loss-point I would have sold every one of my stocks and mutual funds. What's so wrong with that? I ask myself. Listening to my inner critic...my emotional distress over loss becomes very apparent to me. I've prided myself on being objective-hah, isn't self-deceit a wonder?

Lessons:

1. Set a stop-loss low enough to not fret overmuch about getting whip-sawed with general market fluctuations, but high enough to stop me from losing a lot. Duh.

2. Have a rubric, well-constructed, that will allow me to reset the stop-loss lower...once? Oh, listen to me-still loss-intolerant-how about NEVER!

3. Determine to adhere to this plan and stick with this price...and to adjust the stop-loss point higher if/when prices climb.

4. Keep a diary of my thoughts, feelings, wonders, and my specific intent for each buy and each sell decision I make.

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Click on this link to vote for your favorite essay: http://www.surveymonkey.com/s.aspx?sm=oDVORuhE_2bHcYmldD8D16Zg_3d_3d

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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 6/30/09 - The Next Intel

On Monday, Timothy Lutts wrote that he found an op-ed piece from the New York Times entitled "Invent, Invent, Invent" by columnist Thomas L. Friedman so spot-on about the future of the U.S. economy that he copied it in its entirety. Tim likens his featured stock, Starent Networks (STAR), to Intel in its early years.

http://www.cabot.net/Issues/CWA/Archives/2009/06/The-Next-Intel.aspx

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Cabot Wealth Advisory 7/2/09 - The Fabulous Fourth

On Thursday, Paul Goodwin wrote about some of his favorite Fourth of July experiences and made some observations about investing on your own and Yosemite Park. Featured stock: Electro-Optical Sciences (MELA), a low priced, speculative stock with a great idea for scanning skin for melanomas.

http://www.cabot.net/Issues/CWA/Archives/2009/07/The-Fabulous-Fourth.aspx

Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

P.S. Don't forget to follow us on Twitter http://twitter.com/IconoInvestor and check out our blog at http://www.iconoclastinvestor.com!

The Fabulous Forth

Thu, 02 Jul 2009 13:05:34 GMT

The Fabulous Fourth

Yosemite the Great

Tracking the Wily Melanoma

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The national holidays celebrated in the United States--and I'm thinking here of the 10 days designated as official public holidays for which Federal employees get a day off work-are a diverse group. Three celebrate birthdays (Presidents' Birthday, celebrating Washington's and Lincoln's; the birthday of Martin Luther King, Jr. and Christmas Day); two commemorate veterans of the armed forces, both living and dead (Memorial Day and Veterans Day), one honors the discovery of our country (Columbus Day, and no, I don't want to argue about what actually got discovered or when or by whom); one is a harvest festival (Thanksgiving Day); one honors workers (Labor Day); one is a national day of enduring hangovers and college football (New Year's Day); and the one I want to talk about today commemorates the independence of the United States from Great Britain.

The Fourth of July is a great holiday. Patriots love it. Military people love it. Devotees of fireworks and parades love it. It's loud and joyful and it's the only holiday that comes in the summer.

Personally, my three favorite Fourths have been 1) the one in 1969, which I celebrated on Okinawa with my blushing bride 40 years ago, 2) 2002, when my wife and I sang with the chorus backing the Boston Pops for the Pops Goes the Fourth celebration at the Hatch Shell (btw, I was sitting about 15 feet away from the 105mm howitzers during the 1812 Overture-loudest noise EVER!) and 3) the one last year when four of us finally made the trip to Jaffrey, New Hampshire to take in their legendary fireworks show. Actually that was in August, when the Atlas Fireworks Company puts on a pyrotechnic extravaganza that draws thousands of people, so it's not the actual Fourth of July. But it feels like it. Definitely worth the trip.

There isn't much investment juice to be squeezed out of the Fabulous Fourth, although there is evidence that stock markets generally do pretty well before and after holidays. It's also interesting that July 1 is about when stock market trading volume hits the bottom of its summer trough, but not really useful.

If you were interested in buying stock in a Chinese fireworks company (and were able to buy on the Shanghai Stock Exchange), you could snap up some Panda Fireworks Group (600599 is the issue number) or you might like to take a position in Hunan Huasheng Fireworks, which will be available on the Toronto Stock Exchange starting July 1.

But probably the best use to make of July 4th is just to get a little patriotic buzz on (whether from sun, music, fireworks or beer is, of course, up to you) and marvel that this great country continues to give so many people so many chances to follow their hopes and dreams.

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As I see it, America's founders were rebelling against being told what to do by people who lived very far away and who wanted to manage the colonies for their own benefit. It's a popular management style, and we still have to rebel against it every once in a while, whether the managers are in Washington, D.C. or in corporate boardrooms and back offices.

Global equity markets have shown remarkable resilience in bouncing back from their evisceration of last year, and many people have begun to rebuild their financial lives. I hope I don't sound like a complete corporate flack if I say that I'm proud that Cabot is helping.

Taking control of your financial life can be very rewarding, if you're willing to take the responsibility for your own investments. You can make great strides, and at the very least you won't be just another passenger on a boat that's being steered toward the falls by a captain you don't even know. So, resolve to pay the investment charges and management fees to yourself and steer your own course.

If you decide to do this, it takes time and effort. You need to do your homework, and it's good to have an ally in the process.

Cabot has an upcoming event that will help you. Mike Cintolo will be holding another educational Internet Seminar called How to Get the Most from This Bull Market. It will go live on July 9 (that's a Thursday) at Noon Eastern Time. Mike is one of the best technicians I know, and his thoughts on growth stocks, charts and market timing will give a real boost to your portfolio. Unlike lots of Webinars, this is not a thinly disguised sales pitch. It's a value-packed hour of insights, advice and answering questions. Here's a link to the signup.

https://www.cabot.net/orderforms/web/webji08.aspx?source=wc01

Here's wishing you and your family and friends a wonderful Fourth of July weekend. For me-if everything goes according to plan-that will include at least one hot dog and one beer, at least one movie (probably Anvil), and at least one gigantic fireworks show that I'm close enough to that my chest compresses when the big shells go off. Baseball is in there, too. Have a great one!

My wife and I just came back from a trip to Yosemite National Park, and whoever called the National Park system "America's Best Idea" hit it right on the head. Yosemite is a big, glacier-widened valley that's bordered by enormous granite cliffs and domes that were tough enough to force the glaciers to flow around them.

The result is features like El Capitan, an enormous sheer granite cliff that rises straight up about 3,000 feet, and Half Dome, a rounded granite half-pillar that towers over the east end of the valley. There are also lots of waterfalls as the little rivers that always joined up with the Merced River now have to plunge to the valley floor to do the meeting up.

Beyond the scenic grandeur and the amazing job the National Park Service does of protecting the Park from the hordes of tourists and vice versa, I have just three quick observations.

1) Of all the feelings that El Capitan raised in me, I can truthfully say that the idea that it would be fun to climb it was not one of them. I spent at least an hour in a meadow in front of El Cap watching people making their way up the cliff face, probably about midway through their three- to four-day ascent. People now do speed ascents that take fewer than three hours. I'm glad they enjoy it. 2) No matter how many times you tell people not to feed the squirrels, bears, birds or any other wildlife, some of them just can't resist. 3) Other people have said this before, but the view from Glacier Point overlooking Yosemite Valley may be the single most breathtaking scenic panorama I've ever seen. In the days before digital cameras, when Kodachrome film was still being made, it probably put more money into Kodak's pocket than any other landmark.

The takeaway here is that if Yosemite isn't on your Bucket List, it needs to be.

My stock suggestion today is in the spirit of adventure. It's a medical technology company that doesn't really have revenues, much less earnings, and it doesn't have a product approved for sale. What it has is a great idea for a hand-held device that will enable dermatologists to scan skin lesions to determine whether they are melanomas.

The company is Electro-Optical Sciences (MELA), and the device-called the MelaFind-uses light at various wave-lengths to scan the suspicious lesion. It then uses its database of melanoma images to calculate a diagnosis.

With a huge age cohort of sun-worshipping Baby Boomers now approaching the danger years, the diagnosis of melanoma, the leading cause of death from skin cancer, is a big deal. The MelaFind is non-invasive, quick, and reportedly has a 95% accuracy rate.

Electro-Optical has submitted a Pre-Market Approval form to the FDA for MelaFind. The FDA has put the decision on a fast track, and the estimated decision date is some time this December.

This is a low-priced, speculative stock, but the potential payoff is huge. If you're the kind of investor who likes to spin the roulette wheel every once in a while, this may be for you.

If, on the other hand, you like the idea of high potential emerging market stocks, you should consider the Cabot China & Emerging Markets Report that I write. Emerging markets can be a wild ride, but they have beaten the developed markets all hollow this year. You can get a no-risk trial subscription by clicking on the link.

https://www.cabot.net/info/cem/cemjd03.aspx?source=wc01

Paul Goodwin

For Cabot Wealth Advisory

The Next Intel

Mon, 29 Jun 2009 14:22:07 GMT

Featuring Lutts' Logic:

The Wisdom of Craig Barrett and Thomas L. Friedman

The Next Intel

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Today's original column, about the future of political party balance in the U.S., was started last Thursday and nearly finished Friday; my plan was to put the finishing touches on it in a calm period on Sunday and then submit it to our editors/proofreaders on schedule at noon on Monday.

But you're not going to read that column today.

No, the dog didn't eat it. And, no, my hard drive didn't crash. What happened was this: Sunday's New York Times brought an op-ed piece so spot-on about the future of the U.S. economy that I'm copying it here in its entirety. You'll have my delayed column on politics in the future, and with luck it will benefit from the aging.

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Invent, Invent, Invent
By Thomas L. Friedman

"I was at a conference in St. Petersburg, Russia, a few weeks ago and interviewed Craig Barrett, the former chairman of Intel, about how America should get out of its current economic crisis. His first proposal was
this: Any American kid who wants to get a driver's license has to finish high school. No diploma - no license. Hey, why would we want to put a kid who can barely add, read or write behind the wheel of a car?

Now what does that have to do with pulling us out of the Great Recession?
A lot. Historically, recessions have been a time when new companies, like Microsoft, get born, and good companies separate themselves from their competition. It makes sense. When times are tight, people look for new, less expensive ways to do old things. Necessity breeds invention.

Therefore, the country that uses this crisis to make its population smarter and more innovative - and endows its people with more tools and basic research to invent new goods and services - is the one that will not just survive but thrive down the road.

We might be able to stimulate our way back to stability, but we can only invent our way back to prosperity. We need everyone at every level to get smarter.

I still believe that America, with its unrivaled freedoms, venture capital industry, research universities and openness to new immigrants has the best assets to be taking advantage of this moment - to out-innovate our competition. But we should be pressing these advantages to the max right now.

Russia, it seems to me, is clearly wasting this crisis. Oil prices rebounded from $30 to $70 a barrel too quickly, so the pressure for Russia to really reform and diversify its economy is off. The struggle for Russia's post-Communist economic soul - whether it is going to be more OPEC than O.E.C.D., a country that derives more of its wealth from drilling its mines than from tapping its minds - seems to be over for now.

At the St. Petersburg exposition center, showing off the Russian economy, the two biggest display booths belonged to Gazprom, the state-controlled oil and gas company, and Sberbank, Russia's largest state-owned bank.
Russian companies that actually made things that the world wanted were virtually nonexistent: Two-thirds of Russia's exports today are oil and gas. Gazprom makes the money, and Sberbank lends it out

As one Western banker put it, when oil is $35 a barrel, Russia "has no choice" but to reform, to diversify its economy and to put in place the rule of law and incentives that would really stimulate small business. But at $70 a barrel, it takes an act of enormous "political will," which the petro-old K.G.B. alliance that dominates the Kremlin today is unlikely to summon. Too much rule of law and transparency would constrict the ruling clique's own freedom of maneuver.

China is also courting trouble. Recently - in the name of censoring pornography - China blocked access to Google and demanded that computers sold in China come supplied with an Internet nanny filter called Green Dam Youth Escort, starting July 1. Green Dam can also be used to block politics, not just Playboy. Once you start censoring the Web, you restrict the ability to imagine and innovate. You are telling young Chinese that if they really want to explore, they need to go abroad.

We should be taking advantage. Now is when we should be stapling a green card to the diploma of any foreign student who earns an advanced degree at any U.S. university, and we should be ending all H-1B visa restrictions on knowledge workers who want to come here. They would invent many more jobs than they would supplant. The world's best brains are on sale. Let's buy more!

Barrett argues that we should also use this crisis to: 1) require every state to benchmark their education standards against the best in the world, not the state next door; 2) double the budgets for basic scientific research at the National Science Foundation, the Department of Energy and the National Institute of Standards and Technology; 3) lower the corporate tax rate; 4) revamp Sarbanes-Oxley so that it is easier to start a small business; 5) find a cost-effective way to extend health care to every American.

We need to do all we can now to get more brains connected to more capital to spawn more new companies faster. As Jeff Immelt, the chief of General Electric, put it in a speech on Friday, this moment is "an opportunity to turn financial adversity into national advantage, to launch innovations of lasting value to our country."

Sometimes, I worry, though, that what oil money is to Russia, our ability to print money is to America. Look at the billions we just printed to bail out two dinosaurs: General Motors and Chrysler.

Lately, there has been way too much talk about minting dollars and too little about minting our next Thomas Edison, Bob Noyce, Steve Jobs, Bill Gates, Vint Cerf, Jerry Yang, Marc Andreessen, Sergey Brin, Bill Joy and Larry Page. Adding to that list is the only stimulus that matters.
Otherwise, we're just Russia with a printing press."

I couldn't have said it better myself.

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Intel was once a superb investment. If you had bought $10,000 of INTC at the end of 1974, the year Craig Barrett joined the company (three years after the IPO) you would have had about $18.5 million at the stock's peak in 2000 ... or nearly $4 million today.

But Intel's glory days are gone; your job today is to find the next Intel.

Ideally, the next Intel is still small, but growing fast. It makes a product or provides a service that is easily scaled up, so that millions, even billions, can be sold. It comes to dominate its industry by erecting barriers, both intellectual and structural, to potential competitors. It has healthy profit margins. And it is unloved by both institutional and individual investors today.

I can think of a number of Chinese companies that meet these characteristics; some I've mentioned in the past and more I'll mention in the future.

But today, following the lead of Craig Barrett and Tom Friedman, I'm sticking to the U.S., so my focus is a little-known company that's actually just a half-hour's drive from the Cabot offices.

It's Starent Networks (STAR), a leading provider of the hardware and software that enable operators of mobile phones to deliver multimedia services to their subscribers.

In brief, these products act as gateways that connect the radio access network (RAN) of the telecommunications company to the Internet Protocol
(IP) network that we refer to as the Internet.

In this regard, Starent is like Intel; in its early days, no one knew Intel, it was just a supplier of chips inside computers sold by IBM, Hewlett Packard and others. The "Intel Inside" ad campaign that made the company a household word didn't come along until 1992.

Starent's products sit on the data center shelves of Verizon, AT&T and Sprint, as well as foreign providers (in 40 countries) like Bouygues Telecom and mobilkom austria. You'll probably never see one.

But if you've done anything on your phone beyond simple talk, you've probably used Starent's technology. And you'll probably use it in the future.

The company has a sterling record of revenue growth--from $34 million in
2004 to $254 million in 2008--and a golden record of earnings growth--from a penny in 2005 to $0.95 in 2008.

STAR has appeared in Cabot Top Ten Report four times this year. In its most recent appearance, on May 18, when the stock was trading at 19, here's what editor Michael Cintolo wrote:

"Palm will be rolling out the Pre in the next few weeks and Apple is expected to raise the curtain on a new 3.0 version of the iPhone this summer. The various models of BlackBerrys also remain hot. What all of these phones have in common is the ability to deliver multimedia services like video, email, mobile TV and gaming to handheld devices. And Starent Networks is an industry leader in designing and manufacturing the infrastructure hardware and software that delivers the digital goods.
Starent gets 90% of its revenue from the U.S. and Canada, but has operations in Japan, Korea and a few other spots. The company was founded the year the Tech Bubble burst, and has been consistently profitable since it came public in mid-2007. With 3G devices proliferating, the company looks to be in the right business at the right time. We like it."

Since then, the stock has climbed from 19 to 25. A correction from here to 23 is likely; lower is possible. But the main trend is up, so I recommend buying on any normal pullback.

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Editor's note:

You can get regular updates on Starent Networks in every issue of Cabot Top Ten Report, our weekly guide to the most profitable stocks in the world. Cabot subscribers who follow Cabot Top Ten Report's advice have been early buyers of big winners like Apple, Priceline.com, Intuitive Surgical, Baidu.com, Ultra Petroleum, Winn Resorts, Crocs and many more.
To get started with a no-risk trial subscription, click here.

https://www.cabot.net/info/ctt/cttjb05.aspx?source=wc01

Additionally, to get a dose of Michael Cintolo, live, you can tune in to his Internet Seminar next Thursday, July 9 at noon (EST). Click here for details

https://www.cabot.net/orderforms/web/webji08.aspx?source=wc01

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

One More Round of Letters to the Editor

Fri, 26 Jun 2009 13:39:23 GMT

Not the Nation's First Sunrise

One More Round of Letters to the Editor

In Case You Missed It

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By the time you're reading this, I'll be on my way to Acadia National Park in Maine where I plan to spend the better part of a week camping, hiking and communing with nature. I like to do a lot of research before vacations for two reasons. One, it gets me excited weeks (and months) before the trip, so by the time I'm leaving, it's like Christmas morning. And two, knowing a lot about where I'm going allows me to maximize what I can do when I get there. I also like to know a bit of history about each place I visit. So today, I'm going to tell you a little about the history of Acadia National Park.

The park is found on the Atlantic coast of Maine and takes up much of Mount Desert Island, other associated smaller islands and a part of the nearby mainland. The town of Bar Harbor is also located on Mount Desert, which was originally inhabited by the Wabanaki people.

In total, the park consists of 30,300 acres on Mount Desert Island, 2,728 on Isle au Haut and 2,366 on the Schoodic Peninsula. The area includes mountains, an ocean shoreline, woodlands and lakes.

In the more than 400 years since Samuel de Champlain observed a high-notched island with mountains rising out of it, the area has remained largely unchanged. President Woodrow Wilson created the park on July 8, 1916, and it was named Sieur de Monts National Monument. It became a national park in 1919 and was renamed Lafayette National Park, in honor of Marquis de Lafayette, an influential supporter of the American Revolution.

The park was renamed again on January 19, 1929, finally becoming Acadia National Park. It is the only national park in New England and the first park on the east side of the Mississippi River.

From 1915 to 1933, John D. Rockefeller, the wealthy philanthropist, financed, designed and directed the construction of an extensive network of carriage roads throughout Acadia. The network encompassed more than 50 miles of gravel carriage trails, 17 granite bridges and two gate lodges, all of which are still in use today.

Acadia National Park suffered a devastating fire in 1947 that destroyed 10,000 acres. Re-growth was mostly allowed to occur naturally and it has been suggested that the fire has actually advanced the beauty of the park, adding diversity to tree populations and depth to its scenery.

One of the most famous features of Acadia National Park is Cadillac Mountain, standing at 1,528 feet. It's the highest point within 25 miles of the coastline of the Eastern United States.

It's commonly believed that Cadillac Mountain is the first place in the United States to be struck by the sun's rays each morning. However, the mountain only sees the first sunrise in the fall and winter. Many tourists still trek to the top to see the "nation's first sunrise," and I'll probably be one of them. Even though I know the truth, it won't change the beauty of watching the sunrise from the top of a mountain.

(In case you're interested, during most of the spring and summer, the sun rises first on Mars Hill, 150 miles to the northeast. For a few weeks around the equinoxes, the sun rises first at West Quoddy Head in Lubec, Maine, the easternmost town in the United States.)

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I've discussed the tumult plaguing the newspaper industry several times recently and after today, I'll let the topic rest unless something noteworthy happens. But first, I want to share a few more of your letters because they express some ideas that haven't been voiced here before. Thanks to everyone for writing in, I appreciate you taking the time to share your insights with me and your fellow readers.

To read all of the past issues I've written about the newspaper industry and see how others responded, go to our Web site archives: http://www.cabot.net/Issues/CWA/Archives.aspx . If you haven't shared your view yet, you can do so by sending me an email or commenting on our blog, http://www.iconoclast-investor.com

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The newspaper industry is in trouble for myriad reasons. It is not clear to me that daily newspapers will survive in large or mid-sized markets with a few exceptions. It is clear to me that the demand for accurate information will continue, but a new profit-model will have to emerge.

The largest problem facing newspapers right now are these ... in what I think is the proper order:

** Collapsing ad revenues, especially in employment, real estate and auto categories set off by one of the worst post-World War II recessions.
One cannot have housing starts slump by two-thirds, auto sales (whether General Motors, Ford, Toyota or Honda) fall by more than a third from 2008 levels and still have a growing economy. Add to that the shock of crude oil hitting $147 a barrel and gasoline topping $4 a gallon last summer.

** A collapse in display advertising as those advertisers weathering the recession choose to communicate directly with readers either through the Web or the mail.

** A paradigm shift in the delivery mechanism of news that is affecting not just newspapers but radio and television as well.
The Internet has made not only more information possible. It also allows the reader to do his own filtering of the information he deems credible. Thus, alienated readers can ignore the daily newspaper. One result: Left wing and right wing readers can simply ignore what anyone else is saying. It also allows some of the most vile myths and untruths to move around without challenge.

** The large numbers of young readers who do not read newspapers because they don't find newspapers relevant to their own lives. Nor, for that matter, do they find telephone books useful. They can get everything via their laptops and, soon, their smart phones.

** The fact that most women in the United States and other developed economies now work outside the home. That deprives newspapers of what was a core audience. They stopped reading newspapers because they don't have time, either.

The emergence of the Web and related technologies took the newspaper industry by surprise, much as the emergence of airlines destroyed the passenger business of American railroads.

Top managements of major newspaper chains were not trained to search out technologies that would replace expensive investments in printing presses and production systems in newsrooms and advertising departments. The New York Times (not the company) actually was an exception to the rule. The same surprise afflicted broadcasting operations, which is why local news on air (on television or radio) is also a shrinking business.

Moreover, the managements of many newspaper companies overpaid for acquisitions or used precious cash to pay for expensive stock buybacks--decisions made at the behest of investment bankers and short-sighted stockholders. Or they sold their companies to operators who did not know how newspapers work and who had borrowed far too much money to make the deals.

At the same time, credibility is a problem for managements with their employees when they continue to flog the idea that the business is sinking when, in many cases (Gannett for one), the cash flow is still quite positive.

The recession is the biggest short-term problem that newspapers face. However, the change in the technology paradigm both in terms of delivery of news and how news is consumed is enormously profound. Even when the economy moves into recovery--probably next year--the challenge for all news organizations will be to find new business models that will generate the revenue necessary to pay for the expense of newsgathering.

C. B.

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As a former stockholder of, and subscriber to, the New York Times I would like to correct what I see as a misconception to your analysis of the problems of the large city newspapers. In one word they dumbed-down. I cheated on the one word but I couldn't think of a one-word substitute to use. When I started reading the NYT in 1935 at eight I struggled using a dictionary to understand what I was reading. And, had to follow some convoluted reasoning and sentence structure. One day 40 years later I was reading my morning paper and I reminisced about the old days and I made a discovery. The sentences were five to eight words long and if there was more than 1 polysyllabic word in a paragraph I couldn't find it. When speaking to my few surviving friends I was surprised at the unanimity of the opinions. They don't specify the same problems but everything from the crossword puzzle to the front page comes under attack.
Stupidity is the general opinion.

S. W.

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I am puzzled at the frame of reference. Yes large dailies have been disappearing. That is sad and a loss to our society. Small locals and specialty magazines will survive. It's not the same, you say. True. How will national stories be covered? By electronic media. Perhaps by USA Today. Not as good? Agreed, but there it is. But all those who eschew the NY Times because there is a liberal bias are the type of people who just want to have their way and don't want to hear about the other side of the story ... the kind of people who just had their way when we trusted industry to regulate itself and consequently put America in a financial crisis that we may never recover. So part of that legacy is people cutting back on their newspapers. But part of the reason large dailies are disappearing is that they insisted on covering the individual crime, ignoring the major crimes and trends which are significant.

Blaming it on unions is surely an easy out; scapegoating. The smarmy tricks of the NYT management and ownership illustrate why unions came into being; a way for ordinary people to fight the monumental greed, megalomania, and lack of morals and ethics of the super rich. Our schools have done a disservice by downplaying the class system in this country. Our newspapers, likewise.

The one thing which I have not seen is any concern over the loss of a platform for cartoons. Nash brought down Boss Tweed with just cartoons.

G.R.

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If the newspaper industry is to make any money it must do what it did in the past, dig into everything. The paper must become the trusted source of information not just a three-day-old rewrite of the Internet. The newspaper must, on the Internet or not, give the customer new reliable information that you cannot get anywhere else. Years ago the newspaper was something you had to read each morning seven days a week; today it is something that you put in the trash and hope you did not pay for. For the newspaper to be anything other than a waste of time, we will have to hear arguments on what paper is best. These arguments will have to be at the level of what ball team is best, to put life back into the paper. I miss the paper and do my reading on the Internet but it would be nice to have a "paper."

P.J.

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"I've made more money from your letter than I ever could by any other means."
L. McLure, Athens, Georgia

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).

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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 6/22/09 - Never try to Catch a Falling Knife

On Monday, Paul Goodwin wrote about why most people are invested solely in mutual funds and three reasons for owning individual stocks. Paul also discussed why you shouldn't just buy any old stock that's dipped in the recent market correction. Paul finished by writing about a Chinese (don't be fooled by the name) dairy stock with potential. Featured stock: American Dairy (ADY).

http://www.cabot.net/Issues/CWA/Archives/2009/06/Reasons-to-Own-Growth-Stocks.aspx

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Cabot Wealth Advisory 6/25/09 - Cyclical versus Secular, Bulls versus Bears

On Thursday, Michael Cintolo wrote about why it's not worth debating whether we're in a secular or cyclical bear or bull market. Mike discussed why he thinks we're in a new bull market and what you should be doing now. He finished by writing about a stock that he thinks is a potential big winner. Featured stock: STEC Inc. (STEC).

http://www.cabot.net/Issues/CWA/Archives/2009/06/Cyclical-versus-Secular.aspx

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Cabot Wealth Advisory 6/26/09 - Two Stocks to Bank On

On Friday, J. Royden Ward wrote about what he sees wrong with the way the current banking system is set up in the U.S. Roy offered some solutions, such as breaking up large banks that are deemed "too big to fail." Roy finished by recommending two strong bank stocks that aren't bogged down by the current mess most banks are in. Featured stock: Hudson City Bancorp (HCBK) and Wells Fargo (WFC).

http://www.cabot.net/Issues/CWA/Archives/2009/06/Two-Bank-Stocks.aspx

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Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

Editor's Note: Cabot Top Ten Report is the #1 source of new stock ideas, like past winners Crocs, First Solar and Apple, just to name a few. As the editor, Michael Cintolo always has his eye on the market, looking to discover which stocks are going to be the leaders of the new bull market. Every Monday, Mike provides subscribers the market's 10 hottest stocks, including a detailed fundamental and technical analysis. If you're ready to discover the strongest stocks in the market today, Cabot Top Ten Report is right for you. Click here to get started today!

https://www.cabot.net/info/ctt/cttjb05.aspx?source=wc01

P.S. Don't forget to follow us on Twitter http://twitter.com/IconoInvestor and check out our blog at http://www.iconoclastinvestor.com!

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Two Stocks to Bank On

Fri, 26 Jun 2009 12:45:08 GMT

"Too Big to Fail"

Breaking up Banks

Two Bank Stock Recommendations

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I bank at one of the larger banking institutions in this country and have kept my account there for a number of years. My loyalty has been tested lately, though, on more than one occasion. I won't go into all the details, except to say that my latest encounter was the doubling of the interest rate on my credit card for no apparent reason.

My problems, though, are minor compared to bank customers who have over-borrowed and cannot keep up with the required payments on their credit cards, loans, or mortgages. And therein lies the crux of the entire problem. For the past 25 years, consumers have been borrowing too much so they can enjoy the good life. State and local governments have been borrowing too much so they can provide more and more services. And now the U.S. Government is running huge deficits to help prop up a troubled banking system and a sinking economy.

Banks have received large sums of money to help them through their financial crisis. We all have been reading for the last several months about bank executives receiving large salaries and bonuses partially funded by the bailout money from you and me. It seems to me that bailout money ought to be restricted to help banks stay solvent and to provide much needed capital to make loans to you, me and businesses of all sizes.

I realized long ago that banks loan out tons of money when the economy is robust, but then become fearful and make loans hard to get when the economy is tanking. I believe that this phenomenon exacerbates the economic cycle. Loaning more money when we really, really need it during economic downturns would make more sense and would help the U.S. economy avoid the up and down cycles that are harmful to so many. What's the solution? When times are good, banks and the rest of us should save for a rainy day.

While I'm on a roll ... "Too big to fail" scares me. What is too big, and how is too big going to be determined? Will there be two banks that are too big, or will there be 100 banks that are too big? And what is going to be done about these banks besides pumping trillions of our tax dollars into "big" banks when they run into a problem or two? My solution? Go back to the good old days when banks did banking, brokerage firms offered brokerage services, mutual fund companies ran mutual funds, and insurance companies offered insurance.

Now we have financial institutions, like my bank, that offer all of the above and more. "Jack of all trades and master of none" comes to mind. Maybe we should break up our so-called financial institutions by restricting the services that they can offer. Oh no, did I say break up banks? My dad would roll over in his grave if he heard me offer that suggestion. But, as a customer, I would like to be dealing with an expert rather than a jack-of-all-trades. As an investor, I would prefer investing in a few stodgy old banks that pay hefty dividends on a regular basis, rather than financial institutions with questionable investments.

One final thought on how banks and financial institutions should be regulated in the future to prevent another crippling financial crisis. We have a lot of regulations already in place that would have helped keep us from getting into this current mess. If the Securities and Exchange Commission (SEC), for example, had diligently done its job, Bernie Madoff would not have gotten away with bilking hundreds of investors out of billions of dollars.

We even have banking guidelines that suggest that banks avoid investing in risky investments. Evidently, regulators found the word "risky" is rather vague and didn't know how to apply such a rule. OK, let's add an amendment or two to prohibit banks from specifically investing in derivatives, credit default swaps and all similar gambling strategies that might be created in the future. And it goes without saying that all regulatory authorities should be well staffed and well funded to ensure that all regulations are fully enforced. Enough said!

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"I've made more money from your letter than I ever could by any other means."
L. McLure, Athens, Georgia

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).

Don't miss out on the new bull market. Get started today!

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Have all banks run amok? Not quite. I've gone out on a limb lately and recommended a couple of banks in the newsletter I edit, Cabot Benjamin Graham Value Letter.

Hudson City Bancorp (HCBK) owns and operates 127 savings bank branches in northern New Jersey and New York City. The bank specializes in writing jumbo mortgages in the more affluent counties of New York and New Jersey. High loan standards and the avoidance of the sub-prime market have led to Hudson City's strong balance sheet and low mortgage defaults.

Hudson City is taking advantage of the current favorable interest rate environment and the lack of competition in writing jumbo mortgages. However, the company's banking area includes residents who work in NYC's hard-hit financial district. We expect earnings per share growth of 13.3% during the next 12-month period, which we believe will be sustained in future years. The dividend has been increased every quarter for the past six quarters and now provides an attractive 4.6% yield.

HCBK is undervalued at 11.6 times forward EPS. The bank's unique niche in the banking sector and its conservative lending practices make HCBK an attractive long-term holding. We expect HCBK shares to advance to our Minimum Sell Price within two to three years.

And ...

Wells Fargo (WFC) provides banking, insurance, investment, mortgage, and consumer finance services throughout North America. Wells Fargo, founded in 1929, has been conservatively operated and therefore has experienced lower loan losses than most major banks.

The acquisition of Wachovia at the end of 2008 will more than double Wells Fargo's loan portfolio to $850 billion. The purchase, however, added a greater percentage of delinquent loans and mortgages than the company's recent experience. Wells Fargo has raised additional capital to meet new Federal requirements, but will need to raise additional capital soon.

We expect loan losses to diminish substantially before the end of 2009. We believe the banking industry faces challenges that will linger for several more years. Wells Fargo, though, is in good position to take market share from other banks, because Wells Fargo is generating strong cash flow and is improving its balance sheet. In addition, the acquisition of Wachovia at a fire-sale price presents a huge opportunity for the company to cut costs and streamline operations during the integration process.

WFC's EPS were only $0.83 in 2008 but will increase to about $2.00 in 2009. At 11.5 times our $2.00 estimate, WFC shares are a bargain. The dividend, which was reduced recently, now yields 0.9%, but dividend payments could be increased as early as 2010. Warren Buffett is a major investor and Whitney Tilson, co-founder of the Value Investing Congress, recommends purchase.

Sincerely,

J. Royden Ward
For Cabot Wealth Advisory

Editor's Note: You can read more about Hudson City Bancorp and Wells Fargo and get continuing coverage in Cabot Benjamin Graham Value Letter. There you'll not only find buy and sell advice for the companies above, you'll get dozens of other excellent value stock recommendations from J. Royden Ward each and every month. Roy applies the strategy of the father of value investing, Benjamin Graham, to find the market's best-undervalued stocks. This year he's already uncovered several stocks that were sold for double-digit profits! Don't miss out on his next recommendations ... click here now to get started today!

https://www.cabot.net/info/bgv/bgvjr03.aspx?source=wc01

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Cyclical versus Secular, Bulls versus Bears

Thu, 25 Jun 2009 13:38:48 GMT

Is this a Cyclical Bull within a Secular Bear? Who Cares?

Stick with the Evidence

The Strongest Stock in the Market

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While every investor knows the terms bull market and bear market, every investor seems to have a different definition of each. Some people consider any period of rising prices a bull market. Others require that prices generally rise for a certain time--maybe six months--to be called a bull market. And of course there's the popular (though highly flawed) view that any 20% move up in an index represents a new bull market, while a 20% decline constitutes a bear market.

Adding complexity to these simple phrases is the cyclical versus secular debate. Simply put, a secular bull market is one that supposedly lasts many years or even decades. The years 1982-2000 are often called a secular bull market--on a very long-term chart, prices headed higher during that time. But you also had individual bear markets within that time, lasting maybe six to 12 months each, before the bulls retook control.

On the flip side, the 1966-1982 period is often referred to as a secular bear market; the Dow didn't make any progress during that time! But within that period you had numerous cyclical bull markets, again, each one lasting six to 12 months, before the bears retook control.

That brings me to today, as some people are referring to the current three-month upmove as just a bear market rally. Some are referring to it as a cyclical bull market within a secular bear market that began back in 2007. Still others think we've been in a secular bear market since 2000, while others believe we're in a new bull market.

Confused yet? You should be! I like a good debate as much as the other guy, but in this case, I find the whole secular-cyclical-bull-bear debate to be a waste of energy. I specifically remember when I was at Prudential Securities back in the late 1990s, and the market was beginning to fall apart thanks to the Russian ruble and Long Term Capital Management implosion. At the time, Ralph Acampora, who was head of Prudential's technical analysis team, was on the squawk box, telling all the brokers and money managers he was turning bearish for such-and-such reasons; the specifics aren't important. (For the record, turning negative was a good call.)

What I do remember is that one of the brokers asked a question: "Ralph, do you think this is a correction? Is it a cyclical bear market within a secular bull market? Or is it the start of a secular bear market?" I will never forget Acampora's answer: "Call it a banana for all I care. Prices are heading down."

At the time I liked to debate and was a bit disappointed in his answer. But as the years have passed, I have learned the value of what he said. Really, the whole debate is just semantics and takes away from the major goal--making money.

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For instance, you can say all you want that we've been in a secular bear market since 2000 ... and you may be right. But secular bear or not, that didn't stop many big winners from lifting off from 2003-2007, including Apple, Google, First Solar, Crocs, Research in Motion, Coach, XM Satellite Radio, Intuitive Surgical, Potash, Mosaic, Intercontinental Exchange, Nasdaq Stock Market, Southwestern Energy, Ultra Petroleum ... need I go on?

The reverse is also true. We might have been in a secular bull market during the 1980s and 1990s, but many investors lost most of their capital during the '87 crash, the 1990 bear move or the '97 and '98 emerging market debacles.

Listen, I'm a long-term investor, and I plan on being involved in the stock market for decades to come. But allowing the secular-cyclical, bull-bear debate to affect your investments can be a mistake. It's better to just go with the evidence the market has presented. Right now, the market timing indicators I follow are still bullish, although the recent correction brought a couple of them close to the brink.

In the longer term, I've written before in a few different spaces that I do believe the bear market is over and we're in a new bull market. The main reasons I believe this are (a) the huge decline that has already taken place since 2007, which brought about 50-year lows in consumer and investor sentiment, (b) the bottoming process from October through March of this year, which repaired the damage from the crash (c) the minuscule number of stocks hitting new 52-week lows even during the market's latest pullback (still in the single digits!), and (d) a couple of the "blast-off" signals the market flashed in March and April (such as 90% of all NYSE stocks getting above their respective 10-week moving averages).

Maybe a better way to say it is that, given the above, I think the odds are heavily in favor of this being a new bull market, not just a brief rally. However, there are no 100% bets in the stock market--as we've seen during the past year, anything is possible in the stock market. If my indicators turn decisively negative, am I going to say, "Well, this is just a pause before a renewed upmove. Buy with both hands!"? Of course not. I'm going to go with the evidence, i.e., raise some cash, try to hold on to my strongest performers, and then re-evaluate the situation every day. Let someone else make the bold call--remember the saying that "there are old traders, and there are bold traders, but there are no old, bold traders."

So far, the indicators are positive, and while the past couple of weeks have been damaging to a wide array of stocks--from leaders to off-the-bottom stocks like financials and commodities--I'm still betting that this is a bull market. Cyclical or secular? I'll let you debate that one.

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It's Time to Buy

So says Cabot Market Letter, the investment advisory that has called every new bull market advance since the 1970s. And it's declaring once again ... It's time to buy!

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).

Don't miss out on the first innings of the new bull market. Get started today!

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With most stocks getting hit in the past week, it's hard to find a stock that's at a pristine buy point. And, frankly, even if I saw one, I'm not sure it would work out--when the market is under pressure, good stocks can go bad in a hurry. So I want to highlight a company with a new product, with outstanding sales and earnings growth, and whose stock is probably the strongest in the entire market--in other words, it's a potential winner once the bulls re-take control.

The company is STEC Inc. (STEC), which I've written about a few times in both Cabot Market Letter and Cabot Top Ten Report. On the surface, the firm appears to be just another semiconductor firm, producing solid-state (read: flash) drives. And there's nothing special about that; SanDisk and others produce flash memory for many consumer devices, and at this point, flash is just a commodity product.

However, STEC Inc. does not produce flash memory for consumer products--it's targeting large-scale commercial uses like servers and huge storage devices. And it turns out these drives are NOT run-of-the-mill; STEC Inc. has basically no competition, and that's a big deal because the drives save tons of component and power costs (up to 50%!) and boost performance markedly when compared to hard disk drives.

IBM is using STEC's drives in two of its most popular storage and server systems, Fujitsu is using STEC's drives in one of its storage systems, and Hewlett-Packard is also a big-time customer. Right now, demand is so strong that STEC just upped its second quarter earnings guidance ... causing a massive 30% jump in the shares.

Honestly, I do think you could nibble here, maybe buying a token position ... but I'm content to simply watch it closely and wait for a better-looking entry point. If the market has indeed shrugged off its case of the jitters, I expect STEC to enjoy further upside. Keep it high on your own Watch List.

All the best,

Mike Cintolo

Editor's Note: Cabot Top Ten Report is the #1 source of new stock ideas, like those mentioned above by Mike ... Crocs, First Solar and STEC Inc. As the editor, Mike always has his eye on the market, looking to discover which stocks are going to be the leaders of the new bull market. Every Monday, he provides subscribers the market's 10 hottest stocks, including a detailed fundamental and technical analysis. If you're ready to discover the strongest stocks in the market today, Cabot Top Ten Report is right for you. Click here to get started today!

https://www.cabot.net/info/ctt/cttjb05.aspx?source=wc01

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Three Reasons to Own Individual Stocks

Mon, 22 Jun 2009 15:03:58 GMT

Three Reasons to Own Individual Stocks

Never try to Catch a Falling Knife

Milking the Chinese Market

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In 2002, the Investment Company Institute, the industry group for mutual fund companies, found that just about half (52.7 million or 49.5%) of all U.S. households owned stock in some way. But just 21 million households (fewer than 20%) owned individual stocks outside their 401(k) plans and other mutual funds.

I know that much has changed since 2002, but I'm betting that those figures are still in the ballpark.

And that's because owning mutual funds is easy.

If you own a chunk of a fund that owns a basket of stocks, you don't have to watch the daily movements of stocks and make decisions about buying and selling. (The mutual fund companies certainly work hard enough to discourage you from taking much initiative with your investments.) Plus, if you have a tax-deferred mutual fund, you don't have to consider the tax consequences of capital gains.

Personally, I have the bulk of my retirement savings--what's left of it anyway--in exactly the same kind of mutual funds as most people. They are mostly a legacy from my days with earlier employers, and I mostly just let them be.

But I also own individual stocks. And I think there are some really good reasons for taking on that role. Here they are.

1) Owning stocks is real.

Facebook, Twitter, YouTube, Second Life, chat rooms, massively multiplayer online role-playing games and every game console joint ever made may be fun, even addictive. But life online doesn't make or lose a thing.

But if you own a stock, you're joined at the wallet to the fortunes of the company that issued it. It's real money, and you can make actual money with it. You can also lose money, but that's part of being real. You can't hit restart or (command/option/escape) and make it go away. Real risk, real opportunity. There's nothing like making a decision and having it lead to real consequences.

2) Owning stocks gives you a chance to test yourself.

It's one thing to watch the markets in a general way. And you may find yourself making some interesting adjustments to your mutual fund allocations during the open enrollment at the end of your company's plan year.

But owning stocks allows you to test yourself against Warren Buffett, Gordon Gekko and Jesse Livermore, the Speculator King.

How good are you at picking the nuggets out of the gravel? Do you have the nerves to wait out a market correction and the gumption to follow a sell discipline? If you're willing to pay for the class, the market will be more than happy to give you exactly the grade you deserve. It can be a humbling experience at times, but also personally rewarding.

3) Owning stocks is fun.

It amazes me all the time that people go to Las Vegas knowing that they're probably going to lose money ... and yet they enjoy themselves. But then that's what huge fountains, famous headline acts and billions of dollars of advertising and fantasy architecture will do for you.

The stock market, on the other hand, just has the boring old ticker. Stocks and indexes go up and they go down. You have to supply the fireworks.

But if you've ever talked to an investor who owns a stock that has just doubled in six weeks, you've probably seen something akin to real joy. (Yeah, I know that it's nothing compared to parenthood, finding true love and sinking a hole in one, but you have to work with me here.)

I also know that it may not be fun if you're desperately playing catch-up, trying to get your retirement funds back up to where they should be so you can quit a job you don't like and head for the ivy-covered cottage in which you hope to live out your years. I'm not saying it's fun for everyone. But for people who prefer investing to woodworking or collecting Pez dispensers, it can be a hugely enjoyable thing to do.

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The steep market correction of the past week or so has dropped lots of stocks back to their 25-day moving averages and more than a few back to their 50-day moving averages and below. So, since Cabot's market timing indicators are still positive, this must be a great chance to pick up some real bargains on some great stocks, right?

Well, not so fast.

It's one thing to buy an individual stock that has just undergone an orderly pullback on reasonable volume. But it's another thing entirely to buy into a significant market correction that has yet to put in a convincing bottom. Investor sentiment is a little sour, and every down day is only increasing the acid reflux level of equity investors and their eagerness to unload more stocks.

I subscribe to the old stock market saying that you never try to catch a falling knife. The probability of cut fingers is just too great.

So stick to your sell disciplines on the stocks that you already own. Watch to direction of the market's movements and the volume trends that tell you which way the momentum is shifting. But let caution be your guide in this kind of unsettled situation. This bearish mood may pass in a few days and we'll be back on the yellow brick road again. You never know.

But for now, dare to be cautious.

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My stock recommendation today is American Dairy (ADY), a Chinese producer of milk powder, soybean milk powder, walnut products and other dairy stuff.

China isn't known as a big consumer of dairy goods. Many Chinese find cheese distasteful and just don't enjoy yogurt, buttermilk and the rest of the milk-based foods that delight Westerners. But that's changing ... a little.

You can't call a company with $266 million in annual sales a major trend, but it's a start. The Chinese are finding a place in their child-rearing regimen for milk-based infant formula, and the potential is enormous.

The company has been around since 1985, and its product mix--where do walnuts fit in with milk products, you might ask--reflects a kind of opportunistic management style that takes opportunities where it finds them.

It took two successive quarters of amazing results to put ADY on investors' radar screens. In Q4 2008, the company turned in an astonishing 1,550% jump in earnings on just a 25% gain in revenues. Then, just to prove that that wasn't a fluke, the company's Q1 report revealed a 278% earnings jump on a 191% boost in revenues. After-tax profit margin for Q1 was a respectable 24.4%.

The milk business in China has had to do a lot of fence mending following last year's melamine-tainting scandal. American Dairy came through that with its record clean as a whistle and growth has been excellent since then.

The stock bottomed at 9 in March, and since then has gone off like a rocket, soaring to 44 two weeks ago. ADY has been correcting with the market, but it's holding above its 25-day moving average, which is right at 38. The stock will need to settle down a little and build a new base for further advances. But you don't find many stocks that turn in nearly five-bagger performance in less than six weeks. It's worth a look.

Sincerely,

Paul Goodwin
Editor of Cabot Wealth Advisory

Editor's Note: Paul Goodwin is the editor of Cabot China & Emerging Markets Report, which was recently named the top-performing newsletter for five years by Hulbert Financial Digest. The Report gained a whopping 22.2% for the five years ended May 31, 2009, beating out more than 140 newsletters for the top spot. Let Paul be your guide to the enormous profit opportunities in China and the emerging markets. Click here now to get started today!

https://www.cabot.net/info/cem/cemjd03.aspx?source=wc01

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Last Chance to Enter Our Essay Contest

Fri, 19 Jun 2009 13:37:54 GMT

Readers' Views on the Newspaper Industry

Last Chance to Enter Our Essay Contest

In Case You Missed It

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Last week I wrote about the tumult in the newspaper industry, specifically the battle that's been raging between the Boston Globe's Newspaper Guild union and the New York Times company's management. Many of you wrote to me with insightful comments, a sampling of which appears below. Don't forget that you can always write to us via email or on our blog, http://www.iconoclast-investor.com. Thanks to everyone for writing in!

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As a 20-plus year subscriber to the Cabot Market Letter and a former reporter, editor and owner of small daily newspapers, I feel compelled to offer a much different view of the present state of the newspaper industry. The newspaper unions, including the guild, via ridiculous work rules have saddled newspapers with unnecessary expenses for decades. Union members benefited handsomely from their contracts and now those very contracts have, in large measure, brought about the rapid decline and failure of many daily newspapers.

Yes, ad revenue has fallen off dramatically and the industry as a whole was quite late in embracing the Internet. However, it is interesting to note that many small dailies and weeklies have continued to post operating profits albeit not at the level enjoyed in past decades. Very few small dailies and weeklies are unionized and their reporters and editors do not feel it beneath them to cover mundane community events. Most reporters and editors at daily newspapers, particularly the larger ones like the Globe, shun such reporting as shallow and unsophisticated. Each wants to be another Woodward or Bernstein.

Many reporters and editors at larger newspapers actually believe they cannot get involved personally in their communities because it would be a conflict of interest. Some news departments actually have written policies forbidding community involvement by newsroom employees. On the other hand, editors and reporters at good small dailies and weeklies are very much involved in their local communities and their reporting conveys that important closeness. Further, reporters at smaller papers often write five to 10 stories every working day while their union brethren at larger papers are hard pressed to produce one story per day.

Newsroom employees at smaller papers count their success in the number of subscribers while those at larger papers remain obsessed with press club awards and Pulitzer Prizes. Most large dailies have each story edited at least twice by different editors. That way each editor can blame the other(s) for any errors. At my newspapers each story was edited once and the reporter's initials were printed at the end of each story followed by the editor's initials. Those people took pride in their craft and liked their initials displayed for all readers to see. You will never see that practice at larger newspapers where archaic work rules continue to suppress individual initiative.

As to your view regarding depreciation and amortization, I am sure the New York Times Company shareholders are keenly concerned about these accounting practices. Consider the return the company could have gotten on the $1 billion they foolishly paid for the Globe in better times. In summary, I do not feel sorry for the Guild workers, or for that matter any other union employee at the Globe. They gorged at that table for a very long time and now they will starve at that same table in the not too distant future. No newspaper can survive, much less prosper, with a backward-thinking unionized workforce when they have to compete with non-union forward-thinking web employees who are allowed to prosper sans union rules.

P.Z.
San Diego, California

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Many newspapers are in trouble because of the progress of the electronic age. You can get most news items, even newspaper content on the Internet. I am one that does not think this kind of progress is good for us. The Internet has caused many problems we did not have before. Progress is not always good.

Thanks,

J.W.
Salem, Virginia

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In reference to your Boston Globe article. It is not my aim to be rude however, permit me to say the way the news print media focuses on certain subjects--reporting only that which they will use to make their point--borders on unfair and biased reporting. Example, the absolute refusal of the print media to print President Obama's middle name, Hussein. Also, the absence of written historical reports concerning the president's location and activities during his eight or nine year stay in Indonesia. And I only use Obama as one of the most flagrant one-sided abuses of the print media. (I happened to vote for him and support most of what he is proposing.) Another example might be the contribution of news media to the demise of the nuclear power industry in the U.S.--during a 20-year period when all of Europe and China have been building this ecologically sound energy industry.

So you who write and print newspapers, magazines, etc., may be somewhat deserving of the closeout of entire news group systems such as the Boston Globe--at least from a fairness in reporting standpoint. This is one major opinion (major = many) of those living in the Midwest U.S.

I do not countenance any man or woman losing their job. It is a crushing blow and an indictment against our free market economy, which should be able, with some government help, to provide jobs for all those willing to work. Having witnessed, via my aviation career, the ups and downs of aviation employment cycles--I am sympathetic with all workers and well-led unions. But a case can be made which says the reporters and editors' one-sided presentation of the news--has contributed to the lack of readership and thus the company's downfall. Perhaps there is a lesson in all this. Perhaps not. It is for the reader to decide based on unbiased facts reported.

Respectfully,

M.B.
Park Hill, Oklahoma

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Now, if only the New York Times and Los Angeles Times and rags owned by Gannett would just go away and we could get back true and accurate reporting "What a Wonderful World it Would Be!"

G.C.
Sun City West, Arizona

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Unions are causing the problems in this nation today. They have controlled the "forced benefits" for decades and now are surprised as these companies begin their financial demise. Everyone is going to have to cut back on everything. The unions are being rewarded by the Obama administration for his election success.

H.

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There's only one week left to enter our essay contest, so I'm reprinting the information you need to enter in case you missed it the first time or if you're a new subscriber. I'd also like to thank everyone who has already sent in their essay--we've received some great ones already and I know it's going to be tough to choose the best three!

We recently received a very interesting proposal from a Cabot Wealth Advisory reader who suggested an essay contest with a subscription to a Cabot newsletter as the prize for the best entry.

We have never done such a contest, but the reader had obviously thought through the details, and made a very persuasive case. I thought you'd enjoy reading excerpts of the proposal:

"I enjoy receiving the Cabot Wealth Advisory very much. Thank you for sharing your considerable knowledge; our country needs this, especially in light of the fear and panic generated by the current economic events.

"My question to you is: would you consider opening up a few spots in one of your more detailed, subscription-based advisories to a few unfortunates who have lost their nest egg due to predatory lending, or unscrupulous practices by an employer? I won't even mention Mr. Ponzi-Pilferer by name. You know of what I speak, I am sure.

"Perhaps an essay contest on How I Lost My Retirement and What I Would Do if I Had Another Chance? There are many who have lost their nest eggs, due to no fault of their own, other than perhaps trusting the wrong people / company, or having too much faith in the "American Dream." All who care about investing in their financial security could benefit from your knowledge and insight.

As the prize, "perhaps a few six-month subscriptions, or three-month? It would be a very good thing to give knowledge, and a chance for at least a few determined souls to learn enough to possibly recover from a hard lesson and a badly dealt hand. Not to mention some positive marketing karma! (I am sure the world of finance does not operate on karma, but I am an optimist, and it never hurts to ask!)

"Thank you for reading this, thank you for providing the possibility of success."

Respectfully,

L.P.
Camarillo, California, U.S.A.

Well, we liked the idea so much that we've given L.P. a free one-year subscription for sending the idea to us!

First off, we love competitions. Second, we like the idea of asking Cabot Wealth Advisory readers to share their stories and we think others will enjoy reading them. And third, the entries will give us an opportunity to get to know you better, dear reader. Lastly, the winner will have a chance to get back into the market with our best advice because the prize is a FREE one-year subscription to a Cabot newsletter!

Sounds like it will be fun!

Here are the details (we made only slight adjustments to L.P.'s idea):

Cabot Essay Contest Rules

Topic: "How I Lost Money in the Bear Market and What I Would do if I had Another Chance."

* Entries: Maximum 1,000 words

* One entry per email address

* To enter: Send entries via email to essaycontest@cabot.net

* The winner will receive a one-year free subscription to your choice of these Cabot newsletters:

Cabot Market Letter
Cabot Top Ten Report
Cabot China & Emerging Markets Report
Cabot Green Investor
Cabot Benjamin Graham Value Letter
Cabot Stock of the Month Report

* Contest deadline: June 30, 2009

* Winners will be announced on July 12, 2009

* The top three essays will be selected by a panel of Cabot editors, and readers will vote on the winner.

* We may choose to reprint any entries in Cabot Wealth Advisory, but will keep names confidential.

Good luck!

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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 6/15/09 - The True Story of the Pig War

On Monday, Timothy Lutts wrote about the true story of the pig war, which began 150 years ago Monday. Tim used the story to conclude that history happens and turned that conclusion on our modern world to find a stock that's part of the changing world we live in. Featured stock: Ctrip.com (CTRP).

http://www.cabot.net/Issues/CWA/Archives/2009/06/Pig-War.aspx

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Cabot Wealth Advisory 6/18/09 - How to Profit from Green Lifestyle Trends

On Thursday, Brendan Coffey wrote about genetically modified foods, how they can help ... and hurt. Brendan also wrote about how to profit from Green lifestyle trends, like investing in Whole Foods during the organic food craze. Brendan finished by writing about two Green stocks: one that's already taken off and another that has great potential. Featured stocks: Whole Foods Market (WFMI), Green Mountain Coffee Roasters (GMCR) and United Natural Foods (UNFI).

http://www.cabot.net/Issues/CWA/Archives/2009/06/Green-Lifestyles.aspx

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Until next time,

Elyse Andrews
Editor of Cabot Wealth Advisory

Editor's Note: Cabot China & Emerging Markets Report was recently named the top-performing newsletter for the past five years on a risk-adjusted basis by Hulbert Financial Digest. The Report gained 22.2% for the five years ending May 31, 2009, trumping the -1.3% return for the Dow during that time. And Cabot China & Emerging Markets Report Editor Paul Goodwin has issued a BUY signal! He's taking advantage of the market's rebound and snapping up some high-potential stocks. Don't let this opportunity in the emerging markets pass you by.

https://www.cabot.net/info/cem/cemjd03.aspx?source=wc01

P.S. Don't forget to follow us on Twitter http://twitter.com/IconoInvestor and check out our blog at http://www.iconoclastinvestor.com!

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How to Profit from Green Lifestyle Trends

Thu, 18 Jun 2009 11:02:34 GMT

Is There Hope for Genetically Modified Food?

Profiting from Green Lifestyle Trends

Two Winning Stocks from our Recent Editions

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In 2000, Time magazine ran a memorable cover story about golden rice, a rice strain genetically modified to contain beta-carotene, a precursor to vitamin A. Vitamin A deficiency is a scourge in the developing world. The lack of it can lead to blindness in pregnant women, miscarriages and leads to as many as 500,000 children becoming blind each year. Golden rice could solve all that.

In fact it's one of the great arguments in favor of food from a genetically modified organism (GMO)--that altered rice like this will solve a lot of the developing world's nutritional problems. So how many people are benefiting from GMO rice right now? Zero. Maybe one day golden rice will attack vitamin A deficiency, but despite the promise shown in that Time cover story, not one grain is in the market. Sadly, golden rice isn't the only superfood that has yet to prove its worth.

Instead, according to the International Service for Acquisition of Agrobiotech Applications, food from GMOs is confined largely to four crops: soybeans (53% of the world total plantings in 2008), corn (30% of plantings), cotton (12%) and canola (5%), with a small percentage of food supply sugarbeets grown in the Rocky Mountains now in their second year of being genetically modified. The U.S. is by far the leader in GMO crops--half of the GMO crops in the world (by acreage) are grown here.

The other great argument for GMO crops is that they promised to boost yields to otherwise unattainable levels. Yet that isn't the case. A graph of U.S. crop growth between 1930 and 2006 (via the Center for Food Safety) shows that the introduction of supposedly higher yielding genetically modified crops has not affected the steady trend of higher food production.

In fact, a large 1998 study found GMO soybeans actually yielded 5.3% less than conventional soybeans. A similar 2001 study by the University of Nebraska found GMO soybeans yielded 6% less than conventional soybeans.

So why do farmers use something that doesn't boost yields and isn't a miracle food? To reduce labor costs. Crops are modified for one of three characteristics: to be herbicide resistant, insect resistant, or both. Quite simply, genetic modification keeps the farmers from having to make as many passes in the field weeding and allows them to use herbicides at greater levels without harming the crops.

Some problems with that: the level of pesticide-resistant weeds is rising fast, negating much of the benefit of herbicide-resistant seeds, plus there are known links from the pesticides to leukemia, low exposure toxicity to frogs, endocrine disruptions (leading to early puberty in animal and humans), low sperm counts and more.

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As a father of an 18-month old--and of a baby due in October--I'm not a fan of participating in what is essentially a mass food supply experiment so farmers can save a few pennies on gasoline and spend more money on seeds from Monsanto, Bayer, Syngenta, Dow and DuPont, the five pro-GMO companies that control 80% of the commercial seed market. So my wife and I eat as organically and as locally grown as we can. We're fortunate to be able to do so.

And it turns out, organic farming methods are actually good for farmers as well.

In Africa, 114 organic and near-organic farm projects involving 1.9 million farmers has boosted average yields 114%, while an alternate method of planting rice in Asia (more widely spaced plants with no flooding) raises yields 30% without any chemical fertilizers or pesticides. Introduction of natural predators has been shown to control insect populations better than pesticides, such as the parasitic wasp with the mealybug in Africa, saving the staple crop of 200 million people. This is the breakthrough for which Dr. Hans Herren won the World Food Prize in 1995.

As an investor and editor of Cabot Green Investor, however, I separate my personal feelings from investment analysis, relying instead on sound fundamental analysis I developed at Forbes and Dow Jones and the unique and time-tested technical analysis performed here at Cabot, publisher of the Cabot Green Investor. Yet in this situation, my personal preferences and my investing sense dovetail.

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If you follow the stock market, you already know the stock of Whole Foods Market (WFMI) has been a big winner due to this trend for much of this decade. In fact, in recent years, sales of organic products overall were rising 25% a month (!) until the economic turmoil of last autumn. Naturally, because organics are generally pricier, that rate of growth dropped. Yet while pundits expected the recession to be the death knell of the widespread move to organics, it hasn't been.

The organic and natural foods market segment is still seeing growth of 1% to 5% a month, compared to 0.4% annual growth for groceries at large. What appears to have happened is that consumers haven't cut back heavily on organic groceries, although they have shifted more to bulk organics). Instead, they have cut back more on restaurant dining.

One of the big winners of the move toward organic products I've discussed here before--Green Mountain Coffee Roasters (GCMR). The Vermont company has a large mix of organic and fair trade coffee in its offerings. The beans are sold through outlets like Costco, while McDonald's serves its coffee in the restaurant's New England and Hudson Valley outlets.

Green Mountain also produces the Keurig coffee brewer and its popular single-serve K-cups. The Keurig makers have just begun distribution through Wal-Mart, while high-end coffee-maker company Cuisinart has recently inked a deal to market its own version of Keurig brewers.

Cabot Green Investor readers were told to buy Green Mountain stock on April 15 at 34. Two weeks later it leapt to 49 on huge volume as earnings reflected the fundamentals we pointed out to readers. It's still looking good now at 58, a 63% gain for subscribers thus far.

We also bought into another Green lifestyle stock recently: United Natural Foods (UNFI), which we're expecting to continue to improve as the bull market in Green stocks continues and as the economic recovery gathers momentum. UNFI is the largest distributor of organic and natural foods in the U.S., managing 60,000 products for 17,000 stores, from mom-and-pop corner shops to Whole Foods, which recently extended the company's distribution contract through 2013.

We expect United Natural Foods to do well thanks to macro trends toward organic food, and also because it is taking great strides in making itself even more competitive. While its main competitor, Tree of Life, is being jettisoned by its European parent company, UNFI is expanding and will have national coverage for the first time this year when a new Texas distribution center opens.

United Foods is also pushing into the specialty foods market, finally having worked through the integration of a specialty foods distributor it bought in 2007. Specialty foods aren't necessarily organic, but they appeal to much the same demographic--people looking for high-end jams like Stonewall Kitchen and imported goods like Twinings teas, both UNFI brands.

It also serves loyal ethnic markets with specialty items like foods from Goya and Manischewitz. UNFI has only started to tap the $48 billion specialty foods market, but its distribution heft gives it a great shot at making inroads.

We bought UNFI on May 15 at 25. Shares then were sold down to 22 by a market expecting poor earnings due to the recession, but as we told subscribers in a May 28 update, "we expect UNFI to show a good quarter."

On June 2, it reported earnings that beat Wall Street estimates thanks to stronger-than-expected consumer buying and lower costs. Shares rallied to 26 on strong volume, where it is now building a base for a further move higher.

It pays to know the Green market.

Sincerely,

Brendan Coffey
For Cabot Wealth Advisory

Editor's Note: The economic stimulus package is flooding the Green market, creating a once-in-a-lifetime buying opportunity. Be an early investor and profit from the surge, like the one recently seen in Green Mountain Coffee Roasters. Cabot Green Investor Editor Brendan Coffey discovered this stock long before it soared, bringing subscribers 50% gains. Click here now to get started today!

https://www.cabot.net/info/cgi/cgija01.aspx?source=wc01

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A Great Growth Stock for a Changing World

Mon, 15 Jun 2009 14:19:24 GMT

Featuring Lutts' Logic:

The True Story of the Pig War

The Double-Barreled Shotgun

A Great Growth Stock for a Changing World

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Last week, we tackled the very serious subject of health care in the U.S. I thank you all for reading and writing. After that effort, my brain needs a vacation, so today I bring you The True Story of the Pig War ... which you might say began 150 years ago today.

At the heart of the story are the San Juan Islands, a group of some 450 islands off the coast of Washington state that are popular tourist destinations today but were once overrun by heavily armed British and American troops, all ready and willing to start shooting ... but only if the other side started.

Our story starts, perhaps, in 1845, when the Hudson's Bay Company, based on Victoria Island, posted a notice of possession on 16 1/2 mile long San Juan Island, the largest island in the archipelago.

At the same time, however, Americans were trekking westward across the country in growing numbers, and more and more were finding their way to the rugged shores of Puget Sound, and even onto the offshore islands, where the good fishing served to ameliorate the general harshness of frontier life.

In 1846, the simple presence of these hardy pioneers helped to support the claims of the United States in the negotiations leading to the Treaty of Washington in 1846, which established the 49th Parallel, from Minnesota to the water's edge, as the international boundary between this country and Canada.

But the treaty makers, who were generally very precise, were inexcusably vague when they came to the islands dotting the Strait of Georgia. They agreed that the line along the parallel should be projected "to the middle of the channel which separates the continent from Vancouver's Island; and thence southerly through the middle of said channel." Note the lack of numbers, an open invitation for each of the opposing parties to interpret the document in their favor.

The Americans, of course, assumed that the line fell to the west; the English just as firmly believed that the boundary brought the disputed islands into the province of British Columbia.

To bolster their claim, the British used the time-honored legal strategy that possession is nine-tenths the law, and the Hudson's Bay Company, in December 1853, moved a flock of 1,369 sheep--and several Berkshire boars--onto San Juan Island.

Which was provocation enough for the local U.S. Collector of Customs, Isaac N. Ebey, to declare that the English had imported the sheep "without paying any attention to our revenue laws." His move to seize some sheep in payment was, however, thwarted by James Douglas, governor of Vancouver Island, who dispatched troops to protect the sheep.

Then winter came, and all the American pioneers who had attempted to homestead on the island retreated to the mainland, leaving the British sheep and their attendants in possession.

But in March 1854, the formal incorporation of Whatcom County on the American mainland to the east held San Juan and its neighboring islands to be an integral part of the newly created political entity, and the sheriff of Whatcom County was empowered to collect $80 from the Hudson's Bay Company in property taxes.

Organizing a posse, the sheriff descended on San Juan Island without warning--each of his men armed with a brace of revolvers. And when the $80 was not forthcoming, the sheriff and his men chose to seize alternative liquid assets; they bundled thirty-four struggling breeding rams aboard their boat, while Hudson's Bay Company employees stood by protesting.

A few more years went by. No more sheep were seized. And by 1859 there were about 18 Americans homesteading on San Juan Island.

And then came June 15, 1859, a date that, while it does not live in infamy, at least reminds us that small events can have big repercussions.

One of the 18 American homesteaders was a fellow named Lyman A. Cutlar, who had cultivated roughly a third of an acre on the island, planting it with potatoes and enclosing it in a manner that proved repeatedly unable to thwart hungry hogs (are there any other kind?).

On the day in question, Mr. Cutlar was angry to find a black boar rooting in his potatoes. For some reason, this was the last straw; the furious Mr. Cutlar grabbed his shotgun and shot the beast, sending him to hog heaven.

This irritated Charles Griffin, manager of the Hudson Bay Company's farm and thus the legal owner of the pig. Cutlar offered $10 in damages. Griffin asked for $100. History doesn't tell us who got to eat the pig, but I assume it was Cutlar.

The following day, the British warship Satellite sailed into view, carrying to San Juan a special envoy with orders to bring Cutlar to Victoria for trial. Cutlar refused to surrender, and, brandishing his rifle, made it plain that he would blow the emissary's head off rather than submit to arrest.

Sensing opportunity, U.S. Brigadier General William S. Harney ordered Company D of the U.S. Army infantry, stationed at Bellingham to move to San Juan without delay. Interestingly, the commanding officer of Company D was none other than Captain George E. Pickett, who would later win immortality as a Confederate general at Gettysburg.

On July 27, Pickett landed on San Juan with his 50 men and pitched camp near the southeast tip of the island.

In response, Charles Griffin, perhaps still grieving the loss of his hog, sent written notice telling the troops they were on Hudson's Bay Company property and inviting them to depart.

Pickett declined the invitation; in fact, his men dug in as if they were planning to stay a while. So Douglas attempted to blockade the island, to prevent reinforcements from reaching Pickett. On August 3, Pickett had talks with the captains of three British warships "guarding" him, who proposed that they establish joint military occupation of the island. Pickett again refused; instead he sent a plea for reinforcements.

Back on the mainland, Harney granted Pickett's wish, ordering five companies to charter the necessary steamers and move to San Juan Island, taking all field guns and every bit of ammunition they could muster.

By mid-August, the U.S. force on the island had swelled to nine companies, backed by eight 32-pounders. At the northern end of the island were 2,140 redcoats, including 600 Royal Marines and engineer troops, supported by five warships and 167 guns.

Meanwhile, the powers in Washington, D.C. decided that a more experienced hand was needed at San Juan. So President James Buchanan dispatched the Chief of Staff of the Army, 73-year-old Lieutenant General Winfield Scott, who hopped a train, hoping to arrive before blood was shed.

Fortunately, when he arrived, the situation was little-changed. Both sides were prepared to fight, but neither was willing to fire the first shot.

So Scott and Douglas talked, and eventually Douglas agreed to the presence of a token American force on the island. And General Harney, rebuked for his hotheadedness, was relieved and sent back to Washington, D.C.

Yet the issue of the boundary remained unsettled. And the onset of the Civil War only delayed the ultimate resolution.

In the meantime, tensions developed between the expansionist-minded American civilians on the island and the defensive-minded military troops.

Tensions reached a climax when a resentful farmer stretched a wire fence across the road leading from the U.S. Army camp to the landing. The captain in command promptly ejected the man from the island, whereupon the U.S. district court ordered the captain's arrest.

So the Federal government got involved again, ruling that the Army should continue to be the dominant authority on the island, the better to keep the British at bay.

But the citizens chaffed at this restraint, and the government of Washington Territory assumed all fiscal and judicial powers on the island, managed to arrest an army major, and levied a staggering $5,000 fine against the offending captain.

In short, the populace wanted an end to life under military rule. They wanted freedom to live and the freedom to tax. In response, the U.S. Department of State hastily obtained British agreement to lay the boundary dispute before the president of Switzerland for arbitration.

But certain parties were not ready to make peace. In that post-Civil War atmosphere, many northerners were angry that the British had supported the South by building the CSS Alabama in 1862. This screw sloop-of-war, acting as a commerce raider, had a remarkable 22-month career, in which she boarded nearly 450 vessels, captured or burned 65 Union merchant ships, and took more than 2,000 prisoners without a single loss of life on either side ... all without ever visiting a single Confederate port.

As recompense, Anglophobic members of Congress not only demanded huge indemnities in payment for the Alabama claims, but the surrender of all British Columbia as well. In response, the British reacted by backing away from the boundary negotiations with great rapidity.

By 1871, however, the atmosphere was ripe for another try. And as British and American diplomats came together to settle the Alabama claims and other outstanding matters, the problem of the San Juan boundary was quietly handed to Kaiser Wilhelm I of Germany to arbitrate.

The Kaiser referred the issue to a three-man arbitration commission who met for nearly a year in Geneva. Finally, on October 21, 1872 (more than 13 years since the incident with the pig), the commission ruled in favor of the United States, establishing the boundary line through Haro Strait. Thus the San Juan Islands became American possessions and the final boundary between Canada and the United States was set.

On November 25, 1872, the Royal Marines withdrew from San Juan Island, and by July 1874, the last of the U.S. troops had left as well.

As to Lyman A. Cutlar, he removed to the mainland early in the affair, apparently caring more for peace and potatoes than posturing and politics. He died on April 26, 1874, at age 40, leaving no family. His possessions, appraised at $489.75, were auctioned off, with the fancy English double-barreled shotgun bringing $14.00. It is currently on display at the Washington State Historical Museum in Tacoma.

Which all goes to prove what? That Lyman A. Cutlar was a hothead ... and not the only one in the story? That thanks to cooler minds, bloodshed was averted? Or simply that history happens?

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Taking off from the third interpretation, I look around to see what history is happening in the world now and I see above all the rapid development of China. While here in the U.S. we struggle to regain positive economic growth, this year China's economy will grow 8% ... maybe more.

Which means China is a great place to find growth companies!

One of my long-term favorites in the country is Ctrip.com (CTRP), which has the country's biggest travel-related Web site. The company's revenues were $99 million in 2006, $160 million in 2007 and $215 million in 2008. Earnings were equally impressive.

The stock came public in 2003 and had a great run into 2008, with the stock's progress mirroring the company's. But when the global recession took hold, the stock plummeted from 71 to 16, par for the course for a fast-growing highly respected enterprise.

Today, with the economy back on the rails and expectations for Ctrip's growth once again healthy, the stock is working hard to recover lost ground.

In fact, a month ago, when the stock was trading at 38, Paul Goodwin, editor of Cabot China & Emerging Markets Report, made it his featured recommendation, writing, "At the heart of Ctrip.com's success is its excellent Web site. If you go to http://www.ctrip.com, you will arrive at a page that asks you to choose your language, with the choices being Mandarin, Cantonese and English. The layout is clean and easy to understand, with tie-ins to packages, car rentals and the company's award-winning call center. China has developed to the point at which it doesn't make a lot of sense to describe a company as "the Chinese Google" or the Chinese anything. But looking at this Web site, you can see why Ctrip.com was known for years as "the Chinese Expedia."

In the first quarter, the company saw revenues grow 21% to $58.6 million, while earnings climbed 19% to $0.32 per share.

After that report, the stock climbed as high as 48, but it's now pulled back to 42, and I think it's a decent buy here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Publisher
Cabot Wealth Advisory

Editor's Note: Cabot China & Emerging Markets Report Editor Paul Goodwin is our in-house China expert ... let him be your guide to this profitable sector! Paul is the man behind Cabot China & Emerging Markets Report success! The report recently beat out 140 newsletters to be named the #1 newsletter for the past five years by Hulbert Financial Digest! The Report surged 22.2% for the five years ending May 31, 2009, trumping the -1.26% return for the DJ Wilshire 5000 during that time. Paul knows that the emerging markets are growing far faster than the U.S., providing ample opportunity to early investors. Don't let this opportunity pass you by.

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