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What the Experts are Saying

The heart of the Contrary Opinion Forum is the talks by some of the best independent thinkers in the investment business.

What the Experts are Saying

My Takeaway

A Stock for Bargain Shoppers

“Tim Geithner should be put in jail with Bernie Madoff.”

“The United States is Canada’s Mexico.”

“You should register your stocks in your own name, as protection against the time when the Internet crashes, and stock ownership records are lost. “

Those are just three of the unusual--and unusually candid--remarks I heard last week at the 49th annual Contrary Opinion Forum in Vergennes, Vermont. It was my 23rd year of attendance at the forum, and I was fortunate to meet many old and new friends there. But the heart of the forum is the talks by some of the best independent thinkers in the investment business, and today I’m going to give you the highlights of what these experts told us.

For the record, the speakers this year were:

Barry Ritholtz, of The Big Picture & Fusion IQ
Rod Smyth, of Riverfront Investment Group
David Fuller, of
Evelyn Browning-Garriss, of The Browning Newsletter
John Moffatt, of Analytic Systems Corp.
Walter Zimmerman, of United-ICAP
Ian McAvity, of Deliberations on World Markets
Larry McMillan, of The Option Strategist
David Kurzman, of Leuthold Global Clean Technology Fund

But the comments of the attendees--typically professional money managers and individual investors--were no less interesting, so I’ve included tidbits from them as well.

The conference began with a cocktail party on Wednesday night, at which a lawyer from New York--who told me with no modesty that he was the man responsible for getting the IRS to accept tax returns rounded to dollars--opined that thanks to Ben Bernanke, inflation was just over the horizon. (Sometime the next day, when a speaker recommended being 4% in gold, this man proudly announced he was 100% in gold.)

Soon after, a long-time attendee from Connecticut--and previous speaker on the art and science of market timing--confided to me that this year’s market was unfolding just like 1992’s, and his oscillator, in fact, was at the exact same level that it was at on the same day in 1992. He also confessed to optimism about KLA-Tencor (KLAC), the manufacturer of chip-making machinery.

That was followed by dinner, at which the man on my right (a local from Burlington, Vermont) told me that the global trend of growing civil unrest would become a far larger problem, and reminded me that historically, societies were toppled when the poor revolted against the rich.

A man from New Hampshire who races cars as a hobby told me that investing is like racing cars. You’ve got to get as much information as possible, you’ve got to make decisions, and you’ve got to practice risk management, so that you survive to race another day.

After dinner, Barry Ritholtz kicked off the conference by reminding us that analysts are consistently too optimistic about the economy. He reminded us that people typically overemphasize the most recent data point. And he concluded that the current secular bear market is not over because price-to-earnings (P/E) ratios are not low enough.

The next day at breakfast, I related the concerns about civil unrest to a man from London--noting his city had had its fair share--and he replied nonchalantly that the media typically blow these things out of proportion, and that it’s not one of his major concerns.

And then came the morning’s speakers.

Rod Smyth began by reminding the attendees that helping their clients complete the journey toward their investment goals was more important than trying to be right. He then presented the case that companies are in great shape today, with record cash levels, high margins and opportunities for global growth ... but the trend toward deleveraging in the developed world is repressive. He recommended investing in companies with strong balance sheets and a record of growing dividends. And he opined that the low of the current secular bear was seen in early 2009.

David Fuller chose to call the current long sideways movement a “secular valuation contraction,” and noted that the last big one (1966 to 1982) ended when the S&P yielded 6.2%. He said there’s no clear sign we’ve seen the low of this phase, and that while Greece will have an orderly controlled default, the preservation of the euro will sow the seeds of long-term inflation. He recommended “autonomies,” which he defined as multinational corporations that function as quasi-autonomous mobile principalities, noting that their loyalty is not to their home countries but to their shareholders. Examples are Amazon, Apple, Bristol-Myers Squibb, Coca-Cola, Colgate-Palmolive, Costco, Google, Heinz, IBM, Johnson & Johnson, MasterCard, McDonald’s, Nike and Visa. He mentioned Royal Dutch Shell as a favorite. He noted that the U.S. needs a leader with experience on the profit side, not the cost side. And he noted optimistically that if our shale oil and gas is fully exploited, the U.S. could achieve energy self-sufficiency within 10 to 15 years!

Evelyn Browning-Garriss, who is not an investor but a climatologist focused on long-term weather projections, using factors like El Nino, La Nina, volcanoes and ocean currents, told us that the patterns we grew accustomed to in recent years had changed. She told us to expect continued drought in the West and cold in the Northeast. Her projections are of great interest to farmers and commodity investors, but my takeaway was that the coming winter will bring great skiing.

At lunch, there was animated discussion at our table about high-frequency trading, in which deep-pocketed institutions take advantage of technology to “ping” the market, judging its appetite and ability to move in one direction, and in effect front-running it.

After lunch, John Moffatt described his system of forecasting industry group movements by crunching economic data, and told us that there was no recession ahead.

In the question and answer that followed, there was a period when a man from Canada suggested that a value-added tax (VAT) and gas tax would help the U.S. out of its hole, an American remarked that it had been terrible for Australia, and an Irishman said it would boost CPI and inflation.

Walter Zimmermann then gave an excellent presentation of his chart-based investing system, saying he avoids all news when doing his work, and turns to it only after he’s come to his conclusions to see whether there’s sentiment that supports his conclusions. He’s been long the U.S. dollar since April 15. He criticized Alan Greenspan and Bernanke as Princeton academics, saying the Fed needs a businessman at the helm. And he predicted the real estate cycle would bottom in 2014. Repeating the observation of one of the morning’s speakers (I forget which), he noted that regardless of its troubles, the euro was worth preserving because it would prevent the kinds of wars that had killed millions of soldiers and civilians in the previous century. He suggested that in the event we had a repeat of the 2007-2008 decline, dividend-paying multinationals would be no safe harbor; he preferred cash. And he noted that the chart of gold was ominous, saying that a fall through 1542 would lead to a target of 890! Finally, noting that debt is the biggest force in the world now, he recommended a book, Debt: The First 5,000 Years, by anthropologist David Graeber.

Next came cocktails, and then dinner, where I sat between a couple from Mississippi and a couple from Dallas, Texas. As the Texans talked about the drought that’s plagued the state, I was amazed to learn that Texas only has one natural lake, Caddo Lake, which it shares with Louisiana. At one point, when the conversation turned to politics, the woman from Mississippi opined that all the Republicans were worth considering, except one “wacko.” And when I pressed for the identity of this wacko, she leaned toward me, covered her mouth and whispered “Perry.”

The evening’s speaker was Ian McAvity, a Canadian who has spoken irreverently and entertainingly at the forum many times before. Ian--a longtime proponent of gold investing--suggested that the euro would survive. He called high-volatility trading the biggest scam on Wall Street. He said that while October, November and December have traditionally been positive months, he expects a lower low in October. He likes Goldcorp, but he likes physical gold better. He expects gold stocks to suffer somewhat when the S&P falls.

At my breakfast table Friday, a private investor from Massachusetts who invests only in young biotechnology stocks gave an informed and lucid explanation of the technology being developed by Sangamo (SGMO), and a portfolio manager from an insurance company in Missouri explained his own (much more conservative) system.

In the first session of the day, Larry McMillan explained how he tracks the actions of options traders to discern what’s likely to happen in the broad market. Today, implied volatility is quite high; when it falls, that will mark a buy signal for the broad market. (The same is also true, he said, of Apple.) He noted that the put/call ratio, which speaks about once a year, gave a buy signal recently. He also mentioned that put/call ratios for both corn and copper are very high, and that buy signals are expected soon. Finally, he noted the 90% days indicator says there’s a major trading bottom here.

David Kurzman, who’s supposed to be investing in clean technology stocks for his fund told us there’s too much money chasing too few good ideas, and that as a result, stocks in the sector are overvalued. In fact, his employer is launching a long/short fund soon, to capitalize on the downside opportunities. He’s skeptical of biofuel companies, saying none would be profitable without subsidies. He recommends avoiding thin-film solar power companies. And he recommends avoiding Better Place and other automotive battery-swap companies. The one sector he is positive on is fertilizer stocks.

In the Q&A after, an audience member took issue with Mr. Kurzman’s dismissal of biofuel companies, saying that a small private company name Changing World Technologies, which has just emerged from bankruptcy, has a process that turns waste products at a Butterball turkey factory into diesel fuel.

And then came the final--and best--session, in which all the participants (save Ms. Garriss) sat on the stage and collectively addressed the most popular topics of the previous sessions.

There were:

High-frequency trading
The common belief that the market will bottom in 2016
The European debt problem

On the topic of high-frequency trading, the most-applauded suggestion came from an audience member who recommended a tax based on the length of time an investment was held. If held one minute, the tax would be 99%. If held 5 minutes, the tax would be 50%. And if held one year, 0%.

On the topic of the market bottoming in 2016, Kurzman said, “All this talk about a secular bear market sounds like consensus, and that’s probably what we should be contrary to.”

And on the topic of the European debt problem, not only was there no consensus, there was no one who thought he had a certain cure. Of all the topics mentioned, this was the one that caused the greatest worry. (And since that is also the biggest worry of the media currently, it reveals how contrary these people really are.)

But the final session was characterized by great give-and-take, and as it progressed, we heard some refreshingly honest opinions, like these:

“Leveraged ETFs are the worst investment vehicle created; they are a license to lose money, even when you get the direction right.”

“But regular ETFs are great, and the most efficient--surprise, surprise--are Vanguard’s.”

“When Fed policy gets the economy rolling again, we’ll have a bubble in the most unlikely place ... real estate.”

“CNBC is Muzak, except for the occasional interview with the old-timer from Paine Webber ... what’s his name? ... Art Cashin.”

“You can’t borrow your way out of debt”

“If Michele Bachmann and Sarah Palin are the answer, what the hell was the question?”

“Right now, you can buy a congressman.”

“No, you can only rent him. You’ve got to keep making payments”

“They’re going to have to carry Bernanke out on a board before he stops printing money.”

And finally, “The European banking system is a Ponzi scheme beyond belief”

As to my takeaway, I was encouraged by the evidence that deleveraging at many companies has resulted in strong balance sheets and ready cash that will enable profitable growth.

And the contrarian advice “Concern Yourself Least When Others Fear Most” combined with “Trouble Comes From Where It’s Least Expected” gives me confidence to ignore the debt troubles of Greece, Italy, etc., as well as the current concerns about high-frequency trading. I’m confident both will be resolved.

Finally, I turn to what I tell you repeatedly. Investment success comes not from predicting the future but from following a disciplined investing system. If you’re following a disciplined value investing system, there are numerous high-quality companies that you can buy today and hold patiently, waiting until the market’s next up-phase takes them higher. You can find some by clicking here.

But if you’re following a disciplined growth investing system, you should be defensive, holding cash until the broad market becomes more supportive. And you can find expert advice on that by clicking here.


As to today’s recommended stock, it begins with a story.

Last Wednesday just before noon, as I was packing my car for the drive to the forum in Vermont, I was also fixing a door for my wife, grabbing a bite to eat, and packing some supplies to take to our son, the last child of the three still in college. In short, I was multi-tasking, which is not always the best way to get things done.

And for the first time in my life, I left on a trip while leaving something big behind. But I didn’t know it until an hour later, when my wife called to inform me I’d forgotten my bag with my toiletries, underwear and socks. Happily, the garment bag I’d packed held my jacket, shirts and ties, so I decided I could buy what I needed on the way. And a quick look on my phone led to a mall in Manchester, New Hampshire, which held both a Big K (long ago known as Kresge’s) and a Dollar Tree Store. The Dollar Tree Store provided:

One five-pack of disposable razors.
One pack of two yellow lined pads
One pack of two pens
One toothbrush
One tube of toothpaste
One pair of black socks
And another pair of black socks

For a grand total of $7.00! (There’s no sales tax in New Hampshire.)

And the Kmart provided the underwear, for substantially more.

Now I know why Dollar Tree (DLTR) has more than 4,100 stores in 48 U.S. states, and why business is booming!

The stock was first recommended in Cabot Top Ten Trader on June 20, when it was trading at 64. Today it’s at 80! And last week it appeared in Cabot Top Ten Trader again, tagged as the Editor’s Choice. Here’s what Michael Cintolo wrote.

“The reason for Dollar Tree’s strength is simple--a bad economy and jobless situation, along with some of the worst consumer confidence readings in decades, is leading more people to pinch pennies. Interestingly, though, this company isn’t just benefiting from the dip in the economy during the past few months; there looks to be something of a secular trend benefiting the dollar store industry, as Dollar Tree’s earnings per share have been motoring consistently higher for years ($1.23, $1.41, $1.69, $2.37, $3.23 during the past five years, with $3.94 and $4.59 estimated for this year and next). According to one recent report, part of the reason is just a broad moneysaving mindset among all consumers; all firms in the industry are seeing the average income of their customers rise, telling you it’s not just hard luck Joes, but many solidly middle-class folks just trying to save a buck. As for the company itself, it distinguishes itself from competitors by sticking to the $1 price point for thousands of items, but at this point, the sector story is more important than anything specific to one company.

“DLTR has been in a tight, controlled uptrend since early 2010, with the usual retreats along the way when the market hit a pothole. This stock did fall from 70 to 60 during the market crash, but rallied back to virgin territory by the end of August, and has pushed slightly higher since then. Thus, DLTR can drop when the market gets rough, but usually finds buyers on those dips. So if you want in, try to pick up a few shares in the low-70s, where the 50-day line and the top of the stock’s prior consolidation should lend support.”

For more details, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory

Timothy Lutts is Chairman Emeritus of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.