Featuring Lutts’ Logic:
Google vs. China
Ted Kennedy’s Seat
Johnson & Johnson Follow-Up
A Great Simple Investment
In a slow news period, I might have given you a nice article on Martin Luther King today, starting with the fact that his actual birthday was last Friday.
But too much has happened in the last week, so today I’m going to throw the kitchen sink at you.
We start with the earthquake in Haiti, a natural disaster whose power was multiplied many-fold by the legacy of the country’s mismanagement. I don’t need to repeat the details of the tragedy for you; you can get that anywhere. But I do think it’s informative to review the big picture.
Haiti, which gained independence from France in 1804, is the poorest country in the Western Hemisphere, with an average income of $790 per year (worth $1,317 when purchasing power parity is considered, because basic goods are cheaper in Haiti).
Approximately a third of the population cannot read or write. That was fine back in 1804; today it’s tragic.
The reason, of course, is poor management, better known as government when we’re talking about countries.
To trace Haiti’s modern history, you might start with the landing of Christopher Columbus on Hispaniola in 1492. He, of course, claimed the island for Spain. Before long, the Spaniards were operating gold mines on the island, using the native Tainos for slaves. But the local labor force dwindled quickly, succumbing to disease, malnutrition and violence.
So the Spaniards began to “import” slaves from Africa, and the island prospered; in addition to gold mines, the slaves toiled in the sugar and tobacco fields in the lowlands of the island.
Then came the French, fighting back and forth with the Spanish throughout the New World, as well as back in Europe. French buccaneers settled the Western side of Hispaniola, while the Spanish clung to the East. In 1697, they signed a treaty that formalized this division, and from 1713 to 1787, some 30,000 French colonists arrived, attracted by the potential for profitable farming.
By 1790, the French third of the island was out-producing the Spanish side; in fact, it was the richest French colony in the New World, thanks to sugar, coffee and indigo. Of course, life was hell for the slaves.
So in 1791, inspired by the revolutions that had succeeded in other countries in previous years (France and the U.S. in particular), the slaves in the French colony began to revolt. In 1793, slavery in the colony was abolished. And in 1804, after the loss of more than 50,000 French soldiers, roughly 100,000 blacks and 24,000 of the 40,000 French colonists, independence was achieved, completing the world’s only successful slave-led revolution of a country in history. The new nation was named Haiti, honoring one of the indigenous Taino names for the island.
But peace has not lasted. In its 205-year history, Haiti has suffered 32 coups. Forces both domestic and foreign have continually battled to gain some control or extract some profit from the country.
From 1957 through 1986, the Duvalier family, led by “Papa Doc,” ruled the country.
In 1991, former priest Jean-Bertrand Aristide won election but failed to maintain control.
In 1993, Supreme Court Justice Joseph Nerette was named provisional president, but the international community blocked elections and chaos lasted into 1994.
In 1994, former U.S. president Jimmy Carter went to Haiti, to pave the way for the re-installation of Aristide. Aristide left the presidency in 1995, and was replaced by Rene Preval.
But Aristide was re-elected in 2000 ... and then ousted for the third time in a paramilitary coup in 2004.
Boniface Alexandre assumed interim authority, and in 2006, Preval was elected president, and there he is still, recently homeless.
The humanitarian response to the distress brought by earthquake has been impressive ... but it’s a short-term band-aid. Like rebuilding levees in New Orleans, it doesn’t address the bigger problems that afflict the population.
To me, the central problem in Haiti is one of management. Haiti needs leadership that is honest, representative, wise and well respected. The naïve part of me says that neighboring Dominican Republic should take over, but getting the French and Spanish to agree is likely impossible.
And the handful of other French-speaking countries in the Caribbean (Saint Lucia, Dominica and Saint-Martin) are too small (generally less than 10% of Haiti as measured by population, land area and GDP) to effectively manage such a large country.
So I’m afraid that what lies ahead is simply more coups, more corruption and more poverty.
Last year, foreign aid accounted for 30% to 40% of Haiti’s budget, and the U.S. was the largest contributor. It’s been a lousy investment so far.
So what’s the solution? I don’t know, which is part of the reason I’m writing this. If you have any ideas, let me know.
Last week Google (GOOG) threatened to pull out of China, explaining that it has had enough of the government’s interference (both open and clandestine) with Google’s efforts to serve its markets while doing no harm. Whether the company will actually pull out or not remains to be seen.
The immediate beneficiary of the announcement was native competitor Baidu (BIDU), whose stock climbed 20% over the next two days. Baidu is in the portfolio of Cabot China & Emerging Markets Report, and subscribers are happy about that. (Interestingly, Baidu’s Chief Technology Officer resigned today ... coincidence?)
As for Google, I don’t mind if Google chooses to take the high road. Google is a very healthy company. It has cash. It is growing. It has many irons in the fire. And if it chooses to adhere to its mission to “do no evil,” shareholders should not be surprised.
But I’m wondering about the bigger picture.
As the Chinese government steers its country down the road of economic progress, it’s clear that the truth takes a back seat to the lunch basket, as well as the desire to enable its population to secure increasingly productive employment, and the desire to maintain its identity.
The Chinese don’t owe anybody anything.
The U.S. owes them about $800 billion.
And it’s important, when dealing with a trading partner who has a stronger position, to understand that partner’s values and motivations. I wish our politicians luck. And I continue to call for them to work to reduce that debt. So far, they’re not listening.
President Obama has pledged to give Haiti $100 million. China has promised $4.2 million.
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Tomorrow, we Massachusetts voters get to choose who will fill “Ted Kennedy’s Senate seat,” a seat that’s been occupied by a Democratic body for the past 57 years.
Two weeks ago, it appeared the Democrats were going to cruise to another win. Attorney General Martha Coakley, who’s been in the state system her entire career, had great name recognition, while her Republican challenger, state senator Scott Brown, had little.
Furthermore, registered Democrats outnumber registered Republicans in the state by more than three-to-one.
But 51% of Massachusetts voters are independent, and those votes can easily go either way, particularly with a big national issue like healthcare reform on the table.
And now it appears that fear of an expensive, ill-designed healthcare bill, riddled with perks and pork for all the parties whose lobbyists did their jobs, might be the issue that tips the balance to the Republican side.
So President Barack Obama flew in yesterday to rally the troops for Martha.
If his efforts fail, the Democrats’ goal will be to wrangle a healthcare bill through before Brown takes office.
Man, I hate the machinery of politics. But I’d rather live in Massachusetts than in China or Haiti!
On Monday my column led with the story of Casey Johnson, the great-great granddaughter of the founder of Johnson & Johnson. Among your insightful responses was this one, from a reader who’s a Financial Advisor in the Northwestern Mutual Financial Network.
“If Casey Johnson was single at the time of her death--and I think she was--and with no current federal estate tax in 2010, she may well be the first famous “name” to entirely escape federal death taxes. (Her estate would still be exposed to state of California inheritance or California estate taxes).
“And while Congress will supposedly resurrect the federal estate tax retroactive back to 1/1/10, there are any number of constitutional challenges to making a tax retroactive to a deceased person who passed away under then-current tax law.
“Moreover, for very affluent couples with assets exceeding the old 2009 exemption amounts of $3.5MM per spouse if the assets were individually titled, when the first spouse dies, any excess over and above the exemption amount ($3.5MM in 2009) automatically flows into trust bypassing the surviving spouse.
“This has a potentially disastrous effect on the countless wills written across the country that mandate estate asset transfers in this manner.
“Even if the old $3.5MM estate exemption amounts are revived shortly in 2010 by Congress and made retroactive, it will still be too late for millions of assets which passed under will to trusts under the current (no exemption amount due to no estate taxation) tax law for people who died (the already dead) in January 2010.
“Talk about the law of unintended consequences ... stunning consequences, simply because Congress couldn’t get their act together on this expiring estate tax law--all of course due to their almost complete and utter fixation on healthcare.”
As for the stock market, the good news is that the market was up 3% in the first five days of 2010, and history tells us that’s a positive omen. Since 1950, when the stock market has risen over the course of the first five trading days of January, it’s finished the year with a gain 86% of the time.
The average gain was 13.7%, which I think most investors would find satisfactory.
With Cabot’s growth-oriented advisories, we aim to do better, through two techniques.
The first is market timing, the practice of taking cash out of the market when the market’s main trend turns down, and waiting patiently to put it back in until the trend turns back up. Academics will tell you that market timing doesn’t work, but they’re wrong.
In fact, a subscriber (Bob) actually walked into our office last week (a rare occurrence) asking for extra copies of Cabot Market Letter to give to his friends; he’s been touting our value since we persuaded him to sit on the sidelines in the great collapse of 2008-2009 ... he says he made 4%, while his friends stood pat and lost big. He also says his grown son tells him market timing doesn’t work!
The second way we beat the averages is stock selection. We want you to own great stocks in bull markets, not mediocre stocks.
So here’s an idea for you.
It’s NBTY (NTY), formerly known as Nature’s Bounty.
Back on October 7, the stock was recommended in Cabot Market Letter. Editor Michael Cintolo wrote, “NBTY is an international retailer of vitamins, minerals, herbs, sports supplements and diet aids, about 25,000 products in all, which it sells through mass merchandisers, drug store chains, supermarkets, health food stores and other outlets. It also operates its own chain of over 440 Vitamin World and Nutrition Warehouse stores. The chart for NTY shows a strong rally in April and another in July. Each represents an earnings report that beat analysts’ expectations. The stock built one nice base at 37 in August and then put in another base around 40. Business is improving in a hurry and the stock’s tight trading tells us higher prices are likely. BUY.”
Since then, the stock has climbed from 40 to 45, for a gain of roughly 13%.
Also, last week the company announced preliminary results for the quarter ended December 31, saying revenues were up 14%.
I like the fact that millions of baby-boomers are looking for the fountain of youth in vitamins and supplements.
I like the fact that the company is dominant in the industry; when it sees a brand it likes, it acquires it.
And I like the chart, which is climbing slowly and steadily upward. Volume trends indicate that buyers are still in control.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
Editor’s Note: If you want more of Mike Cintolo’s expert advice you should consider Cabot Market Letter, our flagship publication. Cabot Market Letter was recently named to Hulbert Financial Digest’s Honor Roll for performance in both good times and bad. We use our proven market timing indicators to stay on the right side of the market’s trend, putting us in cash when the market is negative and getting us fully invested in the top growth stocks when the market is trending up. Join us today!