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The “Old” New World and the “New” New World

Today is Columbus Day, the day we honor the man with the courage to venture into the unknown, to do something different. As Americans, we all owe him a debt of gratitude. As investors, we should remember that it’s people like Columbus who have made America great, people who try something new, and create value from nothing. We need more men like him today.

516 years ago yesterday, Christopher Columbus landed somewhere in the Bahamas. Over the next 10 years, the intrepid navigator--born in Genoa, Italy, but sailing for the Spanish--made three more trips to the New World, setting in motion a wave of immigration that continues to this day and cementing his reputation as a key player in the development of the United States ... despite the fact that he never stepped on the U.S. mainland. Ironically, America was named for Amerigo Vespucci, who voyaged to South America perhaps five years later and became well known chiefly because of the letters he wrote. Vespucci was also Italian, born in Florence but like Columbus, working for Spain. (That’s where the money was.) But Columbus lives on in the following places:

Columbus, Arkansas
Columbus, Georgia
Columbus, Illinois
Columbus, Indiana
Columbus, Kansas
Columbus, Kentucky
Columbus, Minnesota
Columbus, Mississippi
Columbus, Montana
Columbus, Nebraska
Columbus, New Jersey
Columbus, New Mexico
Columbus, New York
Columbus, North Carolina
Columbus, North Dakota
Columbus, Ohio
Columbus, Texas
Columbus, Wisconsin, a city in Columbia and Dodge counties
Columbus, Wisconsin, a town in Columbia County
Columbus City, Iowa
Columbus Grove, Ohio
Columbus Junction, Iowa
Columbus Township, Illinois
Columbus Township, Indiana
Columbus Township, Iowa
Columbus Township, Luce County, Michigan
Columbus Township, St. Clair County, Michigan
Columbus Township, Missouri
Columbus Township, Nebraska
Columbus Township, North Carolina
Columbus Township, Pennsylvania

And ...

Columbia, Alabama
Columbia, California
Columbia, Connecticut
Columbia, Illinois
Columbia, Indiana
Columbia, Iowa
Columbia, Kentucky
Columbia, Louisiana
Columbia, Maine
Columbia, Maryland
Columbia, Mississippi
Columbia, Missouri
Columbia, New Hampshire
Columbia, New Jersey
Columbia, New York
Columbia Center, New York
Columbia, North Carolina
Columbia, Pennsylvania
Columbia, South Carolina
Columbia, Tennessee
Columbia, Virginia

Also ...

Columbus, the European module for the International Space Station

Seven newspapers

13 railroads or rail or metro stations

12 ships

13 aircraft or airports

Four medical institutions

46 educational institutions, chief among them Columbia University

31 companies

And more.

My considered guess is that the only name with comparable appeal is Washington. Put them together and you get Washington, District of Columbia, which is where the money is today!

More about that later.

But today is Columbus Day, the day we honor the man with the courage to venture into the unknown, to do something different. As Americans, we all owe him a debt of gratitude. As investors, we should remember that it’s people like Columbus who have made America great, people who try something new, and create value from nothing. We need more men like him today.


And now a few words about the current financial crisis. Exactly one year ago I wrote the following in Cabot Wealth Advisory on the subject of financial stocks.

“On the surface, the problem appears confined to the sub-prime residential lending market; thus the calls to regulate that industry better. But the sub-prime market only developed to serve the demands of the market, which insisted on buying/speculating on assets it assumed would be worth even more in the future.

“In a free market, for every buyer, there is a willing seller, and vice versa.

“And the sub-prime market that developed (just like the Internet bubble) was really the final act in a play that had been going on since 1980!

“Yes, you’ll remember 1980 as the year that gold and silver and interest rates peaked. A long-term perspective reveals that the 26 years from 1980 until 2006 were characterized by increasingly loose credit. This easy credit enabled expansion in a host of industries, but none was more visible than the housing industry.

“Now the days of easy credit are over.

“And the collapse of the sub-prime market is just the beginning. Those loans, you see, are still on someone’s books. Debt may be marked down as it’s transferred from one owner to another, but it doesn’t just disappear. So as the prices of the residential real estate that formed the foundation of those loans are re-priced lower and lower, the value of that debt shrinks again and again. And because real estate is a relatively illiquid asset, the transfer of these assets takes a lot more time than the transfer of stocks and bonds.

“Eventually, the malaise of the residential sector will spread to the commercial sector as well, because at bottom, this is not about houses, it’s about credit, and credit holds for those valuations as well.

“The question now is whether the long re-pricing that evolves will last five years or 25 years!

“No one knows, of course, and you don’t need to know. But you do need to remember that trends, once in effect, tend to persist for far longer than originally expected. Which is why I’m happy none of my kids are going into the real estate business!

“As for the credit business, it’s obvious that the more exposure a firm has to the residential housing industry, the greater its risk, but it’s entirely possible that the paradigm shift from increasingly looser credit to increasingly tighter credit could impact even the “best” companies in the industry.”

The Current Mess

At the time I wrote that, I had no idea the domino effect would eventually bring down Fannie Mae, Freddie Mac, Washington Mutual, Lehman Brothers, etc., and I didn’t need to. All I needed to do was stay away from financial stocks, and that’s what Cabot investors have done in the past year.

And now what? Throughout the course of the one-year bear market, investor sentiment has progressed through the three typical stages, Complacency, Concern and Capitulation. In the latest phase, stock prices plummeted as investors rushed to the exits, eager to flee to the safety of cash or government bonds, and the result is that today numerous high-quality companies are now selling at a fraction of their fair value.

At the same time, confidence in our government and our banking institutions has evaporated. The common wisdom today is that America’s best days are behind us and that digging out of this hole will be a long difficult job.

But that’s typical of sentiment at market bottoms!

After bottoms come rallies, and then new bull markets. My best guess is that a rally will start very soon, and will take us into November, but will eventually lead to a re-test of last week’s lows. During the re-test, the best stocks will hold up extremely well, and those are the ones you’ll want to own in the new bull market. But that’s getting a little far ahead, and it’s dangerous to tell the market what to do.

Nevertheless, I suggest that you get ready by building a watch list of likely top performers.

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For example, in the month after the 1987 market crash, which was less damaging than the current one but far more shocking in its abruptness, Cabot Market Letter subscribers bought Apple Computer, MCI Communications, St. Jude Medical and lesser-known stocks that became big winners. We fully expect to recommend similar high-potential stocks in the months ahead.

So how do you find them?

You DON’T buy fallen angels like Potash, First Solar or Research in Motion, unless you’re the most nimble of traders.

You act like Columbus, searching out the growth possibilities in the New World. That means finding fast growing companies that have not yet become well loved and whose price charts are acting well. There aren’t many these days; the damage from the crash has been widespread. But there is a handful and one is Amedisys (AMED).

Amedisys is in the home health care business, a sector that I think will provide great growth opportunities in the years ahead. It has 325 nursing offices and 29 hospice offices in 30 states. Revenues grew 85% in the second quarter, to $313 million while earnings grew 44%, beating analysts’ estimates. And the stock looks healthy. While it has corrected 34% in the past two months, its long-term uptrend is still intact.

I suggest you keep an eye on it.


Editor’s Note: If you really want the inside track on the leaders of the next bull market, I recommend a subscription to Cabot Market Letter. Readers get specific advice on both market timing and stock selection as well as first-class education, and the result is excellent performance. In fact, since the start of 2007, Cabot Market Letter’s Model Portfolio has gained 22% ... thanks in part to a hefty cash position this year. But editor Michael Cintolo is optimistic that a new bull market will begin soon. When it does, I’d like you to be buying the leaders, and the best way you can find them is to subscribe to Cabot Market Letter. To get started with your no-risk trial subscription, simply click the link below.

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.