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Markets are Never Wrong; Opinions Are

Why doesn’t economic news affect my market outlook? The reason for that can be explained in my favorite quote, which is carved on the mantel above the fireplace at Cabot: “Markets are never wrong; opinions are.” The infamous trader Jesse Livermore is responsible for this gem. Far too many investors fail to leave their egos and opinions at the door and this is the #1 reason most investors lose money, or at best produce lackluster returns.

Stimulate a Boom, not just Stabilize a Bust

Markets are Never Wrong; Opinions Are

Pasta for Profits


Well, it’s nearly official--the House and Senate have come together and compromised on a $790 billion stimulus package, one that has plenty of support for state budgets, infrastructure spending, middle-class tax cuts and more (including some pork). Let’s all hope it can help the economy get back into gear.

What do I think of the deal? Honestly, I’m not overly impressed, the reason relates to a quote I heard from Ed Yardeni, a good economist in my book (is good economist an oxymoron?), one who has a pretty decent history of pointing out longer-term trends. I remember him being one of the champions of the global boom in the early 1990s, after the Soviets folded up their tent. And he was one of the first this decade to talk about how China will drive the world economy. Of course, I also remember he was all about Y2K pitfalls, but hey, nobody’s perfect.

Anyway, Yardeni’s quote that stuck in my mind was: “We need to stimulate a boom, not just stabilize a bust.” I think he’s got it right, and nowhere can that be seen more than in the stimulus bill.

I won’t get into the politics of this bill--Republicans and Democrats alike have had more than their fair share of good and bad ideas in recent years--but the substance of it appears focused on stabilizing a bust, not stimulating a boom. If government spending was the key to economic growth and vitality, we’d never have a recession; Uncle Sam would just borrow a few hundred billion, spend it, and we’d be back to happy times.

But the world rarely works that way. To promote long-term growth, there must be incentives (or a lack of disincentives) for entrepreneurs and workers. And I’m not just talking about tax policy, though that’s certainly part of it; stable monetary policy, solid (but not onerous) regulations, a decent infrastructure, and other items need to be in place.

The current stimulus package has hundreds of billions of dollars dedicated to states (for unemployment benefits, health insurance, etc.) and a modest tax credit for most workers (looks like $400 per person, $800 per couple). I think this stuff will do some good--keeping people afloat, and also slicing some taxes for most workers, is generally a good thing.

But it’s not going to encourage risk taking or economic growth. It doesn’t matter if everyone goes out and spends their money right away; again, spending is not the only key to economic growth; the key is risk-taking, capital formation (there’s a reason this is called capital-ism), and new products and services.

So what do the measures mentioned above stimulate? Well, nothing really ... but they will likely soften the blow of this recession. And that gets back to Yardeni’s quote--this package isn’t likely to be a disaster, but I also doubt it’s going to get the economy growing consistently. I have a sneaking suspicion the politicians might be back at it again in the summer or fall, searching for other rabbits to pull out of the hat in order to kick the economy into gear.

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So how does that view affect my market outlook? It doesn’t! And the reason for that can be explained in another one of my favorite quotes--actually, it IS my favorite quote, and it’s carved on the mantel above the fireplace at Cabot: “Markets are never wrong; opinions are.” The infamous trader Jesse Livermore is responsible for this gem.

While I have strong opinions about income thresholds for tax credits (see my previous Cabot Wealth Advisory, dated February 2, 2009) and about the overall stimulus bill, I do NOT let that affect my investing. How is that possible? Because I have an investing system I believe in ... and the discipline to follow it.

Far too many investors fail to leave their egos and opinions at the door. In fact, I would guess that this is the #1 reason most investors lose money, or at best produce lackluster returns, when playing the stock market: They argue with the market’s actions, thinking they are smarter than everyone else. I’ve talked to dozens of people with that attitude, all of whom eventually get their heads handed to them.

Whenever I hear someone say that “the market is DEFINITELY going to go up,” I simply respond, “Maybe ... let’s let the market decide.” Argue all you want about politics or policies; go to a bar with your friends and debate the relative merits of tax cuts, or discuss infrastructure spending with your family at the dinner table. But when it comes to investing, you need to keep an open mind and follow the market’s message.

I mention this because, in recent days, I have been watching some news and investing shows, trying to get the latest on the stimulus package, TARP 2.0, the economy and the like. But about a half hour into one of this week’s programs, I changed the channel, turned to my wife and said, “The news is horrible!!”

When the news is this bad, and when big negotiations are going on in Washington, D.C., emotions run high. Analysts make big predictions. Pundits proclaim extreme views on TV. And it becomes hard to keep an unbiased view of the market’s action.

So let me give you a brief overall view of the market right now. The trends are still down, and until that changes, I believe it’s a mistake to get too bullish. I would at least want to see the major indexes above their 50-day moving averages. For the Nasdaq, that means above 1,535 or so, for the S&P 500, above 870 and for the S&P 600 SmallCap, that means above 250 or so.

On the flip side, a decisive break below 800 on the S&P 500, and 1,430 on the Nasdaq, would tell you some further downside movement is likely.

Still, objectively, while I remain highly defensive, it’s hard not to notice some positives. First and foremost, the growth-oriented Nasdaq is acting far better than the Dow. It’s nowhere near its bear market low of last November, while the Dow got to within a couple hundred points of its low on Thursday.

Second, the broad market is more resilient than the Dow would lead you to believe. A mere 118 stocks hit new lows on the NYSE during Thursday morning’s decline, nowhere near the 1,000+ readings seen during last fall, when the Dow was also hovering in the 7,500 - 8,000 area.

Third, and most important, I’m finally seeing at least a few leading stocks in the market. Forget the beaten-down leaders of the last bull market; you want the new leaders that are going to be the next Apple, the next Google, etc. The good news is that a few of these new leaders, many of which have been mentioned in Cabot Wealth Advisory before, are also hanging in there.

All told, cash is a good place to be. But if you’re letting the headlines make you think a new bull can’t get going soon ... think again. I have my subscribers to Cabot Market Letter sitting up and paying attention, in case the market holds support and breaks above the previously mentioned 50-day moving averages.


Speaking of leaders, not all of them will have revolutionary products or services. Throughout market history, in fact, one out of every four big winners has been a turnaround story, a firm that fell on hard times but has rebounded in a big way.

So in this Cabot Wealth Advisory, I’m going to write about the largest pasta maker in the U.S. Exciting? No. But is the stock one of the strongest in the market? Absolutely!

I’m talking about American Italian Pasta (AIPC), a little-known firm that--believe it or not--has some good reasons to be strong, as I explained in Cabot Top Ten Report a few weeks back:

“American Italian Pasta is the largest U.S. maker of dry pasta, selling it under various brand names. How can a pasta company be one of the strongest stocks in the market? Part of it is the result of a turnaround, as the firm is recovering from years of sketchy management (the former CEO and CFO recently pleaded guilty to fraud). But all that is now in the past, and the new management team has proved adept--they’ve moved
the stock from the pink sheets back to the Nasdaq, have gotten the firm current in all its financial filings, and more important, they’re growing the business like mad. Part of the bottom line’s spike is because of a decrease in legal fees (now that court cases are behind them), but much of it has to do with recent price hikes and a plunge in wheat prices, one of the firm’s biggest costs. The result has been shockingly strong sales and earnings growth, forecasts for more to come (earnings could rise 85% in the fiscal year ending September), and a rapidly rising stock. It’s not a typical leader, but consider it a special situation with solid potential.”

More important, the company reported earnings Thursday morning, and they were ridiculously good--revenues rose a huge 53% to $171 million, while earnings mushroomed to $1.23 per share, up from $0.07 a share the year before! People eat more pasta when times are tough. The stock gapped up to new highs on the news. If AIPC can tighten up or pull back for a few days, I think it would be well worth a nibble.

All the best,

Mike Cintolo
For Cabot Wealth Advisory

Editor’s Note: Michael Cintolo is the editor of Cabot Top Ten Report, which discovers the 10 strongest stocks in the market each week. The Report routinely beats the market by finding strong leaders like these past picks: In 2005, Hansen Natural gained a whopping 570%. In 2006, NutriSystem was up an amazing 480% in 11 months. In 2007, DryShips was up 510% in 10 months. Even during last year’s bear market, Cabot Top Ten Report has found winners in stocks like Cleveland-Cliffs, which doubled in four months, Continental Resources, which rose 160% from its recommendation to its peak, and Walter Industries, which rocketed from 42 in January to 112 in early July. Click the link below to discover the strongest stocks in the market today.


A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.