The Law of Unintended Consequences
How to Know When a Bull Market Starts?
A Strong Stock in a Weak Market
We have fun with laws all the time. Think of the bumper
sticker that says: "Gravity, It's Not Just a Good Idea, It's the
Law." Or how about the law that says that your supermarket line
is the one that will jam up with a price check or a little old
lady searching in her purse for exact change? Or even the one
that says that toast that falls off the table will fall
buttered-side down (one of the many variants of Murphy's
There is, however, one law that's been a favorite of mine ever
since I ran into it in a college history class. It's The Law of
The classic example of the LUC is the Treaty of Versailles
that ended the First World War. The victorious allies were
somewhat peeved with Germany, and celebrated by imposing harsh
reparations and economic restrictions to punish it. (Just a bit
of trivia: one of the provisions of the Treaty was that Bayer,
the German pharmaceutical giant, was forced to give up two
patented pain relievers. The first was being sold under the
trademark Aspirin. The second was trademarked Heroin. But more
about that later.)
The popular LUC theory is that the huge burden of monetary
reparations and strict industrial limitations placed on Germany
created the economic chaos, hyperinflation and desperate national
mood that allowed the Nazis to come to power and start WWII.
(Some historians disagree about this, but historians will
disagree about just about anything, so they don't get a
True or not, it's the perfect story to illustrate how
ignorance, stupidity, short sightedness, malice and the vagaries
of chance can turn well-meaning attempts at rule-making into a
source of negative outcomes.
Another classic example of bad results from good intentions is
America's 13-year experiment with outlawing the sale of alcohol,
known variously as the 18th Amendment to the Constitution, The
Volstead Act or just plain old Prohibition.
It's universally accepted now that Prohibition was a dismal
failure, succeeding only in allowing organized crime to grow into
a profitable colossus, encouraging the production of untold
gallons of questionable (and sometimes dangerous) brews and
liquors, and turning millions of Americans who just wanted a
little drink into criminals.
I'm also fond of the LUC examples of how boxing gloves and
football helmets actually contribute to concussions and repeated
head trauma, but that's a story for another time.
My favorite current example of the Law of Unintended
Consequences is the Fiscal Cliff. It's not that the Cliff itself
is an unintended consequence; I think the lawmakers who made the
interim budget deal that created this artificial deadline
probably had a pretty good idea that it would come down to the
11th hour before a deal got done.
Rather, the LUC is waiting patiently on the sidelines, ready
to evaluate the tax/spending deal that eventually gets done and
then gets busy producing effects that nobody expected, wanted or
Many analysts, commentators and even politicians seem to think
that they know exactly what should be done, and how their actions
will affect the U.S. and global economies. But they're wrong. The
Law of Unintended Consequences says so. And it's the Law.
The Law of Unintended Consequences is a serious business, but
not a solemn one. It can produce misery, and dire results, but it
also yields the kind of ironic outcomes that make great
To get back to my bit of Bayer trivia, I like to point out
that there have been two attempts to produce a non-addictive form
of opium. Everyone wants the pain relief that opium brings, but
addiction is a high price to pay. So a German pharmacist,
convinced that it was the impurities in opium that made it bad,
refined it and named the resulting compound for the Greek god of
dreams, Morpheus. Thus was morphine born.
Working on the same principle of purification, Bayer further
refined morphine and marketed the resulting compound as an
over-the-counter pain reliever beginning in 1895, taking its name
from the German word
, which means "heroic." It's not a name most people would apply
to heroin these days, but that's the way the Law of Unintended
I don't often tell anyone what to do, but I'm telling you now.
You need to pay attention to what I say at the end of this little
section. It's as important as anything I've ever written, at
least for those of you who think you might ever want to invest in
growth stocks again.
You may have noticed that the U.S. stock markets got a nice
boost on the morning of December 3. It didn't last long, of
course, but when markets are unsettled, any rally makes it feel
like the sun has come out from behind the clouds.
What interested me about this rally was that the good news the
fueled it was about a report that indicated a return to growth in
Chinese factories. The Purchasing Manager's Index (PMI) is a
closely watched measure of how much buying is being done in
China's manufacturing sector, and any number over 50 is
interpreted to reflect growth. So the 50.5 PMI number was taken
to mean that China's economy is returning to growth. That's good
news, even if it is pretty slow.
As a dedicated China watcher, the PMI report didn't have me
exactly dancing on the tables at the local pub, but it was better
than further contraction.
If my analysis of the global macroeconomic situation is
correct, solely relying on a resolution to the Fiscal Cliff
standoff isn't enough to produce a genuine, durable bull
To get the bull that we're all hoping for, we will have to
wait for a convincing, durable solution to the crisis in Europe
1) either keep Greece in the Eurozone or kick it out for good
2) re-liquify its banking sector and
3) decide how much refinancing will be made available for
Greek's debt and how it will be repaid, and
4) make similar arrangements for dealing with the potential
problems in Italy and Spain.
That's a tall order, one that will entail more fiscal and
social pain than European countries are willing to accept right
now. Just as with the Fiscal Cliff, the challenge is so daunting
that only the prospect of genuinely catastrophic consequences
will force the parties to accept the pain.
But the point of all this maundering is this:
The most important thing you can know as a growth
investor is when a bull market has begun
. During bear markets, or when markets can't really make up their
minds which way to jump-which has been the case for the last
couple of years-the best you can usually hope for is to break
even, or maybe snag an occasional winner.
Bull markets are different. Bull markets make lots of stocks
look like they've gotten off the stairs and are taking the
escalator. And the best growth stocks will look like they've
finally gotten on the elevator. And a brilliant few will look
like they've hitched a ride on a moon rocket. Bull markets make
you feel smart. They make you glad to look at your brokerage
account. Life is good when the bulls are in charge.
And the best thing about Cabot's growth investing letters-
Cabot Market Letter, Cabot Top Ten Trader
Cabot China & Emerging Markets Report
-is that their market timing indicators give definite,
unambiguous buy signals when markets turn bullish.
The old investing adage that says, "If you think it's a
bottom, you're too early; if you know it's a bottom, you're too
late," has a seed of truth in it. But the truth is that most
people wait entirely too long to get back into the markets after
a long correction or a period of up-and-down trading.
I hate to seem too commercial, but subscribing to a Cabot
growth letter can give you the confidence to put your money to
work weeks or months before you are emotionally ready to accept
that markets have turned around. Which, of course, is usually the
best time to do so.
Our stock picking is very good. But our ability to make
definite calls on what the markets are doing
is the best thing we do.
If you have any growth investor blood in your veins, a Cabot
growth letter can be the most valuable tool in your investing
My stock pick today is a great example of a strong stock that
has been doing well despite a weak market. The company is
Nam Tai Electronics (
, a Chinese manufacturer of LCD display panels and modules for
consumer and telecom markets. The company has been in business
since 1975, and had a reputation as a well-run, profitable
business, but not one that was going to do anything
Then Apple entered the picture.
Suddenly, Nam Tai, which had been more of a commodity
producer, began booking huge sales of its high-margin LCD
modules. The company's Q3 results revealed revenue growth near
200% and earnings growth of 5,200%, up from a penny in Q3 2011 to
Apple never reveals the names of its suppliers, so much of
investors' enthusiasm for NTE is conjectural. But it's a pretty
well nailed-down conjecture.
Nam Tai is in the process of building new manufacturing space,
and management says that the company will shed some of its
low-margin business to concentrate on module making. Estimates
for 2013 are positively rosy.
NTE has spent years as an up-and-down dividend-paying stock
that hadn't traded above 10 since August 2008. But the stock
began to gain momentum in August, blowing past 10 on big volume,
then spent two months trading in a range between 10 and 12 while
investors waited to see what surprises third-quarter earnings
would bring. And when that news was good, the stock popped to 15
in a day and has been digesting that gain and moving to new highs
NTE is hot right now, and that presents challenges for how to
buy and how to handle the stock. One strategy is to buy in on one
of the stock's downticks, like the one today that took
three-quarters of a point off. The other is to take a small
position and then add to it if NTE can push past 16 on good
volume. In either case, the stock's 4.0% forward annual dividend
yield will make it a little easier to ride out the daily
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