The main characteristic of equity markets right now is
If you take a look at a daily chart of the S&P 500 Index
since the beginning of 2009, you can see it immediately. The
S&P bottomed in March 2009, then played the bouncing upward
game for most of the rest of the year, looking like a Slinky toy
going up the stairs rather than down.
After the January 2010 correction, the Index got back on track
in February and rallied beautifully through the end of April.
At that point, the bears got a grip on the market and pulled it
right back to its February lows.
But the more important thing to see in the S&P chart is that
the intraday swings got much, much bigger, indicating a growing
disagreement between those who think the market will go up more and
those who are betting that it will go down.
Volatility is what you get when you have a devoted group of
market optimists fighting it out with an equally committed group of
I won't go through the competing scenarios that each group
paints to support their vision of the market's future. The
scenarios for both a major market meltdown and another big rally
make perfect sense.
But one of them has to be wrong, at least in the short term.
There are actually three possible ways the market can go from
here. They are up, down and sideways, which would mean more of this
hacking around without a central tendency.
If you feel yourself drawn to either the bulls or the bears, the
optimists or the pessimists, and if you're moved to put a lot of
money behind your bet, here's my advice. Don't.
Remember what I keep telling you: The market wants to take your
If we get a new rally in the stock market, it's likely to be a
relatively narrow one, with more and more money pouring into the
most popular names. And for subscribers to our growth newsletters,
Cabot will be happy to tell you what those names are.
We will also be happy to tell you when to get into cash if the
market heads for the deep end.
So try to be like a good World Cup goalie. Ignore the head fakes
and the temptation to anticipate what's happening. Be patient and
wait until the real move becomes clear. Then react with
My favorite story out of China in recent months has nothing to
do with investments or growth stocks. It's part "dumb criminal"
story and part tragicomedy. And the amazing thing is that I heard
absolutely nothing about the story when it first broke.
It all began when a vault manager in the Handan branch of the
Agricultural Bank of China came up with a bright idea in October
2006. (Handan is an industrial city of 1.4 million in Hebei
Province, about 250 miles south of Beijing.) With the "cooperation"
of a couple of security guards, he decided, to "borrow" 200,000
yuan (about $26,000) from the bank's vault and buy lottery tickets
with it. His plan was to win enough that he could replace the money
and keep the excess winnings for himself.
Not a wise plan, you might be thinking, but good enough for our
And the weird thing is that it worked!
The manager replaced the 200,000 yuan, and that might have been
the end of it. (I have no idea how much his excess winnings
Unfortunately, having successfully confirmed the viability of
his scheme to his own satisfaction, the manager decided to go after
some real money.
He enlisted another manager, and together they walked out of the
bank with nearly 33 million yuan (about $4.3 million), of which
they immediately dropped 31.3 million on more lottery tickets. But
this time luck was against them, and they won basically zilch.
As so often happens when a poorly considered sure thing goes
wrong, the manager and his friend must have panicked. They figured
that their only way out of the mess was ... wait for it! ... to
steal more money!
This time they walked out with 18 million yuan (about $2.3
million), and immediately poured 14 million into lottery tickets in
a single day. And almost needless to say, their luck stayed bad,
resulting in a return of just 98,000 yuan.
When their massive embezzlement was discovered, our heroes did
the only logical thing, which is to buy fake IDs and used cars and
hit the road. Unfortunately, China isn't a place where desperadoes
can take to the open road and disappear into legend.
The managers were found within two days and charged with
misappropriating public funds (because the Ag Bank of China is a
state institution). And here's where the tragic note comes into the
The two were executed on April 1, 2008, which may be a bit of
cosmic calendar irony.
I haven't used the men's names because I don't think non-violent
crimes deserve the death penalty, but that's a personal thing. I
don't mean to mock people whose real crime was embarrassing the
Is there a moral for this story? I don't know. There's probably
a lesson in there somewhere about not letting a statistical
improbability (the first manager's big lottery win) convince you
that statistics don't matter.
But sticking to the topic of crime ...
I have a lawyer friend in Arkansas who switched from being a
defense lawyer to the prosecutor's office. I think he just got
tired of defending people who were, for the most part, guilty as
heck. I love his line about crime, which is, "There are really only
two crimes, misdemeanor stupidity and felony stupidity."
Big investment companies love consistent revenue and earnings
growth, especially because this consistency allows them to project
future growth with confidence. When you're trying to predict
anything about the future, confidence is a precious commodity.
Longtop Financial Technology (
) is a Chinese provider of software and IT solutions to the
financial sector in China. The company's products help run bank
teller machines (ATMs), control customer relationship management (
) and let financial firms mine customer information for information
that will enhance revenue and increase client satisfaction. The
company also just signed an agreement with Netezza (
) to provide integrated data warehousing services in China.
The bottom line, though, is the bottom line, which has been
growing steadily for a long time. Both revenue and earnings have
each been growing at a 30% or better rate for the last 11 quarters.
(OK, so Q3 2009 earnings were up only 29%. Don't get picky!)
The company has no debt to speak of and the forward P/E of 21
seems entirely reasonable, given the growth of the Chinese
The chart for LFT shows a stock that has been drifting slowly
downward since January, but has caught an upwind since June 9 and
is now trading above its 25- and 50-day moving averages on rising
I had LFT in the Cabot China & Emerging Market Report
portfolio in April, following a short stay on our Watch List. We
sold it for a small profit in July after the stock corrected from
29 to 22. If this rally continues, it may make another trip to the
Watch List. Then we'll see.
For Cabot Wealth Advisory