The Bull Market Turned 5... Is the Party Over?

WELCOME TO CABOT’S25TH ANNUAL INVESTMENT & WEALTH MANAGEMENT CONFERENCE

Your interests and goals always come first.

Cabot Wealth Management, Inc.

25th Annual Investment and Wealth Management Conference

Rob Lutts President and Chief Investment Officer

September 26, 2014

Outline

• ECONOMICS

• MARKETS

• RISKS

• STRATEGY

Global Economic Recovery:

Slow but Steady Central Bank Intervention:

New Exit Phase Beginning Great Reallocation Beginning:

Out of fixed income and alternative space to

risk-based asset investing

Key Factors Today

Energy Innovation: U.S. is Expanding Energy Production Rapidly –

82% over 7 years. Impact – Lower Inflation and interest rates Driving manufacturing in USA – cost advantage to USA – amazing

positive factor (not well appreciated) Driving Profits Higher for many U.S. Companies

U.S. Innovation Pace is Expanding: Silent Innovation Revolution – Like Industrial Revolution in 1900s U.S. Leading World Innovation: Google, Apple, Facebook,

Linked In, Salesforce.com, Illumina, SolarCity, Tesla, Biogen

Unexpected Changes Having Key Impact

Interest Rate Trends Favorable for Equities: Bear Market in Bonds Not Far Off

U.S. Manufacturing Costs: U.S. NOW Competitive

Global Economics Changing: Capital Investment Accelerating

Deferred Capital Spending: Indications Trend Accelerating

Equity Valuations Higher, Yet Attractive Today: P/E Expansion

International Dependency: Global Cooperation Key – Conflicts Rising

Stocks on Solid Foundation Today

Core Belief: The “Good” in Man Always Overcomes the “Evil”

George Bailey – The Bailey Building & LoanMr. Henry F. Potter

Core Belief: Knowledge Creates Progress and Value

More information has been produced in the last 20 years than the previous 5,000.  If the increase of knowledge from the dawn of history to the 1800s is given a value of one, then knowledge has doubled 16 times within the last 10 years.  Today the amount of information and knowledge in the world is doubling every 18 months.

Core Belief: Innovation Leads to Great Value Creation

Benefits of information technologycan take us a long way!I believe Internet and IT will have much larger impact on productivity than electricity.

Speed of productivity increased dramatically

“Investment management” is one of the (important) components within “wealth management”

Wealth Management:◦ Investment management

◦ Asset allocation (equities, fixed income, international securities, alternative assets, etc.)

◦ Investment choices within each asset class◦ Retirement planning◦ Tax planning◦ Estate planning◦ Risk management (planning for catastrophic risks including disability,

death, long-term care, personal liability, personal property)

Core Belief: Wealth Management - Process is Critical

Expect More Growth and a Better Economy in the coming years

Disruption to established industries high – Value Erosion

Opportunities for value creation very high in next decade

U.S. Economy – The Most Resilient, Adaptable, Creative and Innovative Economy on our PlanetWhy? Free Markets, Capital Markets, Legal System, Educational System, Entrepreneurs Who Drive Ideas, Culture of Growth and Progress

U.S. Economics

Growth is Slower. Reason: Debt Levels High Globally?

Consumers Coming Back! Still Lower than Normal Confidence

Debt Obligations of HouseholdsNow Dramatically Lower

Businesses Now Starting To Increase Capital Spending

Back To 1995-2000 Levels

Depressed

Could Inflation Stay Low Longer? Yes – Time Will Tell

Unimaginable Energy Revolution!

Never Underestimate American Ingenuity and Innovation

New Cost Paradigm in USA - Very Favorable

New Baby Boom – Next Seven Years – Sharp Increase in Number of 30 Year Olds.

Business Efficiency Driving Corporate Profitability Higher

Business Loan Demand Strong and Growing!

U.S. Economy Growth – Stronger soon

U.S. is Strongest Large Developed Economy on planet today – U.S. Shines Today

Expect Inflation and Interest rates to remain lower for a longer period of time - Watch Trends

Corporate Productivity and Profits will continue to be higher than many expect

Overall: Very Positive U.S. Economic Situation

Economic Summary

Markets

Markets Are Very Healthy TodaySignificant Upside over the coming 12 -24 months

Today Entering Expansion Phase Cycle

Earnings Solid and Growing

Markup In Valuations Phase coming Monetary, Earnings, Valuations and Psychology all Positive

Equity Markets Today

14 Year Trading Range 1999 – 2013 Now Ended – BREAKOUT Positive

Markets Have Upward Bias –2013 Breakout – Very Positive

Cycle Still Positive – Looks To Be Positive for a Few More Years

2015 P/E Ratio Average

Earnings Growth Very Healthy

2.0 percent Dividend Yield Plus 2-3% Buybacks = 5% Total Return

Equities Providing Solid Total Return

How High Can Stocks Go? The Bullish Projections By Some Analysts

Earnings Multiple*** Target Upside2014 $119.50 18.5 X 2,211 11%

2015 $130.00 18.5 X 2,405 20%

As of 9/6/14 SP 500 is 1995*** Between 1-3 % inflation Ave. P/E is 19X

Long-Term US Interest Rates

1800 - 2014

1800 7.1% 1900 3.9% 2000 5.6%1810 6.0% 1910 4.0% 2010 4.9%1820 6.0% 1920 5.3% 2014 3.4%1830 5.1% 1930 4.3%1840 5.3% 1940 2.8%1850 5.4% 1950 3.0%1860 5.8% 1960 4.1%1870 5.3% 1970 8.0%1880 4.0% 1980 11.5%1890 3.9% 1990 7.9%

The 200-year Average = 5.2%

30 Year Treas. Bond 3.2% 9/9/14

EEM Discount: 25-35%

Growing Markets: India / Africa

Retail & Healthcare

Travel and Transportation (Auto)

Banks

Insurance & Education

Internet & Advertising

Infrastructure

India – New Leadership may help drive growth higher – much room to improve

Africa – Much room for improvement – those risk takers /high reward

Cape Town, Africa

Rob Lutts Feb, 2014 Attending Indaba Mining Conference

Tabletop Mountain, 4000 ft. peak within 15 minutes of downtown Cape Town

Summary

- US Stocks Overweight- Foreign Stocks - Developed Markets Neutral- Foreign Stocks - Emerging Markets/Frontier Markets Neutral/ Over- Domestic and Foreign Bonds Underweight- Precious Metals Underweight- REITS Neutral- Alternative Assets Neutral

Risks

Global – Geopolitical – Wars, Conflicts

Central Bank Error – Debts still large in Governments

Interest Rate Shock – Inflation Trend

Currency Devaluation – Money Printing is Inflationary

Protectionism – China, Russia – Trading Barriers –

Hostile to Trade

Key Risk Factors Today

Fed Intervention: Delaying Inflation

U.S. Government Spending Gap Closing – Washington Gridlock – Positive ST – LT Trend problematic

15%6%

Government Debt – A potential disaster if rates rise dramatically – could grow deficits quickly

Source: BloombergNOTE: The S&P 500 Index is a widely recognized, unmanaged Index of common stock prices.

“Normal” Market Volatility:3 Corrections per year > 5%1 Correction per year > 10%1 Correction every 3+ years > 20%

IPO Market – Starting to Heat Up (Alibaba)

Secondary Issue Market Strengthening as well

Investors Appetite for Risk Products is building

Equity Flow of Funds Positive now – but still modest

Client Risk Indicator - moderate

Signs of Risk Building

Solar Power Energy:

Residential and Commercial solar now at critical

cost level that is driving growth

Health Diagnostic Innovation:

Biotechnology and Genomic Breakthroughs

Transportation:

Electric Vehicles

Cabot’s Top Three Growth Themes

“Innovation is the specific instrument of entrepreneurship...the act that endows resources with a new capacity to create wealth.”

- Peter F. Drucker

Threefold Increase in Three Years!

Economics of Solar are Driving Growth Now

Medicine now entering dramatic phase of change in next ten years – invest today

The Electric Vehicle Industry - Innovation

Strategy

Shorter Term: 1-2 years Very Positive on Economy and Equities

Mid Term: 2-4 years Yes …We See Troubles Brewing… New Bubbles in

Economy. Eventually valuations will become excessive.

Long Term – Coming Decade: U.S. is well positioned to benefit from innovation

Is Five-Year Bull Market Over?

Economy in U.S. and Globally will be much stronger Inflation will be accelerating and will be viewed as a concern Interest Rates will be rising steadily Federal Reserves and Central Banks will have substantially reduced

their stimulus programs Valuations bubbles will be more evident – stock prices (P/Es at upper

range levels), real estate or other asset classes unknown today. You Will Feel Better About Our Economy

What Trouble Will Look Like In a Few Years

Cycle Factors:Signs of Investor Risk Taking is Building Central Banks - Soon Raising Rates 10 months? Equity Valuations Higher Today Economy Is Closer to “Blue Sky” Today

Geopolitical Issues: Middle East - Conflict, Russia

(Ukraine), China (Protectionism)

Four Signs of Trouble Building:

Diversify

Find a mix that makes sense for you based on risk tolerance, goals, short/long-term income needs.

- US Stocks Overweight- Foreign Stocks - Developed Markets Neutral- Foreign Stocks - Emerging Markets/Frontier Markets Neutral/ Over- Domestic and Foreign Bonds Underweight- Precious Metals Underweight- REITS Neutral- Alternative Assets Neutral

Expect More Growth and a Better Economy in the coming years

Disruption to established industries high – Value Erosion

Opportunities for value creation very high in next decade

U.S. Economy – The Most Resilient, Adaptable, Creative and Innovative Economy on our Planet

QUESTIONS

Thank you for joining us today.

State of Cabot Cabot’s 31th Year – Great Opportunities Ahead

Cabot Technology Platform Expanding – Best Practices Digital Phone System - Thinking Phones – Always Available

Software Integration with Schwab – Salesforce.com and Custodians

Hosted Networks – Cloud Computing

Hardware Upgrades – Security

Backup Generator Installed – All Tested

Green Energy Efficiency Efforts – Roof Solar Project (216 Essex and 30 Federal)

Staff Education – High Investment – Expanding Conferences, Seminars, World Travel

Continue to Seek To Upgrade our Skills and Abilities

Core Belief: The “Good” in Man Always Overcomes the “Evil”

Core Belief: Knowledge Creates Progress and Value

Core Belief: Innovation Leads to Great Value Creation

“Investment management” is one of the (important) components within “wealth management”

Wealth Management:◦ Investment management

◦ Asset allocation (equities, fixed income, international securities, alternative assets, etc.)

◦ Investment choices within each asset class◦ Retirement planning◦ Tax planning◦ Estate planning◦ Risk management (planning for catastrophic risks including disability,

death, long-term care, personal liability, personal property)

Core Belief: Wealth Management - Process is Critical

State of Cabot

Cabot Investment Management

Equity Research – Team Effort

Cabot’s knowledge and Use of New ETFs Expanding/Equity Sectors

Fixed Income – Use of New Fixed-Income products expanding

Wealth Management Team – Best Practices Seminars and further education

Advanced Skills– Taxes, Estate Planning and Insurance work

Staff Culture of emphasizing education and growth