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Cabot’s Wealth Management, Inc.Salem Rotary

January 5, 2016 | Salem, MA

2016 Global Economy – Improving with Upside

ROB LUTTS, PRESIDENT & CHIEF INVESTMENT OFFICER

26TH ANNUAL WEALTH MANAGEMENT CONFERENCE

Outline

1.STATE OF ECONOMIES AND MARKETS

2.WHAT MATTERS TODAY?

3.WHAT STRATEGIES WILL WORK TODAY?

• Global Economic Recovery in

Question:

Global Slowdown – Led by China

• Central Bank Intervention:

New Exit Phase Beginning in USA

Key Factors Today

What Matters Today?

•Growth

•Debt

•Freedoms

•Innovation - Underestimated

•War’s and Conflicts

•Confidence - Lacking

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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

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• Interest Rate Trends Favorable for Equities:

Competition is Weak

• Low Energy Cost – Very Positive

• Innovation Trends – Unappreciated

• Deferred Capital Spending:

Indications Trend Finally Picking up

• Equity Valuations Higher, Yet Attractive Today:

P/E at Fair Value Today

• Consumer Finances are Strong Today

U. S. Economy on Good Foundation Today

Unimaginable Energy Revolution!Peak at 9,600 in May …now about 9,200 BBD

Never Underestimate American Ingenuity and Innovation

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Dramatic Rig Adjustment Will Soon Stabilize Oil Prices

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Could inflation stay low longer? Yes – time will tell

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Normal recovery at this stage of employment usually at quicker pace

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Debt Obligations of HouseholdsNow Dramatically Lower

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Consumers Coming Back! Still Lower than Normal Confidence

101 ReadingWell Below Prior Peaks

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New Home Formations Very Strong – Good Sign for Growth

Global Abundance

•Debt

•Commodities

•Capital / Liquidity

•Global Conflict – Middle East

•Political “Hot Air”

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August 2015 Financial Markets

Financial Turbulence

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The Financial Markets Environment We All Want

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Core Belief: Innovation Leads to Great Value Creation

More information has been produced in the last 20 years than the previous 5,000.   Today the amount of information and knowledge in the world is doubling every 18 months.

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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

U.S. Economy: Most Resilient, Adaptable, Creative and Innovative Economy

• Why? Free Markets, Capital Markets, Legal System, Educational System, Entrepreneurs Who Drive Ideas, Culture of Growth and Progress

• 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

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

“Investment management and thus Asset Allocation” is one of the (important) components within “Wealth Management”

Markets

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Equity Markets Today

• Monetary Condition Positive

• Earnings Positive

• Valuation Fair

• Investor Psychology

Positive

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

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Markets Have Upward Bias –2013 Breakout – Very Positive

A Secular Bullish Phase or a Cyclical Bullish Phase?

Source: Bloomberg

NOTE: 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%

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The Public Is Not Participatingin this Bull Market! Surprising.

30 Year Treas. Bond 3.0% 9/10/15

The Bullish Projections By Some Analysts

Earnings Multiple*** Target Upside

2016 $123.00 19.0 X 2,340 14%

As of 12/31/15 SP 500 is 2050*** Between 1-3 % inflation Ave. P/E is 19X

How High Can Stocks Go?

Summary

•US Stocks Overweight

•Foreign Stocks - Developed Neutral

•Emerging Markets/Frontier Neutral

•Domestic and Foreign Bonds Shorter

•Precious Metals Under

•REITS Neutral

•Alternative Assets Neutral

Strategy

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Changing World

•Amazon Market Cap > Walmart

•Macy’s Closing 40 mainline stores

•Top Rated Auto is Electric Vehicle

•Advertising dollar moving on-line

•Sharing Economy: Uber, Airbnb, ESTY, Zipcar, Kickstarter

•Consumer Intelligence is High

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Cabot’s Top Growth Themes

Health Diagnostic Innovation: • Biotechnology and Genomic Breakthroughs • Sequencing, Testing, Gene Editing, Equipment, Analysis

Cyber Security: • Network, Big Data, Privacy and Protecting Data, • Advanced Analytics, Business Intelligence

Transportation Innovation: • New platform (Electric Vehicles) of power generation, • Batteries, Electric Vehicles and, Use of Solar for auto power

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

- Peter F. Drucker

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• Advanced Materials: Carbon Fibers, Composite Materials, Advanced Glass (solar) technologies, Composite Woods, Advanced Adhesives

• Internet Efficiency: Cloud, Storage, Security, Smart Software

• Digital Efficiency: Smart Stop Lights, A More Efficient World is Coming

• Alternative Energy: Solar, Batteries, Power Management, Efficient Transfer of Power, Residential Power Management

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• Search and Artificial Intelligence: Coming Sooner Than Anyone Expects: “The Singularity” – Ray Kurzweil

• Education: Digital Education, Mobil Education, New Delivery Mechanisms

• Technology: Applications, Smart Processes, Banking, Utilities, Retail Chain, Software

• Health Monitoring: Wearable devices, Disease Management, link to medical system, Insurance driven

• Emerging Middle Class of Emerging Markets: Banking, Consumption, Retail, Capital Goods

• Alternative Currency and Real Assets: Protecting purchasing power of currency, Non Paper Currency, Gold, Silver and hard assets, Digital Currency and Land and Real Estate

Genomics

Change is Coming

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Science 100 years ago to today

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Better Treatments and Cures

•Routine DNA sequencing to monitor overall health

•Personalized medicine. Cures

•Longer, healthier lifespans

•Much lower healthcare costs

•Higher quality of life, esp. seniors

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The Electric Vehicle Industry- Innovation

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCLP24vmF9McCFUx2PgodbHULbg&url=http://www.wsj.com/articles/teslas-battery-could-power-utilities-1430505757&psig=AFQjCNEqqV4ng32lboplR8XhUz_4I0Kmbw&ust=1442234699893365

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1.2 Gigawatts of power equals : 1 nuclear Power Plant, 1,450 Large Wind Turbines, 60% of the Hoover Dam, Two Huge Gas Turbines, 10 Jett Engines, 6 million bike riders, and 8 million solar panels.

Tesla Battery FactoryReno, Nevada – 2017 Production Date

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• Shorter Term: 1-2 years Positive on U.S. Economy and Equities in General – Volatility Expected as we adjust to normalized interest rates

• 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

Emerging Middle Class – 3 Billion Entering This Phase

Is Six -Year Bull Market Over? Cyclical Bull or Secular Bull

Resilient, Adaptable, Creative and Innovative

•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

QUESTIONS