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Cabot Money Management, Inc.
216 Essex Street
Salem MA 01970

Ph: (978) 745-9233
Ph: (800) 888 - MGMT (toll free)

CABOT'S EQUITY UPDATE

The markets aren't well known for giving anything away for free. But once in awhile, investors can almost manage a freebie. It just takes a little bit of against-the-grain thinking.

Take today's yields. As I write this, the 10-year Treasury is yielding about 2.61%. You can be reasonably certain that if you hold this bond to maturity—for 10 years--you will receive this amount per year if you reinvest your interest.

Now consider another investor with the same time horizon: 10-years. An investor buying a basket of all 30 Dow Jones stocks could receive a dividend yield of 2.74%. And the dividend over the next 10 years is likely to rise as well. And it's even possible (some might say probable!)  that the share prices will rise in value as well: you get capital appreciation "for free".  After all, it is quite unlikely that the US and world economies will be worse off in 10 years than they are today (don't ask the Japanese that question, though). All you have to do is give up a little bit of comfort.

If you are convinced by this argument—that long-term equity investing is quite attractive relative to bonds now, just from an income perspective—you're in the minority. We know this because investors are fleeing stocks and racing into bonds. And for seasoned investors, this should be a warning sign…

For a chart of the 10-year bond versus the dividend yield on the Dow Jones Industrials Average, please click here.

Les Satlow, CFA
Portfolio Manager

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CABOT'S PM POINTERS

Market Conditions Summary

Reasons to be bullish on equities in the coming two to five years:

1.) Liquidity in economy is at record levels so the fuel is there for buying in equities. We have never seen more than two years of extremely low interest rates put on our economy. This medicine will eventually positively impact the economy as banks and borrowers gain confidence.

2.) Earnings have been strong and now, if managed properly, can support modest gains as long as consumer spending continues at current level. Further balance sheets and dividends continue to grow in strength. Mergers and acquisitions are increasing - a sign of high value.

3.) Valuations today in US markets are very attractive – especially on a relative basis to bonds, real estate and money markets and other classes. SP 500 trades at 11 times 2011 earnings. Long-term average for stocks is a 14-15 P/E. At a 2.5% 10-Year Treasury – stocks can often sell at multiples of 16-18 times earnings.

4.) Negative equity psychology today is very bullish. Equity flows into bonds are overwhelming all other assets flows. Ultralow interest in US stocks.

5.) Emerging economies of China, India, Brazil and others are growing nicely and may continue to grow well.

Reasons to be bearish:

1.) Deleveraging cycle will take more time than anyone wants and this means slow economic performance for an extended period.

2.) Governments and many consumers are now overleveraged. Governments will tax people and businesses at higher levels. This will negatively impact profits.

3.) Top-line growth in businesses will be difficult to achieve. May be very anemic revenue growth in corporate America.

4.) Consumer is not consuming at very high levels. Retail, homebuilding and many other signs point to weakness at the consumer level. This may stay in a deflated condition for some time.

5.) Deflation concerns. We really have had deflation in our economy over the past decade. Equities have deflated against real values dramatically in ten years. Further, real estate values have also deflated over the past 3-4 years. Will deflation continue to expand through the economy? No one knows.

6.) Employment and Business conditions are very weak.

7.) Economies globally may ratchet down overall growth to much lower levels.

Robert T. Lutts
President and Chief Investment Officer

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CABOT'S FINANCIAL CONFERENCE

DON'T FORGET TO MARK YOUR CALENDAR!

We will host our 21st Annual Investment Conference and Luncheon on Friday, September 24, 2010, at the Hawthorne Hotel here in Salem, MA. Last year's event was well attended with over 100 clients and guests anxious to hear Cabot's outlook on the future and participate in an open forum where attendees could have any questions and concerns addressed directly by members of our portfolio management team.

We invite you to join us and participate in this event. You will have the opportunity to meet our staff, visit our office, and speak directly with members of both our portfolio management and financial counseling teams. RSVP by calling (978) 619-6300 or email info@ecabot.com.

Note: Clients have received Save-the-Date reminders. Formal invitations are in the process of being mailed as of August 31. Contact your financial counselor if you would like to register today.

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