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The Pig and the Python, or 2010 Revisited

|Includes: AAPL, CIEN, CSCO, GE, GOOG, KB Home (KBH), PHM, QLGC, SPWR, STP, T, TSL, VIAV, XHB

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There was a very popular book in the 1990s titled The Pig and the Python, written by financial planners David Cork and Susan Lightstone.

The pig in the book's title was the Baby-boom Generation of the 1950s and 1960s, and the python was contemporary 1990s society as it struggled to digest them as they moved through its economic digestive track. The argument is compelling. If you are roughly one-third of the population, your buying habits will have a profound effect on society (and the stock market too).

So let's fast forward to the present time. The Boomers are now aging into retirement; and we should assume they'll be getting out of their stocks and hunkering down into bonds for a regular % return, yes? Retirement properties should also be selling at a premium. But sometimes history is not so neat or cut and dried. Something happened on the way to the idyllic conclusion above. The Dow Jones Industrials suffered its worst decade in large cap history. Boomers lost half their savings in the stock market, not just once but twice: the first time with tech in 2002 and the second time with 'everything else' in early 2009. Their real estate values also plummeted 30%. As I write, today's actual real unemployment combined with under-employment is 18% nationally, and in California (where I live), it is close to 20%. These are definitely NOT boom times for Boomers. Some researchers assert it is the most under-saved and overspent generation in history.

But before we sail off into this decidedly dismal sunset, I'm going to make a startling prediction. I think we are entering one of the BEST investment environments (see Leading Indicators on the resources page) for quality U.S. stocks in a generation. What has escaped the investing public's attention amidst all this gloom is that we are also in the midst of a gargantuan baby boom, the biggest ever. That's right. I'm not just smoking something here. In 2007 the birth rate exceeded the record numbers recorded in the 50s and early 60s for the first time. The NEXT generation of baby boomers has now hit its stride.

In 1974 the U.S. birth rate bottomed out and the population has steadily risen. In 1987 the birth rate hit a growth spurt and for the last 23 years has increased sequentially every year. You can see the effects of this in schools. Young students are applying to 4 year colleges in record numbers (and not just because of the recession). High schools are (again) bursting at the seams. The next generation of buyers - whose personal habits will profoundly effect their generation (and the stock market too) - is now in the wings, emerging. This is powerful, powerful stuff.

How powerful? One only need look at the ascendency of Apple computer since 2005, the recent popularity of Facebook and the wireless web, to see where things are heading FAST. Just a year ago, in January, 2009, at the bottom of the worst national recession in 70 years, Apple computer reported their best quarter in the company's 20 year history: selling more Macs and IPods than ever before. In fact, in a single weekend, they sold over a million I-phones at its product launch. Take that, gloomsters!

When you spike your ‘economic outlook' with the emerging demographics of an up and coming generation, the juice suddenly has a decidedly sweeter savor. If this powerful trend emerged during the worst of economic times, what lies ahead when things get better? What will this new generation demand from society as it ages and moves through its own 'python'?

Right now that's tech toys, sports equipment (Nike), and entertainment. But there's also the infrastructure to support these pursuits. AT&T's network (the sole provider for the I-Phone in the U.S.) has endured a 5,000% increase in data traffic in the last 3 years. The I-phone has the highest rating of all smartphones, but AT&T's network has the lowest rating - dead last - for all of the carriers. Reason? The sheer amount of data traffic that's jamming its wireless backhaul network. Now that's a good problem to have – too much demand – and I’m betting they aim to solve it pronto.

Optical networking companies solve the legacy problems created by exploding smartphone use. Stocks like Ciena (NASDAQ:CIEN), JDS Uniphase (JDSU), Cisco (NASDAQ:CSCO), Juniper Networks (NYSE:JNPR) and Q-Logic (NASDAQ:QLGC) solve ethernet backbone problems. Ciena's new line of optical DWDM switch is able to stream video for 96 million smartphones simultaneously on a single strand of fiber.

Then there’s the personal PC revolution which began in 1987 with the Apple II computer. The new baby-boom generation I am describing is the first to be entirely formed by the electronic Information Age. And I fully expect Google (NASDAQ:GOOG) and Apple-like (NASDAQ:AAPL) tech products to dominate in the decade ahead. Today’s kids are entirely web-centric and ad revenue indicates that browsers will continue to attract the $ attention because that's where the action is. This means young people will first shop on the web at Amazon (NASDAQ:AMZN); read their daily news on Yahoo (YHOO) or MSN (rather than buy a newspaper). Sooner than later, paper textbooks will be eliminated in lieu of a Kindle-type electronic reader-device that automatically downloads ANY information you want off the Cloud (worldwide wireless network). That means going forward print-publishers are probably a short-sell.

The younger generation wants to keep their health (they really really do; and are very concerned about the environment) and will not allow their climate to continue to be compromised by the proliferation of petroleum products - 19th century tech relics that pollute, stink, and harm the environment they live in. Kids like free stuff, and there's nothing freer or more obvious on the energy-side of investing than sun, wind, and water. California has mandated that 25% of its energy come from renewables within the next decade and there's a younger generation that is politically certain that that's what they want too. Sure, the oil industry is powerful and they could block all this, but are they THAT powerful? Besides, they have the capital to purchase emerging renewables industries and transform their own legacy from being part of the problem to a focus on the solution. This is what the pharmaceutical industry did with biotech. As the future evolves, those who use and make energy will adapt to this new trend.

That means hybrid cars should remain popular in the interim (Like Ford, Toyota and Honda) and evolve into all-electric vehicles in the not-too-distant future. That is a HUGE replacement cycle. If the cost of solar panels is cut in half in the next decade (highly likely while their proficiency doubles) every new homeowner in the American sunbelt has the opportunity to have his home lighting, energy, and transportation needs solved by a rooftop system. Diffused through millions of homes over millions of square miles, the energy grid of the United States will be more secure (de-centralized) and more robust than ever before. Alternative Energy companies like Suntech (NYSE:STP), Sunpower (SPWRA), and Trina SOlar (NYSE:TSL) could end up ruling the energy universe with their products, or, more likely, be bought out by large manufacturers like General Electric (NYSE:GE) or Siemens (SI) who have the muscle to take these industries to the next level with their R&D and financing clout.

Lastly, what do all young families do when they start out? Have babies and buy affordable HOMES! I posit that when the last of the current wave of foreclosures finally exit our crisis, this generation will DEMAND a tsunami of energy-efficient homes from the most oversold and beleaguered housing industry in 70 years. You heard it here first - real estate in January, 2010 is the deal of the decade. Homebuilders and real estate is a trending industry, so I suggest buying the XHB (S&P Housing index) or some large regional homebuilders like KB Homes (NYSE:KBH) or Pulte (NYSE:PHM) and sit on em for awhile.

This is just a thumbnail sketch of a few industries that directly leverage (asset-allocate) to our next "Baby Boom Generation", but I think it's a good place to start. Like Winter to Spring, our economic cycle is about to turn when you least expected it, and I think, for a long long time.

Disclosure: Long CIEN, GE,