Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How to Trade Elliott Waves

Have Interest Rates Finally Bottomed?

Interest-Rates / US Interest Rates Nov 29, 2012 - 02:46 AM GMT

By: Submissions

Interest-Rates

Timothy Lutts writes: The media in recent weeks have been full of stories about the coming Fiscal Cliff. No one knows exactly how Congress is going to deal with it, but one fairly common opinion is that taxes will go up on investment income.

As a result, many smart people have been making moves to take income now rather than in 2013 (or later.)


Wal-Mart joined retailers Hot Topic and Buckle in shifting its January dividend to December. Leggett and Platt Wynn Resorts are among the dozens of companies doing the same.

But dividend-shifting by companies is only the most obvious move.

Much bigger but less quantifiable are the numbers of investors selling their dividend-paying stocks because they’re afraid that higher tax rates on capital gains will make holding them financially unwise. The number appears to be substantial, given the market’s decline since the election, especially in income-heavy stocks like utilities.

Now, most investors try to examine this flight from dividends from a purely rational, fundamental point of view, and that’s hard to do when a key part of the equation—next year’s tax rate on dividends—is unknown.

I like to add a technical component as well, starting with this chart.

As most of us know now, interest rates have been declining for roughly 32 years—and those 32 years have brought a sea change in attitudes.

Remember back in 1980, when bonds were yielding double-digits?

Were investors clamoring to buy bonds then?

No, because they were afraid inflation, which was rampant, would wipe out their income. So they rushed to buy gold and silver instead—causing gold and silver prices to peak.

Yet the contrarians who bought those bonds in 1980 and locked them away did very well indeed, as inflation gradually subsided.

The message—useful in viewing any kind of free market—is that the “crowded trade,” which typically feels comfortable and seems rational, eventually turns out to be exactly the wrong trade.

Which brings us to today.

As we all know, recent years have seen bond yields driven into the basement, as investors withdrew from volatile equity markets. The collapse of the housing market helped, too.

This tremendous appetite for safety has resulted in a very crowded bond market.

And that tells me that eventually, when this 32-year downtrend in interest rates ends, and interest rates revert back towards their long-run average of 6.7%, bond investors will see their principal evaporate faster than a snowball in July.

It’s been a very long time since that happened. More than 32 years. Many bond investors alive today have no idea how fast their money can disappear as interest rates rise.

Many of them will learn the hard way—eventually.

Now, let me be perfectly clear. While I do know that rates will turn up sometime, I’m not saying that rates have turned up yet. Though it’s tempting to say that higher taxes on dividends—courtesy of the Fiscal Cliff—will be the straw that breaks the camel’s back, I simply don’t know.

I also know it’s foolish to predict.

Consider the chart below from a June 2007 issue of European Tribune declaring the end of the downtrend in interest rates.

Hindsight tells us that was a premature declaration—by more than five years!

So what should you do?

My advice is simple. Look for the uncrowded trade. Search for the unadvertised bargains.

For example, over the Thanksgiving holiday, I spoke with many friends and even more relatives, and none of them mentioned a single stock by name!

They didn’t mention aggressive stocks like Facebook, which flopped this year, or Apple, which is down 19% from its high.

And they didn’t mention conservative stocks, even though many of them boast yields far better than you can get in a bank!

I think the best of these stocks are screaming buys here—though no one is advertising that, so that’s what I’m going to do today.

The stock I want to highlight is Bank of Montreal (BMO). It’s Canada’s oldest bank, and one of the Big Five banks in Canada. Its stock is traded on the NYSE, and it yields 4.9%.

Here’s what Roy Ward, editor of Cabot Benjamin Graham Value Letter, wrote about it recently.

“Founded in 1817 in Montreal, Bank of Montreal provides a wide range of retail banking, wealth management and investment banking services in North America. The bank also provides an array of credit and non-credit products and services. The bank maintains 1,600 branches in Canada and the U.S., and operates internationally in major financial markets and trading areas throughout most of the world. Bank of Montreal has made three major acquisitions during the past three years.

“Marshall & Ilsley (M&I) of Wisconsin was purchased in July 2011 for $4.2 billion. BMO paid a very reasonable price, but M&I's loan portfolio includes some non-performing loans. Bank of Montreal folded M&I Bank into its Harris Bank division (based in Chicago). In 2009, Bank of Montreal acquired Diners Club North America from Citigroup for $1.0 billion cash. In 2009, it acquired AIG's Canadian Life and Health Insurance unit for $375 million in cash.

“Revenues climbed 12% and earnings per share (EPS) increased 13% during the 12 months ended 9/30/12. I expect revenues to advance 2% and earnings to increase 6% during the next 12-month period, although Marshall & Ilsley's better-than-expected performance could boost revenues and earnings noticeably higher. Remarkably, BMO has been paying dividends since 1829. The dividend was recently raised for the first time in five years and now provides a high 4.9% yield. At 9.5 times my forward 12-month EPS forecast of 6.29, Bank of Montreal shares are undervalued. BMO is governed by the strict Canadian banking regulations and is low risk.”

It makes perfect sense to me, and I hope it does to you, too. Furthermore, I hope it helps you understand that equities truly are the uncrowded trade today, with unadvertised bargains galore.

How else can you explain the fact that government bonds are so popular, even though rates are in the basement and rising rates would be devastating to investors’ principle, while high-quality stocks like Bank of Montreal—whose dividends are much more secure—are available for bargain prices?

Now, you could agree with all this and simply buy some BMO, but what I recommend is a no-risk trial subscription to Cabot Benjamin Graham Value Letter, so that you can get regular follow-ups on BMO, as well as advice on investing in similar undervalued stocks.

Over the past 10 years, the Letter’s Classic Model has achieved a total return, not including dividends, of 185.6% compared to a return of just 47.3% for the Dow Jones Industrial Average. And I think even better performance is on the way.

For details, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts

President, Chief Investment Strategist, Editor of Cabot Stock of the Month

Timothy Lutts heads Cabot Heritage, one of America’s most respected independent investment advisory services, publishing 12 newsletters including the Cabot Benjamin Graham Value Letter to more than 250,000 subscribers around the world. Combining time-tested investing systems with expert editorial content, these newsletters serve not only to make readers richer investors but to make them better investors. Under Tim's leadership, Cabot has been honored numerous times by Timer Digest, Hulbert Financial Digest and the Specialized Information Publishers Association as among the top investment newsletters in the industry. Tim also edits Cabot Stock of the Month Report

© 2012 Copyright Timothy Lutts - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife