Best of the Week
Most Popular
1.U.S. Inner City Turmoil and Other Crises: Ron Pauls Predictions for 2015 - Dr_Ron_Paul
2. What’s In Store For Gold Price in 2015? - Ben Kramer-Miller
3.Crude Oil Price Ten Year Forecast to 2025: Importers Set to Receive a $600 Billion Refund - Andrew_Butter
4.Je ne suis pas Charlie - I am not Charlie - Nadeem_Walayat
5.The New Normal for Oil? - Marin_Katusa
6.Will Collapse in Oil Price Cause a Stock Market Crash? - OilPrice.com
7.UK CPI Inflation Smoke and Mirrors Deflation Warning, Inflation Mega-trend is Exponential - Nadeem_Walayat
8.Winter Storms Snow and Wind Tree Damage Dangers, DIY Pruning - Nadeem_Walayat
9.Oil Price Crash and SNP Independent Scotland Economic Collapse Bankruptcy - Nadeem_Walayat
10.U.S. Housing Market Bubble 2.0 Meet the Pin - James_Quinn
Last 5 days
Bitcoin Price Tense Days Ahead - 27th Jan 15
The Most Overlooked “Buy” Signal in the Stock Market - 27th Jan 15
Gold's Time Has Come - 27th Jan 15
France America And Religious Terror War - 27th Jan 15
The New Drivers of Europe's Geopolitics - 27th Jan 15
Gold And Silver - Around The FX World In Charts - 27th Jan 15
It’s Not The Greeks Who Failed, It’s The EU - 27th Jan 15
Gold and Silver Stocks Investing Basics - 27th Jan 15
Stock Market Test of Strength - 26th Jan 15
Is the Gold Price Rally Over? - 26th Jan 15
ECB QE Action - Canary’s Alive & Well - 26th Jan 15
Possible Stock Market Pop-n-drop in Store For SPX - 26th Jan 15
Risk of New Debt Crisis After Syriza Victory In Greece - 26th Jan 15
How Eurozone QE Works: A Guide to Draghi's News - 26th Jan 15
Comprehensive Silver Price Chart Analysis - 26th Jan 15
Stock Market More Retracement Expected - 26th Jan 15
Decoding the Gold COTs: Myth vs Reality - 26th Jan 15
Greece Votes for Syriza Hyperinflation - Threatening Euro-zone Collapse or Perpetual Free Lunch - 26th Jan 15
Draghi's "No-growth" QE Money for Stocks, Zilch for the Economy - 25th Jan 15
Unjust and Undeclared Wars - 25th Jan 15
The European Central Bank Commits Monetary Suicide - 25th Jan 15
Stock Market ECB EQE week - 25th Jan 15
Gold And Silver Timing Is Most Important Element - 25th Jan 15
The Best Way to Invest in the Next Alibaba Internet Stock IPO - 25th Jan 15
The Outpatient Surgery Business Rains Cash into Healthcare Stocks - 25th Jan 15
Stock Traders Flock to Gold GLD ETF - 24th Jan 15
10 Reasons Why You Need an Offshore Bank Account - 24th Jan 15
Goldman Sachs Blankfein - Regulation is Like Background Noise - 24th Jan 15
Gold in Euros Surges As ECB To Print Trillion Euros and Greek Election This Sunday - 24th Jan 15
Gold Bear Market Rally or New Bull ? - 24th Jan 15
Euro-zone 'QE already Working' Says IMF Lagarde - 23rd Jan 15
ECB and EU LTRO and QE for Dummies: Or, Make These Trades - 23rd Jan 15
Debt and Deflation: Three Financial Forecasts - There's More Than Falling Prices - 23rd Jan 15
Market Should Not Doubt' Mario Draghi ECB QE - 23rd Jan 15
Francs, Bonds, Barrels, and Bail-Ins - 23rd Jan 15
Are Plunging Petrodollar Revenues Behind the Fed’s Projected Rate Hikes? - 22nd Jan 15
Stocks Bear Market Lessons from History - 22nd Jan 15
Russia's Plans for Arctic Supremacy - 22nd Jan 15
166 Trillion Reasons Why Bank Stocks Are So Cheap - 22nd Jan 15
Will Gold Price Break Out Once Again? - 22nd Jan 15
The Cult of Central Banking - 21st Jan 15
Five Stock Market Questions Wall Street Hopes You’ll Never Ask - 21st Jan 15
China's Yuan Enters the Currency "Big Leagues" to Take on the Dollar - 21st Jan 15
Investor implications of QE by the ECB - 21st Jan 15
Deflation Bonanza! And the Fool's Mission to Stop It - 21st Jan 15
Messin' With My Financial Brain - 21st Jan 15
Are Stock Market Buyouts Checking Out? - 20th Jan 15
Legal “Steroids” Are Making This Tech Stock a “Buy” - 20th Jan 15
Are Stock Market Storm Clouds Massing? - 20th Jan 15
The Swiss Release the Kraken! - 20th Jan 15
The European Union, Nationalism and the Crisis of Europe - 20th Jan 15
Swiss Say No to QE - 20th Jan 15
Gold Demand Explodes as Volatility and Fear Stalk Market - 20th Jan 15
The Truth About This Stock Market "Meltdown" Indicator - 20th Jan 15
Markets 2015 More Of The Same? - 20th Jan 15
Is Market Sentiment Shifting to Gold? - 20th Jan 15
U.S. Dollar’s Major Breakout and Gold’s Simultaneous Rally - 19th Jan 15
Silver Price Breaks Out on Swiss France Euro Decoupling - 19th Jan 15
Gold Bullish Inverse Head and Shoulders Pattern - 19th Jan 15
Bundesbank Announces Repatriation of 120 Tonnes of Gold from Paris and New York Federal Reserve - 19th Jan 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

State of US Markets 2015 Report

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.


© 2005-2014 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

Free Report - Financial Markets 2014