Best of the Week
Most Popular
1.What Happened to the Stock Market Crash Experts Were Predicting - Sol_Palha
2.London Housing Market Property Bubble Vulnerable To Crash - GoldCore
3.The Plan to Control ALL Your Money is Now at Advanced Stage
4.Why Gold Is Set For An Epic Rally This Spring - James Burgess
5.MR ROBOT NHS Cyber Attack Hack - Why Israel, NSA, CIA and GCHQ are Culpable - Nadeem_Walayat
6.Emmanuel Macron and Banking Elite Win French Presidential Election 2017 - Nadeem_Walayat
7.Trend Lines Met, Technical's are Set - US Dollar is Ready to Rally (Elliott Wave Analysis) - Enda_Glynn
8.The Student Debt Servitude Sham - Gordon_T_Long
9.Czar Trump Fires Comey, Terminates Deep State FBI, CIA Director Next? - Nadeem_Walayat
10.UK Local Elections 2017 - Labour Blood Bath, UKIP Death, Tory June 8th Landslide - Nadeem_Walayat
Last 7 days
How Investors Can Profit From The Coming Resource Wars - 29th May 17
Gold vs. Gold Mining Shares – Just The Facts, Ma’am - 29th May 17
Walkers Crisps Pay Packet £5 Cash Wins After Buying 64 Multi-packs - 29th May 17
SPX/NDX/NAZ Hit New All-time Highs - 27th May 17
GBPUSD Top in Place, GOLD Price Ready to Rocket? - 27th May 17
Silver Mining Stocks Fundamentals - 27th May 17
BBC Newsnight Falls for FAKE POLLS, Opinion Pollsters Illusion for Mainstream Media to Sell - 27th May 17
UK Local Election Results Forecast for General Election 2017 - 26th May 17
Stock Market & Crude Oil Forecast! - 26th May 17
Opinion Pollsters UK General Election Seats Forecasts 2017 - 26th May 17
Bitcoin and AltCoins Crypto Price Correction - 26th May 17
Bearish Head and Shoulders in EURUSD? - 26th May 17
SELL US Stocks - Massive Market CRASH WARNING! - 26th May 17
EURGBP: A Picture of Elliott Wave Precision - 26th May 17
Credit Downgrades May Prompt Stock Market Capital Shift - 26th May 17
Rosenstein and Mueller: the Regime Change Tag-Team - 25th May 17
Stock Market Top - Are We There Yet? - 25th May 17
Should I Invest My Fortune in Gold? Inaugural Lecture by Dr Brian Lucey - 25th May 17
USD/CAD Continues Decline - 25th May 17
Bitcoin Price Goes Loco! Surges through $2,500 Despite Unclear Fork Issues - 25th May 17
The US-Saudi Arms Deal - Sordid Saudi Signals - 25th May 17
The No.1 Commodity Play In The World Today - 24th May 17
Marks and Spencer Profits Collapse, Latest Retailer Hit by Brexit Inflation Tsunami 2017 - 24th May 17
Why Online Trading Platforms Are Useful for Everyone - 24th May 17
The Stock Market Will Tank Hard - 24th May 17
It’s Better to Buy Gold & Silver When It DOESN’T Feel Good - 24th May 17
Global Warming - Saving Us From Us - 24th May 17
Stock Market Forecast for Next 3 Months - Video - 23rd May 17
Shale Oil & Gas Production Costs Spiral Higher As Monstrous Decline Rates Eat Into Cash Flows - 23rd May 17
The Only Metal Trump Wants More Than Gold - 23rd May 17
America's Southern Heritage is a Threat to the Deep State - 23rd May 17
Manchester Bombing - ISIS Islamic Terrorist Attack Attempt to Influence BrExit Election - 23rd May 17
What an America First Trade Policy Could Mean for the US Dollar - 22nd May 17
Gold and Sillver Markets - Silver Price Sharp Selloff - 22nd May - 22nd May 17
Stock Market Volatile C-Wave - 22nd May 17
Stock Market Trend Forecast and Fear Trading - 22nd May 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

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