Negative Interest Rates
Cabot Investors Conference
Lumber Liquidators (LL)
One of the most curious aspects of the current global financial situation is the slow spread of negative interest rates in Europe. Sweden was the first country where rates fell below zero, way back in 2009. Since then, Denmark, Switzerland, Finland, Austria, the Netherlands and Germany have all joined the club.
This is uncharted territory.
What kind of world is it where they pay you to borrow money and charge you to safeguard your money?
It's an upside-down world that no one alive has ever been in before, and even thinking about it is confusing.
But I'm not surprised by it, and here's why.
As a student of trends, I've learned that trends go further and last longer than originally anticipated.
When I was young, I witnessed part of an interest rate uptrend that lasted 35 years (1946 to 1981). Inflation was a major worry back then; I even wrote a report on it in high school!
But since 1981, I've witnessed an interest rate downtrend that has lasted 34 years-despite the huge $800 billion stimulus in 2009 that pundits said was likely to spark inflation despite three waves of quantitive easing from the Fed, and despite the fact that for the past five years, the "experts" have been warning that rate increases are imminent.
The reasons behind this long downtrend in rates are obviously complex, and I don't claim to be an expert. That said, since the experts have been wrong, here's some observations by an experienced amateur (a near-oxymoron).
Overall, I see a complex combination of factors that has kept global rates down, and that is now pushing them below the mystical zero mark, where common sense says they should not go.
In Europe, difficult factors include very slow economic growth, the looming prospect of deflation, and the hard fact that the continent has roughly zero population growth.
POPULATION GROWTH IN EUROPE
Kudos to France and Ireland (and Iceland, whose population is smaller than any U.S. state) for growing their populations. And sympathies to Germany and most countries to the east of it, where populations are actually shrinking. (Just as it's hard for a company to grow earnings if revenues are shrinking, it's hard for a country to grow GDP if its population is shrinking.)
Another reason for low rates may be growing efficiencies, globally.
Another may be low energy prices, thanks to both fracking and the unwillingness of Saudi Arabia to cut production.
Yet another may be the slow disintegration of the Russian economy. (Putin just took a pay cut, but I don't think he's eating cat food yet.)
Here in the U.S., everyone is waiting for Janet Yellen to start raising rates-and expecting local data like unemployment rates to justify it. But we don't live in a vacuum, and with European rates increasingly dipping to the negative side, there's risk if the U.S. diverges significantly.
Now, I'll be the first to admit that anything can happen. The unexpected happens frequently. But right now, I think the trend of interest rates is still down, and you should invest accordingly.
So where do you put your money when bonds are near zero and the bank may actually charge you to hold your money?
I think the best option (as long as the bull market lasts) is stocks!
Strong, growth-oriented companies have stocks that have been zooming over the past month, while slower-growing dividend-paying companies are a great way to get regular income. Plus, more and more companies have been boosting their dividends, making their stocks quite attractive to investors focused on yield.
And speaking of trends, have you noticed that more and more corporations are buying back their own shares? The longer this continues (remember my rule about trends), the more valuable these stocks will become. At the same time, there will be fewer shares available to buy!
Carried to the extreme, this trend toward stock buy-backs could easily prolong this bull market longer than anyone expects, even well beyond the day when the Fed finally begins raising rates.
Bottom line, it's not too late to get into this bull market, and if you're looking for a complete guide to intelligent growth investing, you can't do better than Cabot Market Letter, which for 44 years has been guiding investors just like you.
To see its complete array of market timing, stock selection and educational features, click here.
Five Reasons to Attend the Cabot Investors Conference
One of the sad facts of this business is that we get to see very few of our customers.
You're spread all over the country (even all over the world), while we're here in Salem, Massachusetts, doing our best to communicate with you using a variety of digital devices and media.
Yet it's well known that face-to-face interaction is the best way to share ideas. So if you'd like to see us as much as we'd like to see you-and to get all the benefits of face-to-face interaction-your best opportunity is coming up, at the 3rd annual Cabot Investors Conference to be held here in Salem, Massachusetts on August 12, 13 and 14.
The five big reasons to be there are simple.
1. You can get top-notch first-hand advice from all the Cabot analysts. That's Mike Cintolo, Paul Goodwin, Chloe Lutts Jensen, Jacob Mintz, Thomas Garrity, Roy Ward and Nancy Zambell.
2. You can participate in every session, whether it's on growth or value investing, options or small-caps; just ask a question!
3. You can meet fellow investors from all over the country. Believe me, they're a smart bunch-and nice, too!
4. You can walk down the street to see the folks at Cabot Wealth Management, my brother Rob's company, which provides a complete slate of asset management and trust services.
5. And you can make a vacation of it by touring Salem, either on the excursions arranged for attendees or on your on time. Many attendees make this a regular vacation!
And I promise the snow will be gone by then!
Moving on to the market, all trends are up, and you should be heavily invested.
But only in stocks that are going up!
Don't make the mistake of trying to catch a falling knife, like ...
LUMBER LIQUIDATORS (LL)
The two main things I know about Lumber Liquidators are this.
One: They make a nice product. I've personally put their engineered wood floors in two rooms in my house in recent years. What was 30-year-old carpet is now shiny tongue-and-groove Brazilian Cherry.
Two: Their stock had a great run, climbing from under 14 in 2010 to over 119 in 2013, as the company opened more and more stores and sales and earnings mushroomed.
But LL peaked in late 2013, just before earnings peaked, and since then it's been trending down.
And most recently, it's been falling like a stone, thanks in part to the efforts of a short-seller named Whitney Tilson, who not only claims the company has been skirting supply regulations (specifically formaldehyde levels) but also succeeded in getting 60 Minutes to do a segment on the story.
The resulting bad publicity, combined with reduced earnings estimates based on the new compliance costs, legal expenses and reduced revenues, has been hitting the stock hard.
Somewhere, of course, LL is going to hit a bottom.
And it's natural to think that the stock has fallen so far that if you buy now, you can catch a nice bounce.
But that's what buyers have been saying for the past two weeks, and every one of them has been wrong!
Remember what I said about trends. They tend to go further and last longer than people expect.
I wouldn't touch LL with a ten-foot pole.
But what I would do, it I were you, is take a look at Cabot Top Ten Trader, which is a great source of recommendations on stocks that have positive momentum!
For example, back on January 19th, lead analyst Mike Cintolo recommended that readers buy Pharmacyclics (PCYC). It was trading at 143, having just broken out to a new high.
But just last week, Pharmacyclics agreed to be acquired by AbbVie for $21 billion, and shares are now trading at 255!
That's a profit of 78% in less than seven weeks!
For more recommendations like that, you should become a regular reader of Mike Cintolo's advice in Cabot Top Ten Trader, and get 10 hot stock recommendations every Monday.
Yours in pursuit of wisdom and wealth,
Chief Analyst, Cabot Stock of the Month,
Publisher, Cabot Wealth Advisory
P.S. Now is the Time to Stay off the Sidelines
In the past two weeks, the market improved its standing in a big way, with many stocks showing strength and remaining strong. In Cabot Top Ten Trader, we feature a wide array of stocks and sectors you can benefit from in as little as 30 days. Our most recent top pick is a liquid, leading growth stock that's taking advantage of the market advance and has the opportunity to bring you double-digit returns in the weeks to come.