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"Food For Thought", for those of us who still invest in Stocks . . .
June 23, 2022
11:13 am
Dean
Valhalla Mountains, British Columbia
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.
With all the recent Downturns in the stock markets these days, is it now time to jump-in and Buy again ❓

One would think 'Yes' ... if not now, then soon. But for some second thoughts, this vid is well worth the 10 minutes

.
Thought I'd share,

    Dean

sf-cool " Live Long And Prosper " sf-cool

June 23, 2022
12:27 pm
toto
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I was going to pick up some BCE and CIBC stock on the dip, but after listening to this video, Im going to hold off, and wait for Q2 numbers

June 23, 2022
3:17 pm
Bill
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With a one-event event like 9/11 or virus it's easier to pick a time to get back in, but now the market's tanking due to various, longer-term issues such as rapidly rising rates, society awash in cash, inflation taking off, supply chain issues, labour shortage, etc so not so easy to pick a bottom, patience might be a virtue. Or as someone else once said, the trend is your friend, and are there signs yet these trends tapering off?

June 23, 2022
3:30 pm
dougjp
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Thanks Dean, that was an excellent and realistic video.

In terms of alternatives, not just US Treasuries, but simply our own focus here, deposit rates vs. dividend yields and risk. The gap was so wide for years, nobody ever thought much about it. HISA and GICs weren't in the ball park, but now they are.

Why is 'abbreviation' such a long word?

June 23, 2022
5:29 pm
Patch002
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Thanks for posting this video too.

My key takes from it are:

Earnings estimates will start to decline (if they haven't already).
Time value of money is more relevant with higher interest rates than with zero interest rates.
Surprising to hear such frank honest talk from a Fund Manager (who tend to be overly optomistic).

My thoughts are: Interest rate changes take about 12 months to affect the economy. We've had 3 increases, pushing Prime rate from 2.45% to 3.70%. There will be more increases. Logic states that with rising interest rates = lower economic activity = lower future earnings.

The past October crashes were due in part to a) high interest rates and b) lower revised earnings estimates.

So, to me, the only asset that increases in a rising Interest environment is Short-term interest instruments e.g. HISA. Be on guard for downward stock earnings revisions in the next months. Look for signs of a capitulation i.e heavy selling pressure, 95% plus of stocks decline at the same time, trading curbs being implemented etc. If/when this occurs, it won't likely be in the Summer months due to lower trading volumes, but look out post-Labour day.

June 23, 2022
6:16 pm
Loonie
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His reference to US Treasuries reminded me that at some point in the next year or two, there might be great rates on long govt bonds. That would lock in the high rates for a long time. I did very well with those during the last rate inflation period. If rates fall and you need cash, you'd sell them at a premium. At some point, we should be looking beyond five year GICs, but we're not there yet.

June 23, 2022
6:55 pm
savemoresaveoften
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COIN said
Do higher interest rates benefit banks and insurance companies?
https://www.federalreserve.gov/econresdata/notes/ifdp-notes/2016/low-for-long-interest-rates-and-net-interest-margins-of-banks-in-advanced-foreign-economies-20160411.html#:~:text=Low%20short-term%20interest%20rates%20can%20depress%20bank%20margins,pass%20on%20negative%20policy%20rates%20to%20retail%20depositors%29.  

FI’s treasury department calc something called DV01, which is delta value of 1bp. It shows how their profit ( dumb down / generalized explanation) of how sensitive they are to 1bp change in rate.

If you look at the annual report, it will be in there some where. For a big 5, that number will be 7 figure I believe.

June 24, 2022
8:03 am
Lodown
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COIN said
Do higher interest rates benefit banks and insurance companies?
https://www.federalreserve.gov/econresdata/notes/ifdp-notes/2016/low-for-long-interest-rates-and-net-interest-margins-of-banks-in-advanced-foreign-economies-20160411.html#:~:text=Low%20short-term%20interest%20rates%20can%20depress%20bank%20margins,pass%20on%20negative%20policy%20rates%20to%20retail%20depositors%29.  

Yes, higher interest rates definitely benefit Financial Institutions....BUT if rates get too high, as is currently feared, such that there is less business activity...a recession...then the overall impact is that FI's will do poorly. So the maximum interest rate that does not induce a recession is the rate that will maximize profits. So what rate is that...my analysis is where it is right now at 3.7%. Unfortunately the expectation is it will go much higher which is why stock prices are falling.

June 24, 2022
8:53 am
COIN
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I was concerned that the higher rates will adversely affect mortgagors but I think the stress test should show they can handle higher rates. Yes?

June 24, 2022
8:57 am
COIN
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A couple of years ago I spoke to an insurance guy about converting RRSP to an annuity. He said the payout would be really low due to the then current low interest rates. So, it may be time for us to take a look again at converting our RRSP's to an annuity.

These higher rates are a game changer. It's amazing how our parents managed to survive when the rates back then were in the high single or double digits.

June 24, 2022
11:44 am
Norman1
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The return from life annuities has always been lousy.

There was likely a time the internal rate of return from them was over 7%. Challenge then was that GIC's were yielding over 10%.

Mature some of the RRSP to a life annuity because you want to offload some of the risk of outliving your savings to the life insurance company. Don't consider it because you are looking for an investment.

One can glimpse how much that longevity insurance in a life annuity costs in a previous discussion. That $24,000/year life annuity was going to cost $400,000+. A ladder of bonds, producing $24,000/year for 20 years, costs around $332,000. The $68,000+ difference is the cost of the longevity insurance.

June 24, 2022
1:09 pm
Norman1
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COIN said
Do higher interest rates benefit banks and insurance companies?

There is actually no evidence of net benefit. The research admits that "Similar regressions of the effects of low interest rates on bank ROA show no consistent results, …" and then speculates that the banks are somehow able to make up for the lower net-interest margins.

Lower interest rates may result in lower interest margins. But, the lower rates may also reduce loan defaults. Similarly, with higher interest rates there are higher interest margins but higher losses from loan defaults.

June 24, 2022
1:37 pm
AltaRed
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At some high(er) interest level, also less loan demand and/or people accelerating repayment. That is another reason why we are seeing bank stocks falling so much these days. Less equity offering underwriting fees too.

June 27, 2022
4:56 pm
Dean
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dougjp said

Thanks Dean, that was an excellent and realistic video.

In terms of alternatives, not just US Treasuries, but simply our own focus here, deposit rates vs. dividend yields and risk. The gap was so wide for years, nobody ever thought much about it. HISA and GICs weren't in the ball park, but now they are.  

Yes ... most of my Blue Chip stocks pay dividends in the 3-5% area, but now I can get those same rates from CDIC insured GICs, with basically No Risk. And if those GICs are sheltered in a TFSA, there's no tax implications.

Todays GIC rates are a real Gamechanger ❗

    Dean

sf-cool " Live Long And Prosper " sf-cool

June 27, 2022
6:09 pm
Bill
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If that's your yield on blue chips then it's likely you haven't held them for long, so maybe it does make sense to sell and buy gics instead if you suffer little or no capital losses. But long-term holders of blue chips are getting far higher yields due to dividend increases over time so current gic yields might still need to go a fair bit for them to be considered an attractive alternative.

June 27, 2022
9:18 pm
Norman1
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GIC returns will not be a match for stock returns. That the current yields of both are close now is just a distraction.

When I bought those Bank of Montreal shares in the late 1980's, the annual dividend was 7% of the stock price. Government of Canada treasury bills were also yielding 7% per annum. The Investors Digest article I read said the bank shares were better. One got the same yield as a treasury bill. However, there was a very good chance the dividend will grow and take the price of the shares up with it.

Since then, the dividend has grown from 7% per annum of the cost of those shares to around 79%. That's right: I'm receiving 79% of my original principal back each year now.

In addition, the principal has appreciated from $7 per share to $124 per share.

June 28, 2022
7:28 am
AltaRed
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Bill said
If that's your yield on blue chips then it's likely you haven't held them for long, so maybe it does make sense to sell and buy gics instead if you suffer little or no capital losses. But long-term holders of blue chips are getting far higher yields due to dividend increases over time so current gic yields might still need to go a fair bit for them to be considered an attractive alternative.  

Yield on Cost is just a mathematical calculation which has no practical use beyond bragging rights. It is only what your current capital is returning you that matters because there might be a better option with the yield on an alternative investment.

Example: Stock A in 2010 was $100 with a 4% yield of $4. Stock A in 2022 is now $200 with a 4% yield of $8. YOC is now 8% but that is meaningless. You might be better putting that $200 into Stock B today with a yield of 5% = $10. I don't and wouldn't consider tracking it.

June 28, 2022
9:23 am
Dean
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Dean said

Yes ... most Blue Chip stocks pay dividends in the 3-5% area, but now I can get those same rates from CDIC insured GICs, with basically No Risk. And if those GICs are sheltered in a TFSA, there's no tax implications.

Todays GIC rates are a real Gamechanger ❗

    Dean

Bill said

If that's your yield on blue chips then it's likely you haven't held them for long, so maybe it does make sense to sell and buy gics instead if you suffer little or no capital losses. But long-term holders of blue chips are getting far higher yields due to dividend increases over time so current gic yields might still need to go a fair bit for them to be considered an attractive alternative.  

Truth be known, I don't think I'll Ever sell my Blue Chips (had them for Many years now) ... Chuckle sf-smile

What I was referring to is New money that I'll probably need back in 5 years, or less. GICs are looking pretty Good now.

    Dean

sf-cool " Live Long And Prosper " sf-cool

June 28, 2022
9:34 am
AltaRed
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Everything in one's portfolio is 'current money'. There is no such thing as old money (assets/investments) and new money (available for investment).... with the exception 'old' money may have unrealized capital gain/loss tax consequences in taxable accounts that does need to be taken into consideration in 'sell' decisions.

Ultimately it is important to not love one set of $$ over another set of $$ in order to be objective about the performance of each asset today, making judgement on what that asset is intended to do for you today, and how it may continue to be "fit for purpose" going forward. Those are decisions everyone on this site makes on this site today for each of their HISA and GIC accounts. It is a similar decision process for stocks, bonds, RE or whatever, albeit with different degrees of certainty.

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