Jack Ablin: "Private" Advice

10/28/2005 12:00 am EST

Focus:

Jack Ablin

CIO & Executive Vice President, BMO Private Bank

"I’m a quant guy, so I look at market history," says Jack Ablin, senior VP and CIO, who is responsible for establishing the basic investment strategy within the personal investment group at the prestigious Harris Private Bank. Here’s his outlook.

"Don’t fight the Fed. If you believe the two-year Treasury is an adequate predictor of what the Fed is likely to do, which I do believe, and the Fed is going to tighten interest rates two more times between now and December, which I believe will happen, then the Fed funds rate will be 4.25% by year-end. If you believe that the Fed will continue to tighten, which I also believe, then two-year Treasury will be 4.5% to 4.75% by year-end. In fact, every time the Fed tightens, they go too far.

"Considering that the ten-year Treasury rate right now is about 4.4%, either you believe that the ten-year Treasury has to go up to 5%and I don’t see any reason for that to happen or the yield curve will invert. I believe the yield curve will invert. Of the last seven recessions that we have had, every single one of them was preceded by an inverted yield curve. There was only one case in the last 30 years where the yield curve inverted, and we did not have a recession.

"I believe the Fed feels they can engineer a soft landing in housing, but that’s going to take a toll on the economy. So I’m not worried about the sicknessinflation I’m more worried about the cure. Looking from a viewpoint of history, every single time the Fed has raised rates, it’s ended badly and we’ve had some kind of crisis. I don’t know what the crisis is going to be, but if you have Greenspan talking about asset price bubbles and excessive risk taking, my sense is that they are going to continue tightening until they don’t see excessive risks. And that will be the time to invest. In the meantime, I would be careful.

"For this year, we predicted a 5% gain in the S&P 500 and I’m going to stick with that forecast. We are neutrally weighted in stocks in general. We are overweight in emerging markets and international stocks. Within the domestic market, we think the large cap is cheaper than small cap and will likely start to outperform. With respect to the overall market for 2006, my sense is that while valuations are still reasonable, and I don’t expect the bottom to fall out, I also don’t think there will be the opportunity to make a lot of money in the overall stock market. So our next move will likely be to start taking some money off the table, while also increasing the quality of the stocks we continue to hold.

"As for specific investment, the S&P Utilities Index (XLU ASE) comes up very strongly in our models. The stock has good quality, high dividend yields, and is able to pass along higher energy prices to its customers. We also like the healthcare sector, and would look at two companies in particular, Caremark Rx (CMX NYSE) and WellPoint (WLP NYSE). Both are high quality companies in the medical benefit and containment area. In general, we like Canadian income trusts, although we would steer away from the energy trusts. We like the Canadian Yellow Pages (CA:YLO.UN  Toronto). It  pays about a 6.75% dividend yield, and has a price to earnings growth ratio of 55%, which provides a cushion. There is a withholding tax, but you get an offsetting foreign tax credit."

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