Gluskin Sheff’s Rosenberg Offers a Compelling Reason to Buy Stocks

Friday, 16 Nov 2012 08:22 AM

By Michael Kling

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Despite Washington gridlock, the eurozone debt debacle and the weak global economy, David Rosenberg, chief economist and strategist for Gluskin Sheff, sees one compelling reason to buy stocks.

The reason is simple: low interest rates.

In a nutshell, interest rates are so low that stocks are irresistible, Rosenberg wrote in the Financial Times.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

Rosenberg says the Federal Reserve has "completely altered" the relationship between stocks and bonds by promoting low interest rates. Even though the economy and corporate earnings are weak, the interest rate used to discount corporate future earnings streams is negative, which raises earning expectations.

"The fact that the S&P dividend yield is triple the yield in the belly of the Treasury curve has also added to the allure of equities, or at least those that have compelling dividend yield, growth and coverage characteristics," Rosenberg wrote.

Investors sticking to cash and super-safe investments should realize that interest income is in a bear market and dividend income is in a "massive bull market," Cullen Roche, founder of Orcam Financial Group, quoted Rosenberg as stating in an article for Pragmatic Capitalism.

By buying large amounts of bonds, the Fed has pushed the five-year Treasury yield down to 60 basis points, or just 0.6 percent, Rosenberg noted. By comparison, the dividend yield in the stock market is approaching 2.3 percent. That's a difference the markets haven't seen since 1958.

A. Gary Shilling, president of economic research and forecasting firm A. Gary Shilling & Co., agrees that dividend-paying stocks have benefited form low rates, despite average yields of 2.1 percent of S&P 500 stocks.

"Interest rates close to zero create deviations from the norm and produce a new set of relationships that few forecasters and policymakers fully understand," Shilling wrote for Bloomberg.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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