BMO

BMO Lifetime Cash Flow

Hamilton

Supposedly in response to calls from the (Canadian) federal government, this according to the Toronto Star, the Bank of Montreal is set to unveil this product today. Described as the first of its kind, this product is designed to give (Canadians) ages 55 and over a guaranteed cash flow, regardless of stock market fluctuations (again according to the Star).

The timing is impeccable for this launch as our finance minister, Mr. Flaherty is spearheading the debate over pension reforms. This same minister, also this morning, unequivocally stated that interest rates were  going to go up (soon) and added weight to that opinion by announcing more restrictive mortgage lending rules (30 years will be the max. amortization period etc. etc.)

So how does this product work? Well you deposit your $100,000 and for ten years you will earn,but not receive , the return from  a  group of mutual funds managed to be sensitive to your life-cycle (i.e more conservative as you get older). This is done in such a way that no taxes are payable during this “accumulation”  period. After that you will get 6% on the original amount for a period of 15 years which income is considered return of capital and therefore not taxable.  After that you continue to receive 6% but now taxable and this goes on forever, that is to when you die. The remainder, if any, will be transferred to your estate and would be taxable.

So why should you NOT buy this? Simple arithmetic. If you wanted a guaranteed cash-flow you could buy a 30 year (more on this later) Gov. of Canada bond yielding 3.69% (the BMO could do this as a base case). As the MER on this instrument is 2.75% you would accumulate 3.69-2.75=0.94% per annum compounded for 10 years that gives you $109,810. From there you will receive 6% (on the original amount of $100,000 ) which is equal to 5.56% on the accumulated amount. As you are still earning 0.94%, but receiving 6% , your fund depletes at 5.06% per annum, which, over 15 years leaves you with $50,394. By now you are 55+10+15=80 years old.

At age 55 your life expectancy as a male is 79.33 years and as a female 82.81. Lets assume that you are not sure anymore what you are at these ages, and use the average of 81,07 and for the sake of simplicity lets just call that 81 years. You may have been worried about growing very old and running out of money, but the BMO does not need to worry about that as this product will be sold to thousands of people and the average of the mortality tables will apply quite precisely.From their perspective you will die in one more year so they will pay another $6000 and earn about $500 in interest leaving roughly 50,394-5500=44894 in the account for your estate.

So what is the score? You the client gets 16 years at $6000 a year plus $44,894 to your estate for a total of $140,894. The BMO gets 2.75% MER per annum  (assuming on the original amount) for 26 years, or $71,500. What is there not to like?

I have used the 30-year Gov . bond as a proxy for the riskless investment nearest to the time frame we are looking at. Of course our client could do much better if the funds were very well invested etc. etc. but we are looking at the base case, ie what the BMO could do not to run any risk, which might well be the position they would want to gravitate to as much as possible being a bank.

Buying an annuity (last-to die for couples) would, if things stay the same,  pay about $520/month or $6240 a year. If a proscribed annuity is used ( the funds for the BMO product should come from non-tax deferred sources anyway!) the tax treatment overall may be better. And if Mr. Flaherty is correct, rates will be much higher 10 years from now. Furthermore annuity payments are considered the equivalent of a pension and are consequently eligible for both income splitting and the $2000 tax credit per person. It is not clear that this product offers the same advantages.

BMO Feb 21 , 10 reasons to buy!

Hamilton

BMO Feb 21

As always there are different ways of counting this one, for instance a big triangle could be inserted right in the middle as wave 4. However , no matter how you slice it the low of wave 4 is at about $21 and that is where you normally return to. (1) The “box”as Gartman refers to it is at 50-60% retracement. At $21 we would have 71% retracement. (2) The drop from 72 to 24 could be a 5 wave structure that is much larger than ever seen before. (3)

BMO feb 21 2

The diagonal, or in English the clear wedge formation is near perfect and promises a rapid and violent return to its base (which I do not believe but there you go). (4) The wave 4 triangle in this structure measures to about $23 , about where we are (5) and the low is situated pretty well perpendicularly under the apex (6). Any time the RSI, relative strength indicator drops below 30 their is a turn-around of $5-$15; we are there again (7), same thing for the OBV, on balance volume which has never been lower and cannot go lower without going off the page (8). The stock pays an 11+% dividend and has a P/E of about 6 which I think is Benjamin Graham land (9) Last but not least this , on a risk/reward basis, has to be a buy relative to the other Canadian banks based on the relative size of the correction to date (10). Target $37.5 minimum.

BMO again

Hamilton

BMO feb 20

diagonal

Here is the “model” diagonal. It is what happens at the end of a big move, it goes too far too fast that is why the rebound is so large. The big picture suggested about $21 as a low, the trend-line here runs at about $23, lets leave the church in the middle and call it $22

BMO , RY Feb 19 again

Hamilton

Another look at the banks can be informative. First I have made it rather well known that I was VERY bearish on the banks, way too early perhaps as I have held this view for at least 3 years now, if not longer. Here is why;

RY bc feb19

RY big c feb 19

First of all the stock is up in (arguable) 5-waves, increasing the tangent with each new leg up suggesting a bubble of sorts  that would require a large correction any time. Normally to the 4th wave of previous degree that could be at $23 to $14. This move, as with all the banks does not correlate to the growth in population or any other metric that would justify it. Also it far exceeds all the “other” stocks as shown in the lower chart overlaying the TSX, which itself did pretty well but was outperformed by about 1500% from the base in ‘74.

Looking at BMO things are a little clearer as the position of the 4th wave is less ambiguous.

BMO BC Feb 19 The target here is $21, if we go that far.