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Record Low Interest Rates Ahead in 2007

By Dr. Steve Sjuggerud
Thursday, December 7, 2006

Bill Gross says interest rates are headed down to the 3% range...

I know it sounds crazy... and you might not believe 3% long-term interest rates are possible in the U.S.... but no one on the planet is more credible about interest rates than Bill Gross.

He is known as The Bond King. He manages more than a half-trillion dollars (yes, that’s trillion with a “T”) for his firm PIMCO, primarily in bonds. That makes him the world’s biggest money manager.

The nice thing about Bill is, he doesn’t have to bite his tongue when he talks... so I take his recent comments very seriously. They are quite extraordinary and way outside of the conventional wisdom. You don’t become a great investor like Bill Gross by going along with the conventional wisdom.

I heard Bill’s comments on the satellite radio as I was driving, so I don’t have the exact quotes. But I’ll share his core ideas with you today...

Bill said he expects the U.S. Federal Reserve will start lowering interest rates in 2007, as the economy slows. The Fed follows a pattern of lowering rates to stimulate the economy and then raising them to cool it off, he said. Over the last 25 years, we’ve seen this same pattern with the same result: lower and lower long-term interest rates.

If this pattern continues, which Bill believes it will, we should see interest rates around 3%. If my memory is right, Bill even hinted that long-term interest rates could actually dip below 3%.

Bill admitted even he couldn’t believe the words were coming out of his own mouth. But that was the result of his analysis.

I appreciate Bill’s honesty... and I find that I’m often uncomfortable at first with what turn out to be my best ideas.

Take my recent recommendation of homebuilder stocks, for example. My analysis of homebuilders told me to “Buy! Buy! Buy!” But, like Bill, I couldn’t believe the words “buy” were coming out of my mouth. It’s worked... The stock I recommended to subscribers of my advisory Sjuggerud Confidentialone month ago is already up nearly 30%.

Investing doesn’t work like most people think. When everyone agrees that housing stocks should get crushed, for example, chances are everyone has sold. So you’re probably closer to the bottom in housing stocks than the top.

The same goes for interest rates. When everyone agrees that interest rates must go higher, chances are you’re closer to a top than a bottom.

Bill is the Bond King. It wouldn’t surprise me at all if his call for long-term interest rates in the 3%-plus range turns out to be correct. (I believe he was talking about 18 months from now or so.)

His call even has more credibility when he tells us that he is putting his analysis ahead of his emotions here. Summing up Bill’s comments:

“The Fed raises rates a few percent, which causes the economy to stall. Then the Fed cuts rates a few percent, which causes the economy to pick up steam again. If the Fed cuts rates a few percent, we’d be down to 3% on short-term rates... And long-term interest rates would follow short-term rates... Poof, we’re at 3%+ in long rates.”

If you’re banking on higher interest rates coming your way, you’d better change your thinking. The Bond King is predicting falling interest rates over the next 18 months... and he isn’t wrong that often. Bet against him at your own peril.

Good investing,

Steve

P.S. Don't worry. There are still plenty of very good ways to make money when interest rates drop. One of my favorite investments in the world right now, for example, pays a minimum of 20% over the next four years... and could easily pay 600% or more.

In fact, Bill Gross has probably put more money into this investment in recent years than anyone else on the planet. For more information, click here.





Market Notes


DARK CLOUDS FORM OVER THE STOCK MARKET

Two days ago, an amazing 836 securities hit a new high for the year. The number of new lows was a pint-sized 21.

The giant divergence in the number of new highs vs. new lows is the latest sign of incredible strength in the stock market. But how long will the strength last? “Not long” is our guess.

Along with a growing bullish chorus (the number of bullish stock market advisors is at a new high for the year), we’ll offer today’s chart as a reason to be cautious of stocks in general. The S&P 500 is up 14% in the past four months… and has gotten far away from its trend line of the past few years.

We’re not saying sell everything… just pointing out that after a huge, uninterrupted move to the upside, the market looks mighty stretched right now. What’s your prediction for stocks? Up? Down? Sideways?

Let us know your thoughts at editorialfeedback@dailywealth.com


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