Amanda Blitzdorf's  Instablog

Amanda Blitzdorf
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Amanda is an analyst and portfolio manager. Her experience was developed in global macro economics, quantifying and qualifying trading signals, and execution of propietary trades with discretions. She is also a frequent writer of Zumlon's blogs. Amanda has worked with many topnotch fund managers... More
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Zumlon Technologies LLC
  • How are we doing if the interest rate starts to rise? 0 comments
    May 17, 2011 2:02 PM

    Hey, the QE2 is winding down in June, right?  What about the interest rate?  Two fundamental issues that bogged down the economy have not yet been mitigated by the easy monetary policies.  The housing market still shows no sign of real life as April Housing Starts and Building Permits failed to meet market expectations.  The US labor market hasn't done any better as unemployment rate is stubbornly high. That said, the short term interest rate should stay low for a while. 

    On the other side of the spectrum, the weak dollar caused by the ultra low interest rate and QE2 has driven up commodity prices across the globe, which simmers the inflation everywhere.  The combination of slow growth and high inflation will for sure be the worst nightmare for American consumers.  The increasing US fiscal budget deficit has begun put upward pressure on the interest rate.  You got the idea?  We all sooner or later have to face the reality that we will be living in an environment of rising interest rate.

    When the interest rate starts to rise, what does the stock market look like?  Someone would argue that the market will be doomed.  Not so quick!  Let's take a close look at some individual companies

    Companies The Impact of 50 Basis Point Increase of Borrowing Cost Sectors
    AT & T (NYSE:T) Cash Flow: -$320 M; Earnings Per Share: -5 cents ** Telecommunications
    Encana Corporation (NYSE:ECA) Cash Flow: -$40 M; Earnings Per Share: -5 cents  Basic Materials
    Unitedhealth Group, Inc. (NYSE:UNH) Cash Flow: -$60 M; Earnings Per Share: -5 cents Healthcare 
    Symantec Corporation (NASDAQ:SYMC) Cash Flow: -$12.9 M; Earnings Per Share: -2 cents Technology (NYSE:CRM) Cash Flow: -$2.4 M; Earnings Per Share: -2 cents Technology
    United Continental Holdings, Inc. (NYSE:UAL) Cash Flow: -$72.9 M; Earnings Per Share: -22 cents Major Airlines
    Ryder System, Inc. (NYSE:R) Cash Flow: -$14 M; Earnings Per Share: -27 cents Services
    Baker Hughes Incorporated (NYSE:BHI) Cash Flow: -$19.2 M; Earnings Per Share: -4 cents Basic Materials
    American Eagle Outfitters, Inc. (NYSE:AEO) Cash Flow: $0; Earnings Per Share: 0 Apparel Stores
    Ebay, Inc. (NASDAQ:EBAY) Cash Flow: -$9 M; Earnings Per Share: -1 cent Services
    (** The umber is calculated based most recently published earnings report)

    In the ultra low interest rate environment, it does make sense for companies to execute highly leveraged strategies to achieve growth in their core business.  As the interest rate is forces to rise in a foreseeable future, the companies with more conservative approaches will shine. 

    On the other hand, accurately timing the rise of interest rate is next to being impossible.  Nonetheless, it will be prudent to hedge the risk at early stage of the game.  While shorting Treasuries may sound a little too aggressive, rotating holdings accordingly and repositioning portfolios may prove to be a winner's game.

    DISCLAIMER: I don't own any aforementioned securities in my portfolio, but that may change at any time.
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