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 (T)||Cash Flow: -$320 M; Earnings Per Share: -5 cents **||Telecommunications|
|Encana Corporation (ECA)||Cash Flow: -$40 M; Earnings Per Share: -5 cents||Basic Materials|
|Unitedhealth Group, Inc. (UNH)||Cash Flow: -$60 M; Earnings Per Share: -5 cents||Healthcare|
|Symantec Corporation (SYMC)||Cash Flow: -$12.9 M; Earnings Per Share: -2 cents||Technology|
|Salesforce.com (CRM)||Cash Flow: -$2.4 M; Earnings Per Share: -2 cents||Technology|
|United Continental Holdings, Inc. (UAL)||Cash Flow: -$72.9 M; Earnings Per Share: -22 cents||Major Airlines|
|Ryder System, Inc. (R)||Cash Flow: -$14 M; Earnings Per Share: -27 cents||Services|
|Baker Hughes Incorporated (BHI)||Cash Flow: -$19.2 M; Earnings Per Share: -4 cents||Basic Materials|
|American Eagle Outfitters, Inc. (AEO)||Cash Flow: $0; Earnings Per Share: 0||Apparel Stores|
|Ebay, Inc. (EBAY)||Cash Flow: -$9 M; Earnings Per Share: -1 cent||Services|
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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