Investors Beware Higher Interest Rates Looming
Stock-Markets / Investing 2013 Jun 14, 2013 - 05:15 PM GMT
George Leong writes: The rate on a 30-year fixed mortgage has been creeping up higher and just broke the four-percent threshold. This is a telltale sign that higher financing rates are on the horizon.
While there’s still hope that the Federal Reserve will hold off on reducing its bond buying at next week’s Federal Open Market Committee (FOMC) meeting, the reality is that the money party is coming to an end.
The failure of the Bank of Japan to deliver additional stimulus sent traders to the exits and resulted in the Nikkei 225 dropping down to below the key 13,000 level. What happened in Japan may be an ocean away, but the knee-jerk reaction was clearly indicative of nervousness among traders.
The reality is that interest rates are heading higher. It’s just a matter of time, so you better be prepared for the move, because it will affect investors’ portfolios, home sales, consumer spending, and the carrying cost of the massive debt levels consumers have accumulated during this period of cheap money.
Even worse, governments from municipal to state to federal will be facing a cash crunch when yields and interest rates ratchet higher. In many states, we are already seeing debt issues that are threatening to explode when interest rates rise.
Case in point: California and its municipalities have amassed a debt load of about $848 billion, which could eventually be eclipsed by $1.1 trillion, according to The California Public Policy Center. (Source: “Report: California’s Actual Debt At Least $848B; Could Pass $1.1T,” CBS web site, May 1, 2013, accessed June 13, 2013.) This is scary news; furthermore, there are 1.64 million Californians unemployed and 4.2 million collecting food stamps. (Source: USDebtClock.org, accessed June 13, 2013.)
And then you still have the national debt, a situation in which the cost to carry the debt will only get worse as interest rates rise.
You need to understand that the threat of higher interest rates is real.
Income seekers who depend on bonds will be happy with the higher rates, but the many millions of Americans and other major debt holders will not like the higher rates.
To prepare for the eventual upward move of interest rates, you should make sure you begin to pay down debts and reduce your borrowing.
If you have made good money in the stock market, begin to examine which stocks are more vulnerable to higher rates and rotate away from those ones. The more vulnerable stocks may include those companies that offer financing to consumers such as automobile, real estate, and mortgage companies.
Companies that benefit from higher rates are the credit card providers, as the higher interest rates could mean less payments and higher balances.
By George Leong, BA, B. Comm.
www.investmentcontrarians.com
Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”
George Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. See George Leong Article Archives
Copyright © 2013 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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