An Introduction

This next project is an ongoing one that will be revisited and reevaluated after the investment horizon is met. The idea behind this project deals with the Federal Reserve desire to raise interest rates. This rise in interest rates, even a small increase, has impacts on global markets and economies. The rise in interest rates are in speculation of when they will be, but have been hinting at the end of 2015 or start of 2016. This project is an equities based section of a portfolio that could be resistant to interest rate rises and could extract a profit.

Economic Conditions

Economic conditions during this project must be monitored with great detail. These are the selected conditions that will be monitored.

• Federal Funds
• 6-month CDs
• Currency Fluctuations
• 10-year Treasury Bill
• Inflation Indexed
• AAA Corporate Bonds

A discussion on the importance of the selected conditions

Economic conditions should be monitored and treated with importance in any investment. This specific investment project will monitor the selected economic conditions in greater detail and importance. This is because of the nature of the project entails a specific economic instrument (the interest rate) and its past results carry a significant amount of reasoning into the investment project.

Federal Funds

The federal fund rate is an important indicator of the overall economy. It determines the level of highly regarded institutions rate on the borrowing of money from the Federal Reserve. This rate holds value because it tends to control the rate of interest for borrowers throughout the economy. When this rate rises, banks are forced to raise the interest on their loans in order to combat the price they pay from the Federal Reserve.

6-month CDs

A 6-month CD is an alternative investment to equities and could bear a higher interest during interest rate rises based on the fact commercial banks will have to pay more to borrow from other banks to compete with the Federal Reserve rate. 6-months may be the horizon for the project (which will be decided based on the planned Federal Reserve’s rate increase) also could be used as a basis or a benchmark depending on whether or not CDs be a leading rate of return.

Currency Fluctuations

The specific currency rate that I will be taking close note of is the euro to the dollar. With interest rates rising, the dollar would appreciate against the euro, which could hurt multi-national corporations in the states.

10-Year Treasury Bill

The 10-year treasury bill are important to economists because it is a large determinant of investor confidence. The 10-year is regarded as one of the safest investment vehicles to invest in throughout the U.S. and perhaps the world markets. Uncertainty in the market could cause a higher demand for treasury notes.

 Inflation Indexed

The inflation index kept track by CPI numbers among other indicators, is an important measure the Federal Reserve will keep track of when raising interest rates. With inflation near 0 a healthier rate is looked at between 1-2%.

AAA Corporate Bonds

AAA corporate bonds will be a selected condition from Moody’s credit rating service because they are at historically low interest rate. This has created an unusual situation since interest rates and bonds tend to go inversely of each other. Moody’s AAA bond interest rates will be watched as a cautionary measure of corporate bond yields as an alternative investment.

Selected Economic Data

Federal Funds Rate

Source federalreserve.org

6-Month CDs

 Source: bankrate.com

Currency Fluctuations (Euro-Dollar Exchange)

 Source: federalreserve.org

 10-Year Treasury Yield

Source: federalreserve.org

 Inflation Indexed

Source: federalreserve.org

AAA Corporate Bonds

 Source: federalreserve.org

Equity Screening and Analysis & Reasoning

Based on the selected economic conditions above, as well as fundamental and performance-based analysis, an equity screening and analysis took place.

Sector Specific Screening

Based on the economic conditions that I have selected, along with the Fed’s forecast of a rise in interest rates, the general consensus is investing in financial institutions as the key sector during this economic time. With the raise in interest rates effecting banks, I am filtering equities based on the financial industry. I am not comfortable investing in financial institutions, especially after the financial collapse and the inaccuracy of reports coming from the financial industry makes the screening process increasingly difficult. I chose the financial industry based on the direct impact interest rates have on the industry. Using the selected economic data I found banks benefiting and profiting from a rise in interest rates and therefore an important sector for this project.

Federal Funds Rate

The Federal funds rate is at a historic low. Although the interest rate hike may not be as much of a hike instead of a slight hill, the rate rising still (as discussed in the selected economic conditions section) will cause banks to charge higher interest on their loans. This may (even if a small rise) be a gain for banks. Because of my major precaution against financial institutions with poor financial reports and the 2008 financial crisis, I tried to stay away from banks that hold heavy investments in real estate or mortgage backed securities.

Currency Fluctuations

As previously stated in the selected economic conditions, currency fluctuations affect multinational corporations in the states. So, I can effectively narrow down my search to financial institutions least effected by currency fluctuations. This search would come down to domestic regional banks.

Fundamental Screening

Criteria

-Mid-Large Capitalization

– Trailing PE ratio >20

– Regional Banks

– 0-10% Short Interest

– Net Profit Margin between 10-30%

Holdings

MTB                                                                                        M&T Bank Corporation

BBT                                                                                         BB&T Corporation

CBSH                                                                                       Commerce Bancshares Inc.

PRU                                                                                         Prudential Financial Inc.

RF                                                                                            Regional Financial Corporation

MMC                                                                                       Marsh & McLennan Companies

PFBC                                                                                       Preferred Bank

EWBC                                                                                     East West Bankcorp Inc.

ALL                                                                                          All State Corporation

Exceptions to the Fundamental Screening

PRU

EWBC

ALL

Short Explanation of Screening

I prefer to invest in companies with lower P/E ratios, middle to larger capitalization companies, (although not too large to be effected by currency fluctuations) minimal short interest, and net profit be sustainable to at least 20% and ideally above 25% among other screening criteria.

Prudential Financial Inc.

Prudential is an exception based on its in depth financial reports and value in this equity portfolio. I would consider Prudential as part of the project although it is not a bank; insurances tend to gain in cash flow during interest rate moves. Holding this type of large cap stock also makes its movements within certain ranges more predictable, making its risk lesser compared to mid capitalization companies. It also has a good quarterly earnings growth.

East West Bankcorp Inc.

East West Bankcorp didn’t meet my criteria for net profit margin, but has dividend growth, Schwab A equity rating, and is primarily a regional bank with lending services.

A Suggested Primitive Portfolio Allocation

Selling Period

I emphasize selling a security being much harder than buying one. The selling period for this project will not be clear-cut until interest rates move upward. Once they do the market reaction and Fed minutes will be reviewed and a selling period will be revised based on the reaction of the markets and the Federal Reserve. A tentative selling period would be 1 quarter after interest rates are raised, also based on each holding’s earnings. Although if economic data still shows financials being a preferred after 1 quarter of interest rate levels rising, a new selling period may be re-examined. This project could be adapt for long-term positioning with appropriate dividend payouts be each company.

Summary

This project will be an ongoing endeavor and will be updated when deemed appropriate. This is an investment project taking into account interest rate levels changing and preparing a portion of an overall portfolio for interest rate levels rising with exposure to equities that may be adapt to a new interest rate level environment. Economic data will be monitored throughout this project from the Federal Reserve, Statistical Abstract of the United States, Board of Governors of the Federal Reserve System, and 2015 FOMC meeting statements and minutes.