When Interest Rates Rise

03/22/18 04:47:00 PM

by Koos van der Merwe

Jerome Powell, the new Federal Reserve Chairman of America told Congress on Tuesday, February 27, that the US economy "remains strong."

Security: JPM, AGNC
Position: Hold

The Dow Jones Index climbed 330 points on Friday, March 9, in another turbulent trading day. The latest U.S. employment report was perfect for the market. Strong job creation with a tame growth in wages boosted the Dow. The Fed is expected to raise rates three times this year with the objective of achieving full employment and controlling inflation. So, what strategy should you follow with the hint of rising interest rates? The answer: BUY BANKS and SELL REITS.
With the Dodd Frank Act that had been signed into federal law by President Barak Obama on July 21, 2010 under consideration for repeal, Big Banks, which were the reason for the act, are shouting for joy. The act was passed as a result of the financial crises of 2007-2008. The act promoted financial stability by improving accountability and transparency in the US Financial system, to end the "too big to fail" banks that were hurting consumers with abusive financial practices. Studies have shown that the Dodd-Frank act has improved financial stability and consumer protection. Removing the act allows banks to once more market to consumers, increasing profits and dividends paid to shareholders.

With interest rates rising, Real Estate Income Trusts, or REITs will be forced to reduce the amount of income paid in dividends to its shareholders. A REIT's earnings are generated primarily by the net interest margin, which is the spread between the interest earned on mortgage loans and the cost of funding these loans. This makes them very sensitive to interest rate increases.

Figure 1. List of American Banks in order of total assets.

Graphic provided by: Google.

JP Morgan Chase is the largest bank in America with Bank of America a close second. Wells Fargo is third and Citigroup is fourth. Goldman Sachs, Morgan Stanley and US Bankcorp are fifth, sixth and seventh as shown in the list of banks in Figure 1.

Figure 2. Weekly Chart of JP Morgan Chase.

Graphic provided by: Omnitrader.

The chart in Figure 2 is a weekly chart of JP Morgan Chase. The chart shows that a buy signal was given on February 20. The share price has moved up strongly from February 8, 2016 with buy/sell signals given on Vote line based on the Vervoort Stop Strategy strategies shown in green below the Vote line.

Figure 3. Weekly chart of American Capital Agency REIT.

Graphic provided by: Omnitrader.

One of the top REITS is American Capital Agency Corp. The chart in Figure 3 is a weekly chart showing how the share price has fallen from $22.29 on June 26, 2017 to its present value of $18.50. The RSI is presently at oversold levels, suggesting that a buy could be hiding in the wings. The Vote line, however, is in a sell, based on the Aroon Strategy and the Vervoort Stop Strategy.

There are many REITS available. Simply Google, "American REITS", to get a list of those available.

Banks are set to rise, and REITS are set to fall when interest rates in America start rising. Investing in Banks and REITS is there to receive a monthly dividend. With the future rise in interest rates, investing in Banks will be more profitable than investing in REITS because bank dividends will rise while REIT dividends will fall. Each share however should be carefully analyzed.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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When Interest Rates Rise

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