Kass: My 'Fast Money' Recap
NEW YORK ( Real Money ) -- In last night's "Fast Money" segment with Melissa Lee and the gang, I discussed potential winners and losers if interest rates rise in the year ahead.
Two weeks ago on "Fast Money," when Michelle Caruso-Cabrera subbed for Melissa, I discussed why I thought the bull market in bonds was over.
Finding opportunities (long and short) is the next logical step.
It is important to remember that I expect rates to rise not because the economy is especially vigorous -- it's not -- as Wednesday night's PMIs in Europe and China support the notion of below-trend worldwide growth.
As I mentioned in response to a question by Anthony Scaramucci, I expect rates to rise because in a muddle-through recovery in the U.S, with Band-Aids applied to the European debt contagion and China set to ease further:
- The flight to safety in bonds will be reversed -- remember, over history the yield on the 10-year has approximated the sum total of nominal growth in GDP in the U.S. (i.e., real GDP plus inflation). We are currently growing domestically at slightly under 2%, inflation is about 2.3%, so you get a theoretical 10-year yield of between 4% and 4.3% vs. the actual yield of 2.25% for the 10-year now.
Let's assume for the sake argument that it is a given that interest rates are about to launch a gradual multiyear rise. Which industries and companies are then the winners and which are the losers in a rising-rate environment?
There are obvious and less obvious losers and winners.
- Most vulnerable are companies and industries with large debt-to-equity ratios, particularly those that have a large amount of variable-rate debt and low returns on assets. The most vulnerable industry sectors would include telecom -- I found a lot of long-distance and broadband providers on the Bloomberg screen that I conducted -- as well as names in retail, real estate, media and materials. Some exposed and possible short candidates with large debt loads include Pitney Bowes (PBI) , which is in the mail and shipping business; Pepco Holdings (POM) , which is engaged in the transmission of electricity and natural gas in the Mid-Atlantic area; CenturyLink (CTL) , which provides local, long-distance and network access; PPL Corporation (PPL) , an electrical and utility holding company; Avon Products (AVP) cosmetics; Cablevision (CVC) , cable; and CMS Energy (CMS) , a Michigan-based utility.