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Stocks When The Federal Reserve Raises Interest Rates

Stocks When The Federal Reserve Raises Interest Rates

Fed Funds RateWhat is the typical pattern for stocks when the Federal Reserve raises interest rates? That is the question on many stock trader’s and investor’s minds, as Federal Reserve interest rate hikes appear increasingly likely during 2015. There is some angst among traders and investors that Federal Reserve interest rate hikes will cause a sharp stock market sell-off. While such concerns are warranted, it is important to understand the typical trading pattern that occurs in the stock market when the Federal Reserve implements interest rate hikes, so that a stock trading or investment portfolio can be properly managed.

Stock Market Reaction The Federal Reserve Raises Interest Rates

Keep in mind that the Federal Reserve raises interest rates when the economy is strengthening and inflation pressures start picking up. The Federal Reserve raises interest rates in an effort to slow down economic growth, so that the economy does not overheat and inflation does not spiral higher.

The initial stockFederal Reserve Investing market reaction when the Federal Reserve starts raising interest rates is to sell-off, as the market tries to price in how higher interest rates will affect corporate earnings. Higher interest rates affect corporate earnings by raising the borrowing costs for companies, which puts pressure on their bottom line earnings. This is particularly true for companies that are highly leveraged with debt, such as Real Estate Investment Trusts (REITs).

The sell-off due to the initial Federal Reserve interest rate hikes is usually short-lived, as the economy continues to grow and companies continue to report growing earnings. The typical pattern that the stock market follows is an initial sell-off and then a rally for a year or two after the Federal Reserve starts to raise interest rates. The rally ends when the Federal Reserve raises interest rates too much and the yield term inverts (short term rates become higher than long-term rates), which sends the economy into a recession. Typically, when the Federal target rate reaches four percent, it is time to turn cautious and prepare for a recession and stock market decline. A bear market sell-off will typically take hold until the middle of a recession, at which point the next bull market rally will start.

What To Do When The Federal Reserve Raises Interest Rates?

What should a trader or investor do when Federal Reserve raises interest rates? The answer to that question depends upon your trading or investment horizon and how your portfolio is weighted among various asset classes.
Interest Rates Rising
If you are a trader, then the start of the interest rate increase cycle provides opportunities to profit from any stock market volatility that ensues. Going short stocks, buying puts on stocks or stock market indexes, or buying volatility Exchange Traded Funds (ETFs) are three ways to potentially profit from a stock market sell-off that might occur during the early stages of Federal Reserve interest rate hikes. Once the sell-off appears to have played out, a strong tradable long side opportunity will likely be available, as the stock market recovers from the initial shock of higher interest rates.   Buying stocks, buying calls on stocks or stock market indexes, or shorting volatility Exchange Traded Funds (ETFs) are three ways to potentially profit from a stock market rally.

If you are an investor, then the start of the interest rate increase cycle provides an opportunity to evaluate how your portfolio is balanced for the later stages of an economic recovery and how to position your portfolio for the eventuality of a recession within a few years of the start of interest rate increases. If you trade a portion of your long-term stock investment portfolio, then think like a trader to take advantage of the increase in interest rates.

If you are a buy and hold investor, the Federal Reserve interest rate hikes during upcoming years are a non-event, with the exception of the fact that they may provide good buy in points to dollar-cost-average down on long stock positions.  What the rate hikes will essentially mean is that the stock market will likely sell-off and provide buying opportunities, not just initially, but also in the long run, as rate hikes eventually lead to a recession, as the Federal Reserve seeks to choke off economic growth to keep a lid on inflation.  If you are truly a long-term buy and hold investor that is planning on staying in the stock market for decades, the upcoming rate hikes will be non-events; just blips on long-term charts.

What To Do When The Federal Reserve Raises Interest Rates? Rebalance An Investment Portfolio

Whatever your investing philosophy is, the pending Federal Reserve interest rate hikes are a great time to take a step back and gauge whether your investment portfolio is too heavily weighted with stocks. Most investors have investment portfolios that are heavily over-weighted in stocks because when an individual investor thinks of investing money, they think stocks.  With the Federal Reserve interest rate hikes likely to cause stock market turmoil over the short and long term, it is a good idea to assess whether some stock holdings should be shifted into other asset classes, such as fixed-income, real estate, and bonds.

Fixed income securities, such as Certificates of Deposit (CDs) will pay higher yields, as interest rates rise. A pick-up in inflation associated with stronger economic growth helps support higher real estate prices.   Bonds should be avoided during the initial stages of the Federal Reserve’s increases in interest rates, since bonds are currently overvalued and are likely to revert to their mean value (drop in price) as interest rates are increased by the Federal Reserve. Once the Federal Reserve is well into their interest rate increases, it will be time to consider investing in bonds that have reached fair values and pay higher yields in the higher interest rate environment.

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eBay and PayPal Breaking Up

Ebay and PayPal are finally breaking up, eBay had announced on Tuesday morning. PayPal has been growing as a business on its own over the last couple of years outpacing eBay. Over the past 12 months, PayPal has earned 7.2 billion dollars following behind eBay which has earned 9.9 billion dollars in the same amount of time. The online marketplace is set to start its own spin off version of its current payment business by the end of this year. Carl Icahn has stated in the past, “PayPal is a jewel and eBay is covering up its value.” As it would seem since the announcement of the companies splitting up, the value of them both will now be seen in their amount of profit and success.

The BreakupPayPal 1

Carl Icahn cheered at the move between the two companies splitting up. He stated on Tuesday night: “We are happy that eBay’s board and management have acted responsibly concerning the separation – perhaps a little later than they should have, but earlier than we expected.” However Icahn suggested that next step that PayPal should take is to look for another online service in which they can merge. Icahn’s remarks were rather stern as he believes that the industry is ready for massive consolidations and mergers of varying companies. He continued, “In light of the development of strong competition such as the advent of Apple Pay, the sooner these consolidations take place, the better.” Icahn had been vocalizing his desire for awhile, hoping that eBay and PayPal would go their separate ways; when the companies announced that they were going in different directions, Icahn was elated to say the least as he had been pressuring the companies to make the move sooner. Even Tesla’s Elon Musk has been quoted in saying that “It doesn’t make sense that a global payment system is a subsidiary of an auction website – it’s as if Target owned Visa or something.” Many have wondered the same, and if left to its own devices could the company become one of the largest financial companies in the world?

PayPal

PayPal has been growing rather quickly over the last year than in prior years. The business will soon be headed up by the former American Express executive, Dan Schulman who got on board with the company earlier this year. The current CEO John Donahoe and CFO Bob Swan will both be serving on one or both of the post breakup companies that will come into play after the companies split up. In the last 12 months, the transaction volume for PayPal is roughly double that of eBay. PayPal is at 26% whereas eBay is at 13% when it comes to the amount of transaction volume. Right now PayPal’s stock worth is roughly 30 dollars per share. The potential for the worth of the share prices are likely to rise higher once the company is no longer a part of eBay. Mark May who is an analyst for Citi has suggested that PayPal minus eBay could warrant even higher returns or multiple returns for faster growth. May feels that the separation could give off more of a “re-invigorating” sentiment which could help grow the business even farther which would give the company a new face. While there are some concerns that the payment service might not be able to increase business once it severs its ties with eBay, many of the industry analysts are downplaying this theory. The main focus seems to be that the company which is already outperforming eBay will only do better once it sheds the weight of its main source of transactions despite the introduction of Apple Pay in the market.

eBayPayPal 2

Ebay’s board members as well as Carl Icahn feel that the breakup with PayPal is the best thing for the company to do despite their long history together. Shares of the company became stagnant ahead of the news of the breakup between the two companies on Tuesday rose 11 percent when the pre-market trading continued. Within an hour of trading the company’s shares rose 6.7 percent which thrust the company into positive trading for the first time in a year, as the share price closed at 56.19 dollars by the end of trading.

The fates of PayPal and eBay which were once combined will now be put to the test in the coming future. While eBay’s might have been the breadwinner in the past for the two companies, it is now time for PayPal to branch out on its own and see what the world has to offer. There is both industry and market elation over the split up as Wall Street investors and consumers alike eagerly await both companies net moves to see how profitable either becomes without the other.

 

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Finnair and Biofuel

Earlier in the week Finnair AY5 landed in New York’s JFK airport carrying its passengers like the other hundreds of planes to pass through the airport. Unlike the rest of those planes, Finnair’s AY5 was a little different than the rest of those other flights, because it was fueled by biofuel. Biofuel is made up of fat and grease and performs in a plane just as jet fuel would. The pilots and passengers hadn’t noticed a difference in performance.

finnair 1Biofuel

Biofuel for an airplane has the ability to change the industry just like hybrid and electric power has the ability to change how we commute on a daily basis. It wasn’t a mistake that the Finnair had sent a biofueled plane to JFK this week. The company had made both an environment and political message when the plane arrived on the same day that the United Nations Summit on Climate change was about to take place. The Vice President of Sustainable Development for Finnair, Kati Ihamaki, has said “We wanted to send a message to the UN and show that biofuel is a serious and credible alternative that can concretely reduce greenhouse gas emissions.”  The biofuel is primarily made of up the recycled cooking oil that comes from restaurants which has proven to help reduce the carbon footprint that is traditionally left by big commercial jet liners. “Technology means, including biofuel but also new fleet investments, are the most effective means to improve fuel efficiency…and therefore reduce emissions.” said Ihamaki.

Finnair

The biggest cost of operations for Finnair comes from the cost of fuel. By taking jet fuel off the operating costs the company not save money on their bottom line but is also able to pass those savings onto their customers while helping to cut the emissions of greenhouse gases which add to the overall warming of the planet. For customers, the savings and environmental savings have been noticed already as the company has been able to upgrade its tableware by introducing Marimekko tableware which is 15 percent light than previous version offered on their flights. The company has shown a massive commitment towards reducing not only its engine emissions but also the amount of waste produced by each flight and the impact it has on landfills. The airline has been able to recycle, reuse, or limit the amount of waste in every flight that they are sending out. The company has been training their pilots to conserve fuel when both taking off and landing their aircraft. The pilots for Finnair when descending use an industry coined term, the “continuous descent landing method” when landing the plane which helps to conserve fuel and therefore helping maintain the bottom line to the company’s spending on every flight. The company itself has been committed towards shifting the airliner to be one of the most environmentally friendly and cost effective airlines in the world, one that can become the beacon of examples for the rest of the industry to follow and model after.finnair 2

While biofuel helps to reduce the greenhouse gasses which have polluting the planet over the years, it also helps the company to be able to use a fuel that is both sustainable and affordable to use as well. Right now biofuel is not the cheapest fuel that an airliner would be thinking about putting in their fuel tanks to power their aircraft. In an industry which has caused some the bigger companies to merge in order to remain in business with the cost of maintenance, fuel, and high international tension spiking here and there, the industry’s airliners have been making cuts left and right. In fact right now the cost of biofuel that is being put into planes cost roughly twice as much as regular jet fuel. Spokesmen for the company have been quoted in saying that even though right now the cost of biofuel is high, it won’t always be. In a strange twist of luck, we are beginning to see corporate responsibly to the environment and to the customer base take a preference over just making any additional profit. “…flights like this will help develop and stimulate supply chains.” said Ihamaki. While the alternative-ness of this fuel might prove to be industry changing, right now it is not the most affordable fuel to be powering aircraft with. But Finnair has seemingly challenged conventional business theories by putting the environment first in this matter of operation.

Sometimes the best way to change an industry is to pioneer the change you want to see, yourself. If history has taught us anything about leadership, it is that when the tough decision needs to be made and implemented, the best way to rally the troops is t have them follow you into battle rather than give orders far behind the front line. The same thinking in that leadership has been seen by those who run Finnair and are looking for a change in the way their industry fuels commercial jet liners.

 

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South Korea to Buy F-35s

The South Korean government has announced yesterday that they will be purchasing 40 of Lockheed Martin’s Marine Corp F-35 fighter jets which will help the country modernize and strengthen their again air defense fleet. In recent months there have been some questions raised about the overall safety of the F-35s which have caused some nations to either ground their current fleet or pass over the purchase of the aircraft all together. The South Korean government has announced their decision and is standing behind their commitment to the purchase of 40 brand new fighter jets. The deal is worth about 7.6 billion dollars or about 7.34 trillion won.

Lockheed Martin’s F-35F-35 1

South Korea has become the 10th country to choose the F-35 fighter jet as a suitable replacement for the modernization of their current fighter jet fleet. The F-35 is a single engine fighter jet that is capable of aspect of stealth given the plane a clear advantage over that of its Boeing counterpart the F-15. The country is trying to strengthen their aging air defense fleet which has become almost decrepit in recent years. The goal in all of this is to remain in a clear advantage over their aggressive neighbor North Korean. The South Korean government has chosen to go with the F-35 despite the issues and possible defects that have been reported with the plane in recent months. There have been concerns with the plane’s engine to fail or catch on fire which has caused in rare cases the aircraft to fall out of the sky. In June of this year the problem hit an all time high and caused the entire U.S. fleet of F-35s to be grounded until the issues were fixed. South Korean government investigations found that the reported issues were both isolated and non-occurring in the bulk of the production models. Both internal company investigations and governmental investigations have concluded that the F-35s were not subject to failure in safety or operation, a result that has given the South Korean government a sort of assurance since there hasn’t been an fluctuation in price for the aircraft as well.

The Purchase Deal

The purchase deal between the South Korean government and Lockheed Martin is still relatively new. The terms of the deal have not been entirely laid out in public view due to the short while ago of announcement. However the company has released that they will be selling the South Korean government 40 brand new F-35 fighter jets and have set delivery of these jets to be between 2018 and 2021. Earlier last year the South Korean government retracted their initial purchase deal in which the government had wanted to purchase a total of 60 new fighter jets. The original deal would have cost the country 8.3 trillion won but the country decided that 40 brand new F-35’s were better suited than adding on the additional 20 F-15 that are manufactured by Boeing. But the decision for South Korea to choose the F-35s was a bit of a shocker because the Boeing F-15 Euro fighters were typically the more likely choice which would have replaced the existing F-4 and F-5 fighter fleet. All of the jets will be built in the U.S. and then shipped over to South Korea. Lockheed Martin has even offered the country the option to have the company service the planes either in the U.S. or to send over representatives to train the South Koreans how to maintain the planes.

F-35 2On Wednesday a representative from the South Korean Defense Acquisition Program Administration stated “We have agreed to acquire 40 jets within the total budget and reflect all the terms negotiated during the 2013 competition.” Orlando Carvalho who is the executive vice president of Lockheed Martin Aeronautics has said “We are honored by and appreciate the trust and confidence the Republic of Korea has placed in the 5th generation F-35 to meet its demanding security requirements. This decision strengthens and extends our longstanding security partnership while enhancing regional stability across the greater Asia Pacific Theater.” If the deal ends up going through without any issues this could be the first of several deliveries for South Asian Pacific countries such as Japan and Taiwan. Soon the South Korean government and the U.S. government will begin price and offset negotiations. The company expects to have the finalized note of price and delivery signed by both governments and the company by the summer.

The addition of the F-35s to the South Korean air force is a great step in regional security as well as long term profits for Lockheed Martin. As world tensions grow between North Korea and Russia the need for regional and global security becomes ever more needed. The newer fighter jets will help upgrade the aging South Korean fleet while solidifying the increased revenue for Lockheed Martin in future business endeavors in the South Asia Pacific Theater.

 

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The Future of Fossil Fuels

Energy costs continue to rise upwards as new technologies try to breach the gap between environmentally friendly and cost effective. The green revolution took hold a couple of years ago as people sought to manufacture and use a cleaner less harmful source of energy to fuel their everyday lives. There is currently a mass march in Manhattan as protesters demonstrate against climate change. Even with companies like Tesla and ALTe EV Technologies which are trying to transform the way we power our vehicles, it would seem that the future of fossil fuels would be very much a part of the future as well.

The Different Fuelsfuels 1

According to the U.S. Energy Information Agency there are eight different sources of energy that can be harvested for use. One of the reasons that fossil fuels are relatively cheap would be due to the fact that the global economy has been built up on the gasoline and diesel infrastructure. Many of us depend on the various types of energies that allow us to conduct our day to day.

Conventional Coal: One of the oldest sources of fuel, coal is mined from the Earth and has historically been the building blocks of modernization for various countries. Currently there is much of a demand for various Asian countries that are in the middle of modernizing their economic infrastructures. China and India are two countries most demanding of coal which is one of the most cheap forms of fuel.

Natural gas: Natural gas is one of the most abundant sources of fuel that is usually both cleaner and cheaper to use than coal. It is also one of the biggest resources in the U.S. which makes exporting the gas very profitable for the U.S.

Oil: Oil is one of the most widely recognized fossil fuel because of its wide usage as a transportation fuel. Cars, trucks, planes, trains and ship all run on either oil or a divertive of oil to further the transportation of either people or cargo. While the prices for oil typically tend to rise due to international tensions, it is also one of the major contributors to green house gases that are heating the planet.

Wind: Wind based energy is only slightly cheaper than coal depending on its location. Land based wind farms are slightly cheaper than conventional coal but requires larger lots of land where electricity can be generated and are typically both an eye sore and very noisy. There are also wind farms that are based off shore but tends to be more expensive than the cost of using traditional coal.

Nuclear: Nuclear power is very cheap and much cleaner than the use of conventional coal but there are limitations on this type of energy. For obvious reasons the ability to use nuclear technology is limited among certain global powers due to safety issues and regional tensions where one might try weaponizing instead of providing cheap clean power.

Solar Power: Solar power while abundant and completely dependent upon the amount of sunshine available for the panel cells to pick up is also extremely costly when compared to the other sources of energy fuels.

Hydropower: Hydropower much cheaper than the use of coal as a source of power. The only problem that exists when talking about hydropower is the construction of dams that are needed in order to generate the amount of power that would be both sustainable and cost effective, construction that often hurts the environments around the dams.

Biomass Energy: Biomass energy is slightly more expensive than the use of traditional coal, it like hydropower often has negative effects on environment surrounding it. Biomass and the cultivating of certain plants and crops often can have significant consequences that are not limited to deforestation.

The Rise of Technologyfuels 2

As the need to power our future continues to rise with new nations trying to modernize on a nearly daily basis, so too does the desire to have technology try and help bridge the gap between cost effective energy and be eco-friendly. Tesla and ALTe EV Technologies have both pioneered the automotive world into allowing us to enjoy the freedom of driving and have an almost zero negative effect on the environment. While the technology for electric vehicles has gained much support in recent years, electric vehicle sales in the U.S. make up far less than one percent of all vehicles sales in the country. Many analysts believe that coal will surpass oil as the top world fuel by as early as 2020. However if this comes to pass the detriment to the environment will be horrific which is one of the reasons that there is protesting going on in Manhattan, the day before a massive U.N. meeting.

The future of fossil fuels is very much a part of the recent future and the future of modernization of developing countries. Coal and oil are two of the most cheap and cost effective fuels that can allow economies to soar while keeping high cost low. It will be interesting to see how technology combats rising fuel costs while keeping the environment safe.

 

 

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The Boeing Space Taxi

Boeing and SpaceX have both received pretty hefty NASA contracts for their capsule designs that will hopefully one day soon be shuttling U.S. astronauts to and from the International Space Station. The purpose by both companies is to cut the cost to the U.S. and regain a sense of national being by not relying on another country to get into space. Boeing’s capsule has been designed with one extra seat in the capsule which has not been put there for scientists or military astronauts but for tourists.

Boeing’s Contract with NASAboeing 1

The five year, 4.2 billion dollar contract that Boeing has with NASA allows for Boeing to be able to sell rides into space one seat at a time. The Boeing Commercial Crew Program’s Manager John Mulholland has announced that the company plans to copy what the Russians have been doing for years, by allowing tourists into space. While this may sound both exciting and nerve wrecking, not everyone can afford a ride to the International Space Station (ISS). The ISS is currently orbiting about 260 miles above the Earth and is worth roughly 100 billion dollars. While the company has not officially released what Boeing will charge, they have stated that the rates will be competitive with their Russian counterpart. Boeing hopes to start working with a Virginia based tourism broker, Space Adventures, that already helps tourists arrange for trips to the ISS now. Mulholland is quoted stating, “Part of our proposal into NASA would be flying a Space Adventure spaceflight participant up to the ISS…We think it would be important to help spur this industry.”

Tourism to the ISS

Space Adventures believes that the future of thrill seekers that can afford the hefty price tag will love the opportunity to vacation in space. Come January, British singer Sarah Brightman will begin training with Space Adventures for her 10 day visit to the ISS. For ten days in space and the ability to be taxied to and from is costing Brightman 52 million dollars according to a spokesman from Space Adventure. Brightman will soon become the eighth passenger who will have paid to visit the ISS.

There is another very important reason that Boeing wants to push for allowing paying tourists to hitch a ride on their rockets and capsule, profit. Under their newly signed contract with NASA, Boeing is responsible for any overages on cost that this program may accrue. Also if there are any delays Boeing is also responsible for the costs of that as well. Boeing believes that they will be able to produce the space taxi without having to lower the profit price point which will affect their profit margins. The aerospace company believes that commercial flights to the ISS will help them fluff their bottom line. And if anything is important to Boeing it is their bottom line which should be important because Boeing is sharing their glory with one of their biggest industry rivals, Space Exploration Technologies or SpaceX.

boeing 2

Competition with SpaceX

While both Boeing and SpaceX have landed contracts with NASA for similar designs for a space taxi, both companies are in constant competition with each other. Boeing really has to knuckle down because of the competition with SpaceX which has claimed that in the same time givern to Boeing they will be able to produce a capsule for 40 percent less than what Boeing has stated or for roughly 2.6 billion dollars. The biggest difference between the two companies when it comes to cost seems to be with the type of rockets being used. SpaceX’s Dragon Capsule will fly on the company’s self produced Falcon 9 rocket which currently costs about 61 million dollars per satellite delivery. Boeing’s CST-100 capsule will be flying aboard an Atlas 5 rocket which is produced by United Launch Alliance. The company is a joint venture between Boeing and Lockheed Martin Corporation and the rockets are powered by a Russian RD-180 engine which costs about 150 million dollars each! While competition with SpaceX may be rough, the space taxi project appears to be well within the capabilities of Boeing’s core abilities which advocates that the company will not have any trouble in meeting either its deadline or its targeted delivery schedule.

Boeing’s space taxi program is not all that different from the program projected by SpaceX. The company is looking to make a substantial profit from the NASA contract as well as the ability it may have by being able to shuttle paying tourists to and from the ISS. The space taxi program is one of the first steps taken by Boeing, SpaceX and NASA in order to cease the dependency by the U.S. on Russia in order to shuttle astronauts to and from the ISS which is currently costing the U.S. 71 million dollars per seat. Boeing which has been at the forefront of U.S. aerospace technology for nearly all of its history is looking to maintain that tradition onto the next frontier.

 

 

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