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Strategies & Market Trends : Bear! -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (158)	6/14/1999 4:02:00 PM
From: Worswick	Read Replies (1) \| Respond to of 267

Fleck remarks all on the bottom of my page. Yes. 3% of $25 trillion? What does that do tothe banks'capital??? Best to you, Clark 6.13.99 For Private Use only "By GRETCHEN MORGENSON" (C) NY Times lthough the stock market has exhibited relative indifference to the upward march in Treasury bond yields, rising interest rates are not good news for equities. In the simplest terms, higher bond yields -- currently 6.16 percent for the 30-year Treasury -- make those instruments more attractive than stocks to many investors. Of course, the damage from rising rates is neither random nor universal. As Eric Sorensen, a quantitative research strategist at Salomon Smith Barney, points out, some industry groups have historically fared better than others. Sorensen examined the performance of 60 industry groups during five different periods of sustained rate increases in the last 22 years. The top-performing groups were the oil-and-gas drillers, which beat the Standard & Poor's 500-stock index by 27.6 percent; the oil producers and sellers, which outperformed by 25.4 percent, and computer software and services companies, which beat the index by 23.7 percent. Losers included shares of home builders, which underperformed the index by 27.3 percent; trucking companies, which fell 26.6 percent more than the S&P., and engineering and construction firms, which lagged by 25 percent. Maybe even more vulnerable this time is a group that has produced some of the biggest profits in the current bull market: financial services companies, including commercial banks, brokerage firms and mortgage lenders. Charles W. Peabody, a bank analyst at Mitchell Securities, believes that the combination of rising interest rates and the hefty leverage on the books of these businesses will prove hazardous to their stock prices. "Right here and now, money center banks and broker dealers are most vulnerable," Peabody said, "because they are the most exposed to interest-rate-related products such as swaps and mortgages." The most popular of all derivative products is the interest rate swap, which essentially allows participants to make bets on the direction interest rates will take. According to the Office of the Comptroller of the Currency, interest rate swaps accounted for three out of four derivative contracts held by commercial banks at the end of the year. The notional value of these swaps totaled almost $25 trillion; 2 percent to 3 percent of that reflected the banks' true credit risk in these products. Derivatives of all kinds weigh heavily on banks' capital structures, as the accompanying chart shows. But interest rate swaps can be especially toxic when interest rates rise. And since only a few economists predicted a jump in rates for the first half of the year when 1999 began -- in fact, yields have risen 21 percent -- it is a good bet that many of these institutions now find themselves on the wrong side of an interest rate gamble. Moreover, as interest rates rise, Peabody noted, banks' income diminishes from interest-rate-related businesses like mortgage lending. "Interest-sensitive sources of income will be the revenue disappointments this year," Peabody said. Last year it was trading, he noted. With Treasury yields at their highest levels in a year and a half, a rate increase from the Federal Reserve Board at the end of this month seems all but certain. Stock investors haven't cared so far. But if rates go higher still, they will.