How to play with the coming increasing interests

 I assume it is no news anymore that interest rates will go up in the near future. The Fed has already had a road map to do so and it is just a matter of time. The earliest possible rate hike may be in Jun this year. Today’s unexpectedly strong job report further convinced the market about this prospect.  Increasing interest rates are generally perceived negative to economy as it will increase the borrowing costs for companies to do business. But there are some businesses love the rate hike as they can make more money. One is the banking industry and the other is the related business: brokerage companies. You see, brokers have a lot of traders who use margins by which they borrow money to trade. When the interest rate goes up, brokers can ask for a higher interest to be paid by the margin takers. This will directly strengthen their bottom line and increase their profitability. So buying the brokerage stocks may fare well in this environment. Just look at what the banking and broker stocks were doing today when there was a huge sell off overall in the market. They were all going up when S&P (bottom red) crashed by 1.4%.

 

There are many banking and brokerage stocks. I find one stock which is quite interesting: Interactive Brokers (IBKR), which is currently trading around $32. I recently opened an account at IB and it has a very sophisticated trading platform. To be honest, I cannot say I like it very much as to me it is way too much complicated and not so user-friendly. However, I must say its fee structure is very competitive and attractive. I heard professional traders often use it. So its business is apparently doing very well. IB has a lot of cash in hands, over $24 B with minimal debt around $4 B. Basically one third of its share price is cash. So there is very little credit risk for bankruptcy. The stock is rather stable with a beta of 0.8, meaning it is 20% less volatile than the market. The stock is not particularly cheap at the moment, but with the interest rate hike coming soon, IBKR should be doing quite well I think. You may use it as a hedge against the negative impact of the increasing interests.