As the saying goes: Don’t Fight the Fed.
Here is my rather naive understanding of how Interest Rates influence equity markets and why I’m still bearish.
Let’s have a look at a very simplistic example of the following company:
Share price: $100
EBIDTA: $10/year
Debt: $100 (variable interest rate: 2% = $2/year)
Dividends: 3% = $3/year (payout rate is only 37.5%, nice!)
To keep things simple, the company pays no taxes.
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Bottom line: after all the payments, we end up with $5 extra dollars every year.
$10 – $2 – $3 = $5.
Pretty amazing.
What happens when interest rates start going up?
For example, from 2% to 5%.
Continue reading “The Triple Action of Interest Rates”
