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Fundamental Analysis

Fundamental Analysis. Tanveer Chandok (Director of Mentorship). Last Time. Valuation Important Terms Important Ratios. Fundamental Analysis. “Cornerstone of Investing” Method of evaluating a security to measure its value, by examining Economic factors Financial factors

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Fundamental Analysis

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  1. Fundamental Analysis Tanveer Chandok (Director of Mentorship)

  2. Last Time • Valuation • Important Terms • Important Ratios GTSF Investments Committee

  3. Fundamental Analysis • “Cornerstone of Investing” • Method of evaluating a security to measure its value, by examining • Economic factors • Financial factors • Quantitative factors • Broken up into • Macroeconomic analysis • Market specific • Microeconomic analysis • Company specific • MANDATORY GTSF Investments Committee

  4. Macroeconomic Analysis GTSF Investments Committee

  5. Overview • Big picture • The performance, structure, behavior, and decision-making of the whole economy • National • Regional • Global • Examples • Bloomberg Markets • Federal Reserve Economic Data GTSF Investments Committee

  6. Important Macro Indicators • Interest Rate • “The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets” • Long term vs. Short term rates • Interest rates  Cost of borrowing • Interest rates  Bond Prices • Important in pricing currencies • GDP • Gross Domestic Product • Broad measure of economic health • Total market value of all finished goods and services GTSF Investments Committee

  7. Important Macro Indicators • CPI • Consumer Price Index • Represents changes in level of retail prices for the “basic consumer basket” • Most crucial indicator of inflation • Large CPI  Bond Market and Equity Market • Since: CPI  Inflation  Bad for company profits • Example GTSF Investments Committee

  8. Employment Indicators • Jobless Claims • The number of people who have filed to receive unemployment benefits • Released weekly • Initial vs. Continuing • Unemployment Rate • % of the total labor force that is unemployed but actively seeking employment GTSF Investments Committee

  9. Employment Indicators • Nonfarm payroll • Statistic representing the total number of paid U.S workers of any business, excluding the following: • General government employees • Private household employees • Employees of nonprofit organizations that provide assistance to individuals • Farm employees • Accounts for ~80% of the workers who produce the entire GDP of the U.S • Reported on the first Friday of every month GTSF Investments Committee

  10. Indicators can have huge effects – USD/JPY (Feb 7th, 2014) GTSF Investments Committee

  11. Other macro indicators • Retail sales • Dollar value of merchandise sold in the retail sector (selling products to consumers) • Shows strength of consumer spending • Timely indicator (monthly) of broad spending habits (seasonally adjusted) • Balance of payments • It is a record of all payments or monetary transactions between a particular country and other nations during a specific time period • Video explanation GTSF Investments Committee

  12. Central Banks • Manages the currency, monetary supply and interest rates • Usually oversees the commercial banking system within the country • Hold a monopoly on increasing money supply in a country • Lender for last resort situations • Manages the country’s FX & Gold reserves • What are the most important Central Banks? GTSF Investments Committee

  13. Fiscal and Monetary Policy • Monetary policy  Central bank • Stimulative policy • Example: Quantitative Easing • Improves economy’s rate of growth of output (increases GDP) • Restrictive (tight) policy • Example: Raising interest rates • Slows down the economy to offset inflationary pressures • Fiscal policy  National government • Stimulative policy • Example: tax cuts, spending increases • Economic growth in the short run • Restrictive policy • Example: tax hikes, spending cuts • Slows the rate of future economic expansion GTSF Investments Committee

  14. Japan: A case study • Problem • Two decades of deflation and recession • Weak consumer spending and low growth despite government intervention • Shinzo Abe and “Abenomics”: • Three arrow policy • Quantitative Easing • Fiscal policies to stimulate demand • Deregulations and creation of sustainable growth • Devalue the Yen • Boosts exports GTSF Investments Committee

  15. Microeconomic Analysis GTSF Investments Committee

  16. Overview • The details • Analyzes behavior of individuals and firms in an attempt to understand the decision making process of firms and households • Important for intra-industry analysis • Some say micro data, like industry payrolls, are a more accurate description of national economic health • What do you think? GTSF Investments Committee

  17. Micro Indicators • Vary between industries • Examples of the right questions to ask: • What is the competition doing? • How has the firm performed historically? • Opportunity cost • Supply vs. Demand • Growth within a local market • Local economic data/outlook • Decision-making process GTSF Investments Committee

  18. Growth Drivers GTSF Investments Committee

  19. Overview • What is pushing this company/asset higher? GTSF Investments Committee

  20. Qualities to look for in Long Positions • Solid business models • Gaining market share or pricing power • Improving free cash flow • Low expectations (surprise factor) • Catalysts that unlock value GTSF Investments Committee

  21. Qualities to look for in Short Positions • Poor business leverage • Weakening competitive position/losing pricing power • Declining margins • High expectations • Weakening balance sheets • Catalysts that erode value GTSF Investments Committee

  22. Brief Introduction to Fixed Income GTSF Investments Committee

  23. Bonds • A bond is essentially an I owe you for a loan • Example: I loan you $1,000 to buy a car. You promise to pay me 1% interest each year for 3 years and the principle at the end of 3 years. • Same thing with corporations, except with larger amounts Company Name || Company Ticker

  24. Why is there a Debt Market? • Interest is considered a business expense and is tax-deductible • Do not have to issue more shares and give up more control of company • Cheaper in a low interest rate environment • Types: • Money Market • Capital Market Company Name || Company Ticker

  25. Money Market • Debt securities with a maturity of less than one year • Lower interest rates, less risk involved • Types: • Commercial Paper • T-Bills • CDs Company Name || Company Ticker

  26. Capital Market • Debt securities with a maturity of greater than one year • Higher risk, more potential for reward • Types: • Corporate Bonds • Treasury Bonds Company Name || Company Ticker

  27. Bond Terms Company Name || Company Ticker

  28. Par Value • Can also be called face value or principle • The amount of money the holder of the bond will receive at maturity • Quoted using 100 as par value • A bond priced at 95 is trading at 95 cents on the dollar Company Name || Company Ticker

  29. Maturity • Due date • At maturity: the principle is repaid and all pending interest payments are paid. The bond then ceases to exist • Accrued vs. non-accrued interest payments Company Name || Company Ticker

  30. Coupon/Coupon Rate • Coupon is the dollar amount of interest paid each period • Coupon rate is the coupon payment as a percentage of principle • Coupon rate = Coupon ÷ Face Value Company Name || Company Ticker

  31. Yield To Maturity (YTM) • Also called the “yield” • The rate/yield you will get if you buy a bond today, at current market price, and hold it until it matures • This yield serves as the bond’s IRR (internal rate of return) and using this as the discount rate will give the bond market price Company Name || Company Ticker

  32. Discount Rate • Because you receive payments in the future, you have to use the concept of the time value of money • This rate is the rate you use to discount the bond’s future cash flows to find the present value Company Name || Company Ticker

  33. Yield Curve • Shows relationship between interest rates and time to maturity • Bond prices are influenced by the yield curve • Interest rates/discount rates • Shifts up, prices down Company Name || Company Ticker

  34. LIBOR • London Interbank Offering Rate • Rate at which London banks can borrow money from each other • Floating rate securities can be tied to LIBOR • World’s most used benchmark for short-term interest rates Company Name || Company Ticker

  35. Duration • Weighted average of the time it takes for a bond to receive cash flows • Measures interest rate sensitivity • Higher duration bonds are more sensitive to interest rate risk Company Name || Company Ticker

  36. Bond Valuation Company Name || Company Ticker

  37. Time Value of Money • A dollar today is worth more that a dollar tomorrow • Have to discount future cash flows to get them into present value terms Company Name || Company Ticker

  38. How do I Price a Bond? • Use time value of money! • Discount all of the coupon payments and the face value by a discount rate Company Name || Company Ticker

  39. Risks Associated with Bonds Company Name || Company Ticker

  40. Risks • Interest rate risk • Credit risk • Liquidity risk • FX risk • Inflation risk • Reinvestment risk Company Name || Company Ticker

  41. Visualizing Interest Rate Risk Company Name || Company Ticker

  42. Next Time • Measuring Risk • Technical Analysis GTSF Investments Committee

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