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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

Fundamental Analysis

Tanveer Chandok (Director of Mentorship)

last time
Last Time
  • Valuation
  • Important Terms
  • Important Ratios

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fundamental analysis1
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

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macroeconomic analysis
Macroeconomic Analysis

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

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important macro indicators
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

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important macro indicators1
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

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employment indicators
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

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employment indicators1
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

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other macro indicators
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

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central banks
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?

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fiscal and monetary policy
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

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japan a case study
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

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microeconomic analysis
Microeconomic Analysis

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overview1
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?

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micro indicators
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

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growth drivers
Growth Drivers

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overview2
Overview
  • What is pushing this company/asset higher?

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qualities to look for in long positions
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

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qualities to look for in short positions
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

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brief introduction to fixed income
Brief Introduction to Fixed Income

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bonds
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

why is there a debt market
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

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money market
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

capital market
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

bond terms
Bond Terms

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par value
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

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maturity
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

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coupon coupon rate
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

yield to maturity ytm
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

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discount rate
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

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yield curve
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

libor
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

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duration
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

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bond valuation
Bond Valuation

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time value of money
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

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how do i price a bond
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

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risks associated with bonds
Risks Associated with Bonds

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risks
Risks
  • Interest rate risk
  • Credit risk
  • Liquidity risk
  • FX risk
  • Inflation risk
  • Reinvestment risk

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visualizing interest rate risk
Visualizing Interest Rate Risk

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next time
Next Time
  • Measuring Risk
  • Technical Analysis

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