Analysis - 9% Flashcards
How many consecutive quarters of deflation for:
- Recesssion
- Depression
- 2
2. 4
What four Major issues is Fundamental Analysis concerned with?
- Monetarist policies as implemented by the FRB through is open market committed
- Fiscal vs Monetary policy
- Economic Indicators, leading, lagging, and coincident
- Specific company balance sheet and income statement information
What is the trough?
The point at which the economy bottoms and and begins to expand
Who does the fiscal policy involve?
the politicians and the bills that they pass
Which political branch can spend money it doesn’t have and authorize borrowing?
congress
What government decisions help the economy?
increased spending and lower taxes
What is the Keynesian Theory?
it is the government’s responsibility to stimulate the economy. the economy runs at and equilibrium level that is determined by income and spending, and aggregate demand.
What is supply side economics?
as long as government does not meddle with the economy, business will take care of itself. stable interest rates, money supply, and low inflation achieved through monetary policy will enable business to drive the economy
Who controls and what is Monetary Policy?
- Controlled by the FRB or the Fed
- Main bank is in NY
- If the FRB believes the economy is growing too quickly it will tighten the money supply to slow the economy, causing interest rates to rise
The FRB Reserve requirement
- overnight cash reserve that each Fed reserve member bank must maintain each night.
- most powerful tool to tighten or loosen the economy
Discount rate
- set by the FRB
- rate that the FRB charges member banks for loans to meet their overnight loan requirement
- FRB meets at least quarterly on the discount rate
Discount Window
- when a member bank borrows from the main FR bank, which is considered the lender of last resort
- borrowing from the main bank is a symbol that the member is experiencing financial trouble
Fed Funds Rate
- intra-member bank rate
- average of all interest rates charged by member banks for overnight loans
- extremely volatile as it can literally change overnight
Federal Open Market Committee (Operations)
- the most often used FRB tool
- buys or sells treasuries in the secondary market through primary government securities dealers to help stimulate or slow the economy
M1
cash and demand deposits such as checking accounts
M2
M1 + savings accounts and some money market funds
M3
M2 + institutional investors and money markets
Interbank system
- international, decentralized unregulated market
- high risk market
- foreign currencies are traded in large blocks of $1-$5 million
What can an inverted yield curve lead to and when is one formed?
- leads to disintermediation, which is a large scale investor movement into long term debt instruments
- formed with short-term rates rising above bond yields
- this is tightening the money
What does a normal yield curve mean for money policy?
sign of loosening
Repurchase Aggreements
-when a bank dealer sells collateralized securities with a promise to buy them back
Commercial Paper
unsecured corporate notes with securities ranging from 30 to 270 days
Banker’s acceptances
import/export paper
CDs
jumbos requiring a min investment of $100,000
Prime Rates
charged to the best customers
call loan rates
charged to B/D for customer margin purchases
loan rate
the highest rate
order from lowest to highest loan rates
- discount rate
- fed funds rate
- money market rates
- repurchase agreements
- commercial paper
- banker’s acceptances
- CDs
- prime rates
- call loan rates
- loan rate
Leading indicators
estimate future economic activity in a business cycle, determined by:
1. US Commerce Department
2. Conference Board
are conceptually negative as they lead the way to recession
Leading Indicators (types)
- Consumer Confidence (as we are a consumer driven economy)
- Durable Goods
- Machine Tool orders
- Building permits
- housing starts
- S&P 500
- Claims for unemployments and length of manufacturing workweek
- index of consumer expectations
- the yield curve (spread between long and short interest rates)
Coincident indicators
- current indices(that show the current phase of the cycle), and the more current index, the more coincident
- personal income
- index of industrial production
- GDP
Lagging Indicators
- employment
- corporate profits
- business inventories
- they measure historical data
NYSE Market Indicators
- Dow Jones Average - 65 stocks (30 industrial, 20 transports, and 15 utilities)
- Dow Jones Industrial Average - averages the movement of 30 widely held stocks
- S&P 500 - 500 largest cap stocks in the US
- NYSE Composite Index - broadest most accurate, it includes all common issues on the exchange (~1700)
NASDAQ Market Indicators
- FINRA publishes
- NASDAQ 100
- NASDAQ Composite -covers over 6500 stocks
Wilshire Index
-consists of the market value of more than 7,000 NYSE, NYSE AMEX, and OTC issues headquartered in the US
Cyclical Industries
- Moves with the state of the economy
- durable goods
- large appliances, autos, heavy equipment and airplanes
Defensive industries
- steady predictable performance
- consumable goods
- food, alchohol, drugs, cosmetics, or clothing
Counter Cylcical industries
-pawn shop and asset repossession industries
Growth industries
- new rapidly developing market sectors
- technological advances
- internet and biothech
Net working capital
current assets - current liabilities
Current Ratio
Current Assets/current liabilities
Quick ratio (acid test)
current assets - (inventory/current liabilities)
Common Stock Ratio
Par value of common + Retained Earnings + Paid In Capital/Total Long-term Capitalization (Stockholder’s Equity and Bonds)
Bond Ratio
Par Value of Bonds/Total Long-term Capitilization
Earnings per Common Share
Net Income - Preferred Dividend/Common Shares Outstanding
Fully Dilluted Earnings per share
Net Income + Convertible Bond Interest/outstanding common shares + common shares resulting from conversion
Technical Analysis
used by market makers and traders in the determination of price and time
difference between Fundamentalists and Technicians
- Fundamentalist (economists) used primarily for stock seletion, as they know the corporate financial statements and can select strong, growth companies - concerns are alpha, financial, and bankruptcy risks.
- Technicians know market movements, support lines for purchasing stock, and resistance lines for selling stock - among chief concerns are beta risk, systematic risk, and market risk
Head and shoulders formation
reversal of an upward trend
-inverse is the reversal of a downward trend
Technical analysis market indicators
- 200 day moving average
- Advance/decline line charting
- Put/call ration
- Short interest theory - if rising, bullish as buyers will cover the shorts
Alpha
- the difference between the beta and the actual return obtained from an investment
- neg alpha indicates underperformance
Beta
-measures the reaction of a particular security in relation to the movements of the market as a whole
CAPM, capital asset pricing model
- determines value of a security
- equals the risk free rate of return and the time value of money
What is the Inherited Securities cost basis?
the fair market value of the securities on the day of the deceased’s death
Specific Identification for cost basis
- must have supporting documentation
- may choose LIFO
Mutual fund cost basis choices
- weighted average
- Fifo/lifo
What cost basis does the IRS default to?
FIFO
Wash Sales
-may not sell and purchase a stock within a 61 day window for a loss, 30 days prior to and 30 days after the sale
Corporate Dividend Exclusion
when a us corporation owns common or preferred stock of another domestic corporation and receives a dividend, it may exclude 70% of the dividend from its taxation
