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Series 7- Passed with 83% > Chapter 14- Economics And Analytics 15-20 Pages > Flashcards

Chapter 14- Economics And Analytics 15-20 Pages Flashcards

1
Q

Economics

A

The study of supply and demand and how it affects the prices of goods

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2
Q

Business Cycles

A

Always start with Expansion when putting order of business cycle

  1. Expansions- Periods of increased business activity throughout the economy. Expansions end when a peak is hit

2, Peak

  1. Contractions- When business activity declines.
    Short contractions= Recessions
    Long contractions= depressions
    Bottom of a contraction is a trough
  2. Trough
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3
Q

US commerce department definition of contractions and depressions

A

Contraction- 6 month period or more of decline is real output of goods and services (GDP)

Depression- 6 quarter period or more, in which unemployment rates are greater than 15%

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4
Q

Expansion characteristics

A

Increased demand for goods and services

Increases in industrial production

Rising stock prices

Rising property value

Increase in GDP

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5
Q

Downturn characteristics

A

Rising number of bankruptcies and bond defaults

Higher consumer debt

Falling stock prices

Rising inventories

Decreasing GDP

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6
Q

Gross domestic product

A

Nations annual economic output of services and goods

Includes personal consumption, gov spend, gross private invest, foreign invest, net exports

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7
Q

Consumer price index

A

Measures rate of increase or decrease in broad range of consumer prices

Computed monthly

Uses constant dollar calculation to account for inflation

Allows economist to compare the actual purchasing power of the dollars rather than dollars themselves

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8
Q

Inflation

A

General increases in price

Mild inflation can stimulate growth, high inflation reduces buying power

Higher inflation drives up interest rates on fixed income, while decreases lower bond yield

Low inflation- drives up interest rates of fixed income securities, and bond prices down. Positive for business

Periods of high inflation are bad for business

Always some amount of inflation in a growing economy

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9
Q

Deflation

A

Occurs during severe recessions, when unemployment is rising

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10
Q

Stagflation

A

Combination of inflation and high unemployment (stagnation)

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11
Q

Leading indicators

A 
Money Supply (M2)
Building permits
Average weekly claims for unemployment
New orders for consumer goods
Machine tool orders
Changes in inventories of durable goods
Changes in sensitive material prices
Stock prices 
Changes in business and consumer borrowing

Positive change indicate growing economy
Negative forecast a recession

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12
Q

Coincident indicators

A

Vary directly and simultaneously with business cycle

Number of hours worked
Employment levels
Non agricultural employment
Personal income
Industrial production
Manufacturing and trade sales
GDP
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13
Q

Lagging indicators

A

Factors that change after the economy has begun a new trend but serve as confirmation

Corporate profits
Average duration of unemployment
Labor cost per unit of output
Ratio of inventories to sales
Commercial and industrial loans outstanding 
Credit to personal income
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14
Q

Keynesian Theory

A

Active government is vital to health of economy

Demand for goods drive employment and prices

Government should manipulate economy to drive it upwards

Gov reduces taxes to increase private sector spending

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15
Q

Monetarist theory

A

Milton Friedman is originator

Money supply is major determinant of price levels

Moderately increasing money supply leads to price stability, which allows business to plan and invest

Controlled by Federal Reserve Board

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16
Q

Supply Side Economics

A

Government should allow market forces to move freely

Laffer argues that as tax rates increase less people will be incentived to work

If taxes were 100%, no one would work

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17
Q

Three categories of money (M1, 2 and 3)

A

M1- Currency in circulation and checking accounts. Money used for ordinary purchases. Largest and most liquid

M2- adds time deposits (less than $100,000) that are fairly easy to convert. Includes savings accounts, money market funds…

M3- Adds time deposits over 100k and repurchase agreements past one day

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18
Q

Federal Reserve Board

A

12 regional fed banks and hundreds of banks nation wide

Controls monetary policy and implements policies including:

  • acting as agent to US Treasury
  • Regulating US money supply
  • Setting reserve requirements
  • supervising printing of money
  • Clearing fund transfers

Three policy tools

  • Open market ops (buy/sell gov securities)
  • Changes in discount rate (bank loans)
  • changes in reserve requirements
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19
Q

Open-market operations

A

Federal Open Market Committee meets to direct government open market operations

Buying securities- increases supply of money in banking system, which in turn increases bank reserves and loans issued by banks

Selling tightens or contracts the money supply

Less drastic compared to Reserve requirements, but more frequently used

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20
Q

Discount Rate

A

Discount Rate is the Rate in which the fed charges its members for short term loans

The charge between banks is called the federal funds rate

Fed funds rate fluctuates daily and is most volatile interest rate

Generally an overnight rate for funds exceeding $1MM

Higher rate usually indicates a shortage of funds to lend

Though interbank lending interest rates move more with policy change, long term bonds typically move more than short term under same conditions

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21
Q

Reserve requirement

A

Commercial banks must deposit a certain percentage of depositor money with Fed Reserve

All money deposited are known as federal funds

Increasing the reserve requirement, tightens the money available and increases interest rates

Most drastic mover of money supply

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22
Q

Fiscal policy

A

Government budget decisions

Includes:
Federal spending
Money raised through taxes and
Federal budget deficits or surpluses

Based on assumption gov can control l unemployment and inflation by adjusting demand (keynsian idea)

Inefficient due to politics in short term economic problems

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23
Q

Disintermediation

A

Flow of Money from low yielding savings accounts to a high yielding investment in the marketplace without bank acting as middleman

Occurs when money supply tightens

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24
Q

Balance of payments

A

Flow of money between US and international countries

Deficit occurs when higher interest rates can be found abroad because money flows to high interest rates

Largest component is balance of trade

Debits are imports and indicates spending abroad

Credits are exports and is foreign spending domestically

Value of dollar effect balance of payments

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25
Technical analysis
Attempt to predict direction of prices on basis of historic price and trading volume patterns
26
Market trading volume
Substantial above normal movement indicates a pattern or trend Significant jump in volume signals trend beginning
27
Market bredth
Number of advances and declines over the course of a day Regardless of daily performance the market is bearish if there were more declines Advance/decline line is graph that displays
28
3 common trend lines
1. Consolidation- moves sideways neither up or down 2. Reversal- change in movement usually indicated by a consolidation, saucer (reversal of downward trend) or inverted saucer. Could also be seen by a head and shoulders. Inverted head and shoulders indicates bullish. Direction determined by opposite of the neck point 3. Support level- range of narrow trading Resistance- top of the trading level Breakout is when the market goes out of the range Look for a breakout to start a trend
29
Overbough vs oversold
Overbought- number of increasing stocks declines relative to decreasing signifies correction Oversold- number of falling stocks decreased relative to increasing stocks
30
Dow Theory
Three different types of changes Primary trend- 1 year plus Secondary trend- 3-12 weeks within a primary trend Short term fluctuations- hours of days In a primary bull market, there could be bearish secondary trends but each successive one would settle at a higher point. Series of higher highs, and higher lows
31
Odd lot Theory
Belief that small investors invariably buy and sell at the wrong times Therefore they get in when small investors trading in round lots get out
32
Short interest Theory
Shorts reflect mandatory demand and create a support level High Short interest is bullish
33
Modern Portfolio theory h
Analyst predictions is of no value, develop a weighted portfolio to emphasize market trends
34
Random walk Theory
Direction of stock prices is unpredictable Efficient market theory that all prices reflect current info
35
Market indexes
1. Dow Jones Industrial Average- oldest and most widely quoted index, charts 30 stocks 2. Dow Composite- 30 industrials, 20 transportation and 15 utilities 3. Value Line index- 1700 NYSE and OTC stocks 4. Wiltshire 5000 index- broadest market index, all NYSE and Nasdaq stocks 5. S&P 500- 500 most widely held companies chosen with respect to market size, liquidity and industrial sector
36
Fundamental analysis
Study of business prospects of an individual company within context of the industry and the overall economy Look for quality of management, historical earnings trends and examine the structure of a corporation and use of working capital
37
Defensive industries
Least affected by normal business cycles Usually produce non durable consumer goods, pharmaceuticals or tobacco Low risk, low return Something that people can't live without
38
Cyclical industries
Highly sensitive to business cycles and inflation trends Produce durable goods such as heavy machinery, raw materials and automobiles
39
Growth industries
Growing faster than the economy as a whole due to technology enhancements, new products or changing consumer tastes Most will retain their earnings
40
Special situation stocks
Stocks of a company with unusual profit potential resulting from nonrecurring circumstances New management, discovery of natural resource on company property, patents pending etc
41
Financial statements (studied by fundamental analysts)
Provide info on profitability, financial strength and operating efficiency Balance sheet- snapshot of financial position at a specific time. Does not provide analyst with determination of how Company is improving or deteriorating Assets-liabilities=equity or net worth Assets are listed in order of liquidity Fixed assets are usually property, plant and equipment and are depreciated over time Notes payable is balance due on equipment Shareholders Equity= stockholders claim on company assets Par value is an arbitrary figure that has no effect on market value Retained earnings= profits not paid out in dividend shares
42
Capitalization
Combined sum of long term debt and equity accounts Capital structure is the composition of the capitalization
43
Working capital
Current assets - current liabilities Measure of liquidity and ability to pay near term expenses Important because it highlights a company's ability to pay the expenses associated with running the business
44
Depreciation effect on books
Reduces value of fixed assets on balance sheet and taxable income
45
Capital structure 4 elements
Long term debt Capital stock Capital in excesss of par Retained earnings Changes in capitalization are reflected in the balance sheet Does not include short term debt
46
LIFO and FIFO: dealing with inventory
During inflationary period FIFO would boost profits while LIFO would present a more accurate picture Inventory is understated in LIFO
47
Convertible securities effect on BS
Would have a net impact of 0 as liabilities would decrease and equity would increase in case of a bond being converted
48
Dividend effect on BS
Cash dividends- Reduce retained earnings and eventually reduce cash once paid Stock dividends- does not affect anything on BS except possibly share price and share total
49
Spin offs
When a new company is created by the sale of all shares of a subsidiary company
50
Financial leverage
Company ability to use long term debt to increase its return on equity Long term debt to equity ratio Federal Reserve Board considers debt to equity ratios over 50% as high leverage
51
Total par value of share is
Not affected by a stock split rather the share price and total shares is only affected
52
Majority of private equity investments are made by
Institutional and accredited investors
53
Business development company
Help small companies grow and develop Many are set up as closed end investment companies FINRA warns that investments in these companies are usually highly illiquid Nontraded BDCs are especially problematic in terms of suitability
54
Income statement (fundamental analysts
Summarizes quarterly, year to date or full year performance Compares revenues with expenses Operating income or EBIT includes non operating income
55
Taxable income
Also known as EBT Interest on company debt does not reduce Operating income because it is not considered an operating expense
56
Net income after taxes
Common stock Dividends are paid from net income after preferred dividends are paid Paid with after tax dollars
57
Earnings per share
Earnings available to common / Number of shares outstanding
58
Footnotes
Footnotes identify significant financial and management issues
59
Capitalization ratios
Debt to equity Bond ratio (long term liabilities/ total cap) Common stock ratio Preferred stock ratio Debt to equity over 50% is high
60
Leverage
Debt to equity is a common measure of leverage Total capitalization is long term debt + equity
61
Liquidity Ratios
Working capital= CA-CL, though not a ratio is often used Current ratio Quick ratio (takes away unsold inventory from current assets) Cash asset ratio= cash equivalents/ CL
62
Debt service Ratio
EBIT/ annual interest + principal
63
Asset coverage ratio
Book value of tangible and monetary assets / outstanding debt
64
Book value per share
Assets - liabilities - intangibles - par value of preferred stock / Share of common stock Solvency if a company were to be liquidated
65
Valuation ratios
Earnings per share after dilution- Can be complex with tax but attempts to count all shares that could be converted Current yield Dividend payout ratio- Annual dividend / EPS Utilities have a high payout ratio Price to earnings ratio- growth company's typically have higher PtoE
66
Fiscal vs monetary policy
The government sets a fiscal policy while the Federal Reserve Board sets the monetary policy
67
Keynesian
Demand side economics
68
Stock market response to lower interest rates
Would create a bull market as it increase the money available and lowers interest rates
69
Increase in Fed Reserve requirements has what effect on total bank deposits
Decrease and multiplier effect

Series 7- Passed with 83% (19 decks)

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