Chapter One : Economic Factors and Business Information Flashcards
Business Cycle
- Expansion
- Peak
- Contraction
- Trough
Expansion
- Economy shows above average grows
-Economy activity increases
-GDP goes UP
-Unemployment Falls
Peak
- A maximum point of economic activity
-Marks the end of the expansion and beginning of contraction
Contraction
-Below average economic growth
-Unemployment rises
-Two quarters is a recession (6 months)
-Six quarters is a depression (18 months)
Trough
-When contraction reaches lowest point
-Beginning of Expansion
Cyclical Stocks
-Stocks whose performances track the ups and downs of the business cycle
-When the economy is expanding, these stocks do well, but when the economy is contracting, they do poorly.
-To maximize profits, buy them at the beginning of the expansion phase and sell at the peak
-These issuers include automotive, specialty retail, home furnishings, apparel, and air travel companies.
Non-Cyclical Stocks / Defensive Stock
-Less sensitive to changes in the economy.
-Issuers produce goods and services that people need, in good times and bad; tobacco, alcoholic beverages, pharmaceuticals, toothpaste, toilet paper, groceries, and utilities, such as water and electricity.
-They are believed to provide more stable earnings and dividends during the various phases of the business cycle
Economic Indicators - What is it & How Many
- Statistics that indicate the future, current or historical performance of the economy
- 3; Leading, Coincident & Lagging
Leading Indicators - General Explanation
PREDICT
- a change in advance of the economy as a whole
- they have predictive power, and therefore, allow economists to tell us what the economic future may hold
Leading Indicators - Name Them
HBBIIINYC500
1. Housing Start
2. Business Inventories
3. Building Permits
4. Initial Claims for Unemployment
5. Inflation Adjusted Money Supply
- an increase signals expansion
6. Index of Consumer Spending
-an increase signals expansion
7. New Manufacturing Orders for Consumer Goods
8. Yield Curve
- a flattening or inverted curve may signal contraction
9. Consumer Confidence
10. Performance of S&P 500
- an increase signals expansion)
Coincident Indicators
REFLECT
a. Change same time economy changes
b. Reflects where the economy is right now (identifies peaks and troughs)
Coincident Indicators - Name Them
GGPPBNR
- GDP
2.GNP
3.Balance of Trade - Non-Farm Payroll
- an increase in hours worked and hourly wages
across the country indicates an expansion phase
- an increase in hours worked and hourly wages
- Producer Price Index (PPI)
- increase in the price of materials and wholesale
goods indicates inflation
- increase in the price of materials and wholesale
- Personal Income Levels
- Retail and Manufacturing Sales
Lagging Indicators
OCCURRED (already)
a. Reflect changes in the economy that have already occurred.
c. Tells you were the economy has been
Example: Department of Labor’s unemployment report is a lagging indicator because employers lay off employees after a downturn has already begun
Lagging Indicators - Name Them
CUPEBB
1. Consumer Price Index (CPI)
2. Business Spending
3. Unemployment Report
4. Prime Rate Charged by Banks
5. Bank Loans Outstanding
6. Employment Cost Index (ECI)
-monthly changes in employee wages and benefits
Bond Yields ; follows what pattern? when does it rise and fall? When does it have higher yields? When are they bought and why? When are they not bought and why?
Follow the interest rate pattern, rises in later stages of expansion, and falls in the later stages of contraction
Yields in the EARLY and MIDDLE stages of Contraction = HIGHER YIELDS than expansion
Bonds generally perceived to be safer than stocks in an economic downturn bc stock prices often fall as buyers shun the higher perceived risk of the equities market
In good times, investors tend to stay away from bonds that pay lower interest payments
Price in the what generally indicates inflation?
Produce Price Index (PPI)
Monetary Policy - Name the Tools
- Change Reserve Requirements
- Open Market Operations
- Modifying Discount Rate
Changing Reserve Requirements
Amount of customers’ money that banks are required to keep in reserve
To grow the econ -> fed lowers reserve (more $ to lend, more customers spend)
To slow growth -> raises requirement (less to lend, less to spend, slows inflation)
Open Market Operations
a. Buy (Big) U.S Treasuries = Grows Economy
i. More money in economy and lower interest rates
ii. More spending, will grow economy
iii. Too much can increase inflation
b. Sells (Small) U.S Treasuries = Slows Inflation
i. Less money in economy, less spending
ii. Slows economy, slows inflation
Which of the following leading indicators does not indicate an expansion of the economy?
A. Growing business inventories
B. Increase in building permits
C. Decrease in unemployment claims
D. Widening liquidity spread
A. Growing business inventories can signal a slowing of the expansion phase and a coming contraction, because consumer demand has declined.
GDP vs GNP
Gross Domestic Product
A measure of value of all finished goods and services produced WITHIN the geographic boundaries of a country during a specific period of time (typically quarterly or annually)
- Where production takes place is determining factor, and product must be a finished product
Gross National Product
Measures production of the residents of one country, regardless of boundries
- Who produces, not where
Assuming these are all equally available and you have equal knowledge of each and their relationship to the economy, which of the following indicators would be the best predictor of future economic expansion?
A. Prime rate charged by banks
B. Employment cost index
C. Performance of the S&P 500
D. Producer Price Index
- C. Performance of the S&P 500 is a leading indicator that may suggest the future direction of the economy.
How are Inflation and Deflation measured?
They are measured in the Consumer Price Index (CPI)
2-3% inflation generally thought to be ideal
Modifying the Discount Rate
The rate banks have to pay when borrowing from the Federal Reserve
- to GROW economy -> lower the discount rate
- to SLOW economy (& fight inflation) -> raise the discount rate
Fiscal Policy
What the Federal Gov can do to effect change in the economy -
Tax and Spend (to create overall demand)
- STIMULATE economy - cut taxes and increase government spending
example: building highways - SLOW economy - raise taxes and lower government spending
Balance of Payments
A record of a country’s international economic activity over a period of time, usually a quarter or annually
- Current Account
- tracks imports, exports, services and business consulting
- Financial Account
- records capital transfers
- such as U.S. investment abroad (capital outflows) (debit)
and foreign investment in the U.S. (capital inflows) (credit)
What Affects the Balance of Payments?
- Economic Growth
- Prices
- Education and Technology
Balance of Trades
Difference between the value of a country’s exports and imports
- EWIS : Exporters prefer a Weaker dollar, Importers prefer a Stronger dollar
EWIS
Exporters prefer a Weaker dollar, Importers prefer a Stronger dollar
Credit Spreads
Spreads widen during contractionary periods of the business cycle, and they narrow during periods of expansion
They tend to widen just before an economic downturn, as investors anticipate a recession
Order of the Interest Rates from Lowest to Highest
(Discount, Federal Funds, Prime and Broker Call)
FDBP
Lowest to highest
1. Federal Funds Rate (the rate banks charge each other to
borrow funds overnight)
2. Discount Rate (the rate the fed charges banks to borrow
funds)
3. Broker Call Rate (the rate at which broker-deals are
(allowed to borrow money to fulfill requirements)
4. Prime Rate (The rate banks charge their best customers
to borrow money)
Money Aggregates
Measures of Money Supply in the US, to judge how fast the money supply is growing
M1 - Physical Money, Immediate Funds (funds that can be spent
immediately, and Traveler’s Checks
M2 - M1, Savings Accounts, Short-term Market Accounts, Time
deposits of less than $100,000
M3 - M2, Long-term deposits, Institutional Money Market Accounts
Spot Rate vs. Forward Rate
Within the foreign currency exchange, the spot rate is the exchange rate that is available today. The forward rate is the exchange rate for a contract to exchange a currency at a future date.
What are the types of securities analysis
fundamental analysis and technical analysis
What’s the difference between Fundamental Analysis and Technical Analysis?
Fundamental Analysis - Uses published information to determine whether a security is overpriced, underpriced, or fairly valued; income statement, balance sheet, and cash flow statement.
Technical Analysis - Examines the patterns of a stock’s price movements, and based on these patterns, makes a forecast about where the stock’s price will go in the future
Bearish Patterns
Head and Shoulders
Double Top
Inverse Saucer
Bullish Patterns
Reverse Head Shoulders
Double Bottom
Saucer
Cup and Handle
Consolidation
Consolidation is a period when the market price of an asset is relatively stable and moves between support and resistance. Consolidation ends when the price breaks through support or resistance.
Technical Analysis Tools: Moving Average & What do they Identify?
Long-term average (e.g., 200 day) and short-term (e.g, 20 days)
– the most recent 200 or 20 days for example
When the short-term moves above long-term, it’s a bullish sign, opposite is true
They are also used to identify support and resistance levels.
Technical Analysis Tools: Short Interest Ratio
of short positions in a stock % by avg daily trading value
If the ratio is high, analyst think price will rise because short sellers will eventually have to close off their short positions
