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14 Cards in this Set
- Front
- Back
Macroanalysis & Microvaluation of the Stock Market
(SS7) |
Macroeconomy and market analysis help with your industry and company analysis
1. Miicroanalysis builds on the macro by deriving a specific value. 2. This intrinsic value is contrasted to the current market value 3. The decision is how to weight the US stock market in a global asset portfolio, overweight, underweight the US stock market depending on whether it is overvalued, properly valued or undervalued. |
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Macroanalysis & Microvaluation of the Stock Market
Limitations of cyclical indicator approach (SS7) |
1. False Signals - when a series moving in one direction suddenly reverses
2. Currency of the data and revisions - some data takes time to be reported and it is always being constantly revised. e.g. GDP data 3. Economic sectors not represented - like the service sector, import/export and most international series |
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Macroanalysis & Microvaluation of the Stock Market
What happens when the money supply growth goes up/down? (SS7) |
1. Money supply growth declines precede business contractions
2. Increases in the growth rate of the money supply have preceded economic expansions. 3. Studies show that growth in money supply is also a strong leading indicator of stock price changes (studies from both sides). It was found to be all about UNANTICIPATED changes in money supply that were predictors of stock market returns going up. |
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Macromarket Analysis
Inflation, Interest rates and the stock market (SS7) |
The relationship between ir, stocks and inflation isn't consistent, 3 scenarios:
1. The positive scenario - i. ir rise due to the rise in inflation ii. corp earnings grow due to higher inflated prices iii. rise in k (required return) is offset by increase in g (growth of earnings) SO stocks go up in line with inflation 2. Mild negative scenario - i. ir rise due to inflation ii. prices are sticky and can't go up at the same pace iii. k goes up (required return) but the g can't go up iv. stocks would decline slowly 3. Very negative scenario - i. ir up due to inflation ii. cash flows FALL due to rise in ir iii. k is rising and g is declining iv. so stocks are down big |
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Microvaluation Analysis
(SS7) |
Specific values for the stock market using
1. Dividend discount model (absolute value) 2. FCFE model (absolute value) 3. Earnings multiplier technique (relative value) 4. Relative valuation rations P/E (relative value) |
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Microvaluation Analysis
What you need your Nominal Risk Free Rate Asset to be (SS7) |
1. Zero-coupon (no reinvestment risk)
2. Default-free 3. Time to maturity approximating your own holding period (no price risk because mat = holding) Therefore the YTM is known |
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Microvaluation Analysis
What is wrong with the Equity RIsk Premium? (SS7) |
Equity Risk Premium: Disadvantages
1. Estimate 2. Premium isn't constant over time. An average, like a mean value assumes this. Studies show the 20 year moving average ranges from 1% to 16%. 3. It's TOO long term USE geometric = long horizons |
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Microvaluation Analysis
Free Cash Flow to Equity - FCFE (SS7) |
Net income
+ Depreciation expense - Capital expenditures - change in working capital - Principal debt repayments + New debt issues It's all about trying to find the free cash flow that is available to stockholders after payments to all other capital suppliers and after providing for the continued growth of the firm. Valuations are VERY sensitive to estimates of k and g |
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Macroanalysis and Microvaluation of the stock market
Relative Valuation techniques are great because? (SS7) |
Relative Valuation Models
1. Markets can be out of whack, away from fundamentals but you can still assess stocks, relative to one another. |
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Macroanalysis & Microvaluation of the Stock Market
Earning per Share - Example (SS7) |
Step 1. Nominal GDP for next year estimate based on this years numbers (this is your base number $923)
Step 2. How much are the S&P industrials going to appreciate by? ($935 x 1.07 = $988) Step 3. Decrease in the operating margin to 16% (0.16 x $988 = $158) Step 4. Take off depreciation expense ($158 - $51 = $107) Step 5. EBT - after interest ($107 - $21 = $86) Step 6. After tax rate of 33% ($86 x 0.67 = $58) EPS = $58 The whole point of this is to use it for an earnings multiplier |
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Macroanalysis & Microvaluation of the Stock Market
Dividend Payout Ratio - Active or Residual Decision (SS7) |
1. If dividend payout RATIO is constant
i. this equates to an active decision to keep paying out the same RATIO each year ii. dividend amount is going to be volatile because the earnings will fluctuate from year to year 2. If dividend payment AMOUNT is constant i. the active decision is to pay out the same AMOUNT each year and then ratio will be volatile dividend ------------ earnings ii. If low earnings, payout ratio is really high iii. If high earnings, payout ratio is really low Data shows that the dividend payout is the residual decision as seen by changing dividend amounts and high volatility in the payout ratios. History shows that there is a secular trend over the long term where the payout ratio is declining. More companies are holding on to their cash to reinvest it themselves. |
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BRICs
How Countries Get Richer (SS7) |
As developing economies grow
i. they have the potential to post higher growth rates as they play catch up This comes from 1. Developing countries have a lower capital base to start from, so returns are higher 2. Second part is technological development can be used from more developed countries effectively playing 'catch-up' ii. Countries also grow richer from appreciating currencies. Developing countries all have ER's that are a long way below PPP (mostly due to productivity differences) Convergence will be slower where the people have a lower base level of education. |
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BRICs
Breaking Down Growth (SS7) |
Growth accounting divides GDP into 3 components
1. Growth in employment 2. Growth in the capital stock 3. Technical progress (TFP growth) BRICS overtake G6 through i. Higher real growth (2/3rds of the increase in GDP) ii. Appreciation of BRIC's currencies (1/3 of the increase in the GDP) |
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BRICs
Conditions for Growth - 4 Factors (SSs) |
Setting the stage for growth
1. Macro Stability - low levels of inflation, price stability, fiscal deficit reduction and tighter monetary policy 2. Institutions - legal system, functioning markets, health and education systems, financial institutions and gov. bureaucracy. Instability discourages investment and damages growth. 3. Openness - to trade and FDI (Foreign Direct Investment) 4. Education - access to skilled workers. Studies show 0.3% faster growth for countries with an additional one year of schooling. |