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31 Cards in this Set

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Companies with high growth expectations vs. VALUE STOCKS
what are value stocks?
what are their common characteristics?
what does a value investor believe in terms of the market?
Ch.17SecurityValuation&Selection
A stock that tends to trade at a lower price relative to it's fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor.
Common characteristics:
*high dividend yield
*low price-to-book ratio and/or *value investor believes that the market isn't always efficient and that it's possible to find companies trading for less than they are worth.
*easy way to attempt to find value stocks is to use the "Dogs of the Dow" investing strategy - buying of the 10 highest dividend-yielding stocks on the Dow Jones at the beginning of each year and adjusting it every year thereafter.
Companies with high growth expectations vs. VALUE STOCKS
what are value stocks?
what are their common characteristics?
what does a value investor believe in terms of the market?
Ch.17SecurityValuation&Selection
A stock that tends to trade at a lower price relative to it's fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor.
Common characteristics:
*high dividend yield
*low price-to-book ratio and/or *value investor believes that the market isn't always efficient and that it's possible to find companies trading for less than they are worth.
*easy way to attempt to find value stocks is to use the "Dogs of the Dow" investing strategy - buying of the 10 highest dividend-yielding stocks on the Dow Jones at the beginning of each year and adjusting it every year thereafter.
Value vs. growth stocks

Ch. 17 SEcurity valuation and selection
value stocks perform better than growth stocks and have less risk (growth stock may already be overpriced
e.g. selling at a high p:e ratios=what an investor is willing to pay for $1 of company's earnings
causes volatility in stock returns
Bonds have default risk b/c?
Investor is promised interest in the bond indenture--the contract between the company and the bondholder.
DEFAULT RISK

ch.17
Default risk is the chance the a bond issuer will not make the required coupon payments or principal repayment to bondholders.
INDENTURE

CH. 17
A contract between an issuer of bonds and the bondholder stating the time period before repayment, amount of interest paid, if the bond is convertible (and if so, at what price or what ratio), if the bond is callable and the amount of money that is to be repaid.
The indenture is another name for the bond contract terms, which are also referred to as a deed of trust.
Do STOCKS have DEFAULT RISK?

Explain why or why not.

17Security Valuation&Selection
NO since nothing is promised.

It is an IMPLIED CONTRACT for the RESIDUAL VALUE of the firm:

a promise to MAXIMIZE VALUE (and also cash distributions when reinvesting that cash cannot produce growth in excess of what the investor could earn on her own).
What is FUNDAMENTAL ANALYSIS?
What types of factors are considered? (M and I)
What does it determine?
What is the end goal?
1. METHOD OF EVALUATING A SECURITY by attempting to measure its INTRINSIC VALUE by examining related economic, financial and other qualitative and quantitative factors.
2. FUNDAMENTAL ANALYSTS attempt to study everything THAT CAN AFFECT THE SECURITY'S VALUE, including MACROECONOMIC FACTORS (like the overall economy and industry conditions) AND INDIVIDUALLY SPECIFIC FACTORS (like the financial condition and management of companies).
3. The end goal=to produce a VALUE that an investor can COMPARE with the security's current price (MARKET PRICE) in hopes of FIGURING OUT WHAT SORT OF POSITION TO TAKE WITH THAT SECURITY (underpriced = buy, overpriced = sell or short).
In what context does FUNDAMENTAL ANALYSIS use to evaluate a firm?

CH.17 SECURITY VALUATION/SELECT.
a. ECONOMY
b. COMPETITIVE MARKETPLACE
c. INDUSTRY CONDITIONS
What is TECHNICAL ANALYSIS?
What does it evaluate?
What are technical analysts called?
What belief are their methods based on?
1. A METHOD OF EVALUATING SECURITIES by ANALYZING STATISTICS generated by MARKET ACTIVITY, such as PAST PRICES and VOLUME.
*Technical analysts do not attempt to measure a security's intrinsic value, instead USE CHARTS AND OTHER TOOLS TO IDENTIFY PATTERNS THAT CAN SUGGEST FUTURE ACTIVITY.
*Technical analysts=TECHNICIANS (used to be chartists)
*Examine CHARTS of HISTORICAL INFORMATION about VOLUME, PRICE, AND OTHER INFO. SUPPLY AND DEMAND OF SECURITIES
*based on belief that HISTORY REPEATS ITSELF
What is the BUSINESS CYCLE?
What type of analysis is it used in?
What are the five stages of the business cycle (EPCTR)
What is economic activity measured by?
1.The RECURRING AND FLUCTUATING LEVELS OF ECONOMIC ACTIVITY that an economy experiences OVER A LONG PERIOD OF TIME.
2. ECONOMIC ANALYSIS
2.BUSINESS CYCLES ARE IRREGULAR
3.The FIVE STAGES of the business cycle are
I. GROWTH (EXPANSION),
II. PEAK
III. RECESSION (CONTRACTION)
IV. TROUGH
V. RECOVERY.
4. ECONOMIC ACTIVITY IS MEASURED BY GDP (GROSS DOMESTIC PRODUCT)
What is GDP vs. NOMINAL GDP vs. REAL GDP?
Which (nominal or real) is adjusted for inflation?

Ch.17
*Used in economic analysis
GDP is a measure of ALL GOODS AND SERVICES PRODUCED by the ECONOMY.
NOMINAL-NOT ADJUSTED for inflation
REAL-IS adjusted for inflation
What is considered to be a RECESSION in the BUSINESS CYCLE?

When were the most notable declines in financial markets?
Recession--2 QUARTERS of CONTRACTION

Most notable declines in financial markets were DURING EXPANSIONS.
The BUREAU OF ECONOMIC ANALYSIS is part of the US DEPT. OF ___________?

CH. 17
COMMERCE
What are Business Cycle Indicators (BCI) or COMPOSITE INDEXES (LLC)?

Ch. 17
Composite of leading, lagging and coincident indexes created by the Conference Board and used to forecast changes in the direction of the overall economy of a country. They can be used to confirm or predict the peaks and troughs of the business cycle and are published for the U.S., Mexico, France, the U.K., South Korea, Japan, Germany, Australia and Spain.
Explain and give ex. of LEADING INDICATORS in the Composite indexes)

Ch. 17
1. LEADING- SIGNAL FUTURE EVENTS. Think of how the amber traffic light indicates the coming of the red light, but less accurate. Created to proceed the price movements of a security giving predictive qualities. EX: 10 MEASURES, MANUFACTURES NEW ORDER, NEW BUILDING PERMITS, THE MONEY SUPPLY AND STOCK PRICES. Bond yields : good leading indicator of the stock market b/c bond traders anticipate and speculate trends in the economy.
Explain and give ex. of LAGGING INDICATORS in the Composite indexes)

Ch. 17
*Lagging indicators confirm long-term trends, but they do not predict them. Some examples are unemployment, corporate profits and labor cost per unit of output. Interest rates are another good lagging indicator; rates change after severe market changes. **An example of a lagging indicator is a moving average crossover, because it occurs after a certain price move has already happened. Technical traders use a short-term average crossing above a long-term average as confirmation when placing buy orders since it suggests an increase in momentum. The drawback of using this method is that a significant move may have already occurred, resulting in the trader entering a position too late.
Explain and give ex. of COINCIDENT INDICATORS in the Composite indexes)

Ch. 17
COINCIDENT-An economic factor that VARIES DIRECTLY AND SIMULTANEOUSLY W/BUSINESS CYCLE, thus INDICATING the CURRENT STATE OF THE ECONOMY.
Ex: NONAGRICULTURAL EMPLOYMENT, PERSONAL INCOME, INDUSTRIAL PRODUCTION.
MONETARY POLICY…Goal? In US controlled by? (FR)
Controlled by Federal Reserve.**goal is to have a STABLE ECONOMY and MODERATE GROWTH** SECURITIES (buys) MONEY SUPPLY-MS (increases) INTEREST RATES (decline) and visa versa (sells, decreases, increase)
During a Recession how will FR ease credit with monetary policy? Lowering or highering interest rates by increasing or decreasing the money supply by buying or selling Treasuries to lower or raise the interest rates? Or what could they do to the reserve requirement or the discount rate to increase or decrease the money supply?
LOWERING target Int. Rates--by INCREASING the MS by BUYING treasureies to LOWER int. rates. Or they could LOWER the Reserve Requirement or LOWER the Discount Rate to INCREASE MS.
FISCAL POLICY (ch.17) Goals? In US this is the SPENDING POLICY of the ________.
Government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy. Goals same as FR's monetary policy-- to have a STABLE ECONOMY and MODERATE GROWTH.
What are the goals of both Monetary Policy and Fiscal Policy of the US Gov?
STABLE ECONOMY and MODERATE GROWTH.
Since 1960 what kind of spending has the US gov. been implementing in terms of FISCAL POLICY? What does this type of spending do to interest rates and prices (inflation). Why? (Ch.17)
Since 1960, DEFICIT SPENDING (spending more than taxes taken in). DEFICIT SPENDING INCREASES I.R. and PRICES. b/c gov. is forced to borrow. To raise the necessary funds to finance a deficit, the economic unit may sell debt--securities
How does DEFICIT SPENDING EFFECT DEMAND FOR FUNDS AND INTEREST RATES? What type of policy is this?
INCREASES DEMAND for funds and interest rates…..FISCAL POLICY
RECESSION in the BUSINESS CYCLE. How long does it last? Where is it visible in the economy? How does the FED. Stimulate economy in recessionary times? (Ch.17)
A significant decline in activity spread across the economy lasting 6-18 months. visible in industrial production, employment, real income and wholesale-retail trade. two consecutive quarters of negative economic growth as measured by (GDP). Fed. Buys securities so that Interest rates fall to stimulate the economy by offering cheap rates at which to borrow money.
Fiscal policy strategies of US Gov.
Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian economics, this theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when at a level between 2-3%), increases employment and maintains a healthy value of money.
Industry Life Cycles-IEM
A concept relating to the different stages an industry will go through, from the first product entry to its eventual decline. Introductory, Expansion, Maturity (IEM)
Introductory (Industry Life Cycles)
low barriers to entry, low survivorship, bare bones ops, high growth expectations and positive NPV projects
Expansion (Industry Life Cycles)
survived the intro stage and ops get more sophisticated, growth slows, sale increase but at a diminishing rate, barriers increase, fewer growth ops and beginnings of payments of dividends
Maturity (Industry Life Cycles)
firm are well entrenched, high barriers to entry, growth flattens and earnings are pd. Out as dividends.
Evaluating a firm's financial position by looking at CFS? To determine _______ and other measures using _________ statements (uses accounting stmts which may not represent ________ earnings
looking at cash flow statements to determine value and other measures using financial statements (uses accting statements which may not represent economic earnings) must judge or interpret economic earnings