general body meeting 09.15.11. mutual investment club of cornell agenda announcements ...
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Mutual Investment Club of Cornell
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Agenda
Announcements Opportunities Cornell Undergraduate Stock Competition
News Updates American Jobs Act + Eurozone Update Yahoo Implosion
Financials Pitch: Goldman Sachs Group
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Opportunities
Newsletter (David Kim: sk852) 250 word sample by Saturday, 9/17!
Research Reports Groups of 3 – 4 Closely tied to Education Series
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Cornell Undergraduate Stock Competition
Intercollegiate Stock Competition Reception: 5:30pm on Tuesday, 9/20
Email [email protected] with resume by Sunday, 9/18 Presentations: Wednesday @ Statler Hotel
Amphitheater Open to public First round: 9:00am – 11:00am Final round: 12:30pm – 1:30pm
http://www2.johnson.cornell.edu/parkercenter/undergradstockpitch/
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American Jobs Act
White House Talking Points: Cut the payroll tax in half “Rebuilding and Modernizing America” Extend unemployment insurance Deficit Neutral
Will it work? Some bipartisan support A decent alternative to limited monetary
policy options Some kick in the short-run, but questionable
long-run impact
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European Central Bank
Dr. Jürgen Stark, member of the executive board (unofficially: chief economist) resigned.
Considered a major advocate of European economic stability
Result=>Investors highly insecure, volatile markets. Dax 52 Week Low (4,965 -12th) Euro at 6 month low.
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Endangered Countries
Greece: Troika to return next Monday (19) Portugal: 4 billion euro from IWF. Positive
outlook towards meeting goals. Spain: CDS insurance premium for treasury
bonds at record value Italy: placement of 5 year government bonds
reached new record high (5.6%). Ratings of European banks at as low as 2009
after the collapse of Lehman Brothers China recently tripled its investment in the
Eurozone.
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Germany
Following the Verdict of Germany’s Constitutional Court, the German Parliament needs to approve measures to establish the ESM.
ESM: Successor to the ESFS, with a greater capacity and efficiency.
The German Minister for Economics, Philip Rösler stated that letting Greece default on its debt can be considered.
This gave rise to the idea that Germany would be willing to let this happen, but Rösler is the head of a small, failing party.
German Chancellor Angela Merkel distanced herself and German policy from the idea of Greece defaulting.
Ongoing debate. Ruling coalition divided.
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Exchange Rates
6 month low compared to USD. DAX is also at a low. Considering German financial
potential, it is undervalued. Would be a possible investment option, if one had
credible evidence the current value was a floor and would increase.
Recommend following and tracking closely.
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Yahoo News Update
CEO Carol Bartz fired over the phone – Sept 7 lack of turnaround of the company Tim Morse (CFO) named interim CEO Bartz joins board to later be fired after
Forbes interviewing saying she got fucked by the board
Investors seem happy Bartz is out of the picture
Angst shifted toward the board chairman Roy Bostock
Daniel Loeb at Third Point (5.2% ownership): board and management needs sweeping changes, fresh eyes and a big turnaround
5 CEO’s over last 10 years
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Yahoo News Update
Yahoo over the last few years… Been losing to Google for quite some time Missed social media and mobile apps Yearlong discussion to get back on track Independent directors: not doing as well
as it could 10 year search engine deal with Microsoft,
Bing powered search but 50-50 split of ad revenue
Ad revenue down from $1.8B to $1.5B y-o-y
Communication: losing to Gmail and Facebook
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Yahoo News Update
Bartz’s time at Yahoo Goal to increase time spent on Yahoo, but
decreased by 33% since she was appointed CEO
Failed reaching a series of performance targets
Focused on cost cutting and incremental improvements
Lack of focus on products and innovation Made the company run better, focusing on
deals
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Yahoo News Update
Looking ahead Acquisition as a whole or sold off in parts $16B market value: private equity firms
sniffing around as well as AT&T Product driven CEO, focusing on
innovation, social media, video and mobile.
Strategy: CEO product focused and COO operations
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Stock
Stock rose 7% during September 7th Option prices of Yahoo rose by 14%,
signaling expected stock volatility Valuation: Third Point ($20), Barclays
($18) Lower P/E at 17 compared to AOL at 23
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Financials Sector Pitch: Goldman Sachs
John Troncoso Matt Burns Billy Maselli Bobby Wong Alex Lucken
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Goldman at a Glance
Goldman Sachs Group, Inc.
NYSE: GS
Price $107.97
52-Week Range $99.78-175.34
Price to Earnings 10.62
Dividend $1.40/1.38%
Market Capitalization 52.68B
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Thesis
We rated Goldman Sachs a buy despite negative market sentiment and poor price performance over the past year. Goldman is a best-in-class brokerage franchise with a
solid market position over many businesses. Goldman has one of the strongest balance sheets in
the financial sector. Goldman has a long track record and has repeatedly
proven to be a high caliber company that will outperform over the long-term.
Short-term speculation and investor fear have driven Goldman’s price down creating value for rational investors with longer time horizons.
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Investment Banking Services Investment
banks engage in: Equity and debt
underwriting Mergers and
acquisitions advising
Corporate finance services
Fixed income, currency, and commodity trading
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Industry Snapshot
1. Goldman Sachs: 18.3%
2. J.P. Morgan Chase & Co: 15.9%
3. Bank of America Corporation: 14.6%
4. Morgan Stanley: 14.6%
5. Citigroup Inc.: 7.7%
Market Share Goldman Sachs holds the largest percentage of market share within the Investment Banking Industry.
Annual growth has contracted sharply over the past 5 years, but this trend seems to be at an end.
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Investment Banking and the Economy Stock market performance affects:
IPO offerings Also affected by consumer sentiment During strong markets, IPO’s become more
likely Values of AUM and associated fees M&A Activity – related to corporate
performance. Dependent on company earnings, business
confidence, and economic outlook
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Bernanke and the Banking Sector Bernanke vowed to keep the Federal
Funds rate near 0 through 2013. Potential of a QE3 or similar program
has increased in recent weeks. Bernanke’s willingness to intervene
monetarily is good news for banks.
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European Crisis
Greece is at the center of a European Union crisis. “PIGs”
Continued volatility from the summer. ‘Orderly default’ is more becoming
more likely. Shock resignation of top German ECB
official Juergen Stark.
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Possible Contagion to Banks
According to the Bank for International Settlements, US banks have approximately $32.7 billion of credit guarantees linked to Europe. This number does not include any hedges
employed by US banks, so the actual exposure is far less.
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Investor Fear and Recent Volatility The volatility index was up nearly 100%
over the summer. Recent market volatility has lead to
sharp declines in global markets. Investors are currently extremely
cautious. Pessimism and fear have created value
in the markets, especially within the financial sector.
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Regulations: Basel III
In 2009, the Basel Committee developed new global standards to address systemic risks among banks. Improve the ability of banks to absorb economic
shocks Improve risk management and governance Strengthen bank’s disclosures
Standards: Greater focus on common equity; 4.5% of risk-
weighted assets. Capital conservation buffer of 2.5% of risk-weighted
assets Total of 7%, plus 2.5% for ‘systemically important
firms’ (9.5%).
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Dodd-Frank: Highlights of Legislation Consumer Protection agency with
authority and independence Ends Too Big to Fail Bailouts
Imposing tough new capital and leverage requirements
No longer will the government prop up individual firms
Transparency and accountability for ‘exotic instruments’
End Goal: Protects Investors
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Fannie Mae and Freddie Mac Lawsuits Last week, the overseeing body of
Fannie Mae/ Freddie Mac sued 17 large financial firms.
Blame the firms for luring the government-run mortgage giants into troubled loans.
The lawsuits are filed against (among others): Goldman Sachs Bank of America Citigroup JP Morgan Credit Suisse
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Competitive Landscape
The financial crisis has caused an overall consolidation of the market for financial services. Bank of America acquired Merrill Lynch;
Morgan Stanley acquired Washington Mutual and Bear Sterns.
Lehman Brothers and Bear Sterns no longer exist.
Goldman Sachs is at the top in terms of revenue generated in the US and globally.
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Competitor Comparison
Goldman Sachs
Morgan Stanley
JPMorgan Chase and Co.
Bank of America
Price to Earnings
10.62 27.58 7.21 --
Price to Book
.74 .48 .75 .34
Debt to Assets
32.30 25.58 36.07 35.75
Return on Assets
.95 .69 .84 -.10
Profit Margin
18.17 14.36 16.91 -2.03
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Investment Banking: Critical Analysis Investment Banks have been hit hard
over the past few years but there is light at the end of the tunnel.
Despite the perception that Goldman’s strongest years are behind it, Goldman has maintained market share.
S & P 500 companies now have more than $1.2 Trillion in cash. As uncertainty fades, expect a lot of M & A.
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Investment Banking: Critical Analysis (2) Goldman employs some of the smartest
and savviest people on Wall Street. They will adapt quickly to the new landscape
Remember what Warren say about wary markets
Regulation is never as tough and stringent as originally proposed
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Company Background
A premier global investment banking, trading, and asset management company with leading market shares across its businesses
Goldman weathered the financial crisis better than most and is in a fairly secure financial footing
Strong management team that kept Goldman strong under financial crisis remains Lloyd Blankfein – Chairman and CEO Gary Cohn – President and COO
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Company Background (2)
Four separate segments of operations Investment Banking Investment Management Investing and Lending Institutional Client Services (majority of revenue)
Leading bank in Mergers and Acquisitions and Investment Banking (20.2% global)
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Sales Breakdown
Goldman’s revenue structure is diverse enough to help reduce exposure if one field declines.
2010 Sales Millions of Dollars Percent of Total
Market Making 13,678 30
Interest Income 12,309 27
Investment Banking 4,810 10
Investment Management
4,669 10
Commissions & Fees 3,569 8
Other 6,932 15
Total 45,967 100
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Balance Sheet
Coming out of financial crisis, management has increased liquidity
Actively de-leveraged firm since 2007 Significantly reduced high risk assets This is largely responsible for the decreased
margins that we have been seeing at Goldman.
Assets Dec 10
Dec 09
Nov 08
Nov 07
Nov 06
Cash 93,519
74,954 15,740
11,882 6,293
Net Receivables
81,887
71,647 30,531
22,887 13,223
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Revenue
Goldman has seen revenue declines over the past few years but it has faired better than many of its competitors
Goldman’s large international exposure may reduce exposure to domestic uncertainty
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Income
Analysts are predicting that net income will recover in 2012.
As cost cutting measures take hold, profit margins will expand.
Dec 10 Dec 09 Nov 08 Nov 07 Nov 06
Total Net Income
8,354 13,385 2,322 11,599 9,537
Net Profit Margin
18.17% 25.90% 4.33% 13.19% 13.75%
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Ethics Concerns
Has been involved in a number of high profile scandals over the past few years European Sovereign Debt Crisis Insider Trading Fraud
Business Principles and Standards Committee Report Formed on May 7, 2010 to review business standards
and practices Eight Month Review with 39 recommendations for
change Overseen by Board of Directors with advice from
private consulting firms for more reliability
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14 Business Principles
Created 30 years ago to define the fundamental way Goldman should run business Put clients first Make an unusual effort to recruit the best Stress teamwork Etc...
Business Principles and Standards Committee Report affirmed the 14 principles and showed the need to strengthen certain principles
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Company Overview: Critical Analysis
Goldman not only maintains the highest market share in investment banking but also dominates the global banking scene.
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Company Overview: Critical Analysis Goldman does not have
as significant exposure to many of the mortgage related lawsuits as competitors.
In the event of industry settlements, Goldman’s EPS at risk is only $.63 or 6% of total EPS.
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Company Overview: Critical Analysis
The importance of Goldman’s strong balance sheet cannot be stressed enough
Goldman is still the best in the business and recruits the best talent in the industry
Goldman’s partner system is unique within the investment banking realm and is a great competitive advantage
Goldman’s high risk, high reward days are a thing of the past
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Strengths
Global Market Leader- Very strong brand name within the financial sector
International Focus- Office branches located around the world
Employees- Extensive recruiting at elite universities around the globe ensures that they have the top talent in the financial sector
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Weaknesses
Percentage of Trading Revenue within Total Revenue- recent laws have limited how much risk firms can assume which has reduced the amount of pre-tax revenue made
Public Perception- Overwhelmingly negative public perception of Goldman Sachs and how they have run their business
Litigation Issues- Goldman Sachs has been involved in a few very costly lawsuits that have negatively affected both profitability and public perception
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Opportunities
International Clients- as international markets continue to recover, investment banking activities will continue to increase and Goldman Sachs has excellently positioned themselves to profit from this growth
Emerging Markets- As markets like China, India, and Brazil continue to grow, Goldman Sachs’ strong international presence will allow them to be involved in a wide variety of business ventures
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Threats
Increasing Financial Regulations- Increases in financial regulations will limit the profitability of the firm
Competition- The financial industry is highly competitive due to the limited number of clients to work for and deals completed each year
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Critical Analysis: SWOT
Goldman Sachs’ has committed itself to expanding into key international markets Australia and Brazil
Goldman is working on its public perception but it will take some time and it may lose clients
Goldman purposely avoided acquiring any competitors in 2008 to keep itself lean and adaptive
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Technical Analysis
Moving Average Convergence/Divergence is bearish
50 and 200 day moving averages are downward sloping
Support: $99 Resistance: $109 Proceed with caution
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Valuation
DCF Valuation: $218 Fundamental Valuation: $175 Forward Earnings Valuation: $220.36 Tangible Book Ratio: .76 Benjamin Graham’s Margin of Safety
Rule
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Summary
Goldman maintains its claim as the premier investment bank in the industry
Fear has driven the stock price down, creating value
History has proven that Goldman will overcome
Buying with a margin of safety
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Recommendation
Buy 13 shares of Goldman Sachs at $107.97 for a total cost of $1,403.61 and continue to watch it in the coming weeks to buy on any significant drops.
Mutual Investment Club of Cornell
The Pair Trade
Long a Financial Instrument
Short a Financial Instrument
Of Equal Value
Simultaneously
Why?...We believe one stock will outperform the other
Mutual Investment Club of Cornell
The Pair Trade
And If...We lose less money
Thus… The Pair Trade is a Hedge
Gains are less
Losses are less
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Goldman-XLF Pair
Proposal: Long ~ $2000 Goldman Short ~ $2000 XLF
Supporting Points Reversion to the Mean Hedge in tumultuous market
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Reversion to the Mean
Correlation of XLF and GS 6-Month: 0.95
1-Year: 0.79
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Reversion to the Mean
When testing for occasions of GS trading 1 standard deviation below XLF over the past 500 days Pair Trade Profited 60 times at 4.3% Pair Trade Lost 59 times at 4.0%
Currently GS is only .24 standard deviations below XLF
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Hedge in Tumultuous Market Betas:
Goldman: 1.28 XLF: 1.51
12039587796115134153172191210229248267286305324343362381400419438457476495
-4
-3
-2
-1
0
1
2
3
GSXLF
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Hedge in Tumultuous Market
If XLF has a higher beta…
It may rise faster; meaning we lose money even if GS has gone up
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Technical Indicators
Williams %R (WLPR) Oscillator (between -100 to 0),
shows whether stock is trading high, low, or somewhere in between recent trading range
Measure of current price in relation to high and low of past n days %R = close(today) – high (n days) x 100
high(n days) – low (n days)
Indicators: %R = Five trading days since -100%
reached; %R < -90% strong buy %R < -80% buy %R > -20% sell %R= Five trading days since 0%
reached; %R > -10% strong sell
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Technical Indicators Bollinger Bands (BOLL)
Shows two standard deviations below and above moving stock price Lower bound = mean[close, n] – 2*stdev[close, n]
Upper bound = mean[close, n] + 2*stdev[close, n]
Indicators: Stock price < lower band buy Stock price > upper bound sell
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Technical Indicators
Relative Strength Index (RSI) Momentum oscillator (between 0 and 100)
Momentum = rate of the rise or fall in price
Calculates as ratio of average higher closes to average lower closes Positive trading period: U = close(now) – close(previous) Negative trading period: D = close(previous) – close(now) RS = EMA(U,n)
EMA(D,n)
RSI = 100 – [100/ (1+ RS) ]
Indicators: RSI < 30 strong buy RSI < 40 buy RSI > 60 sell RSI > 70 strong sell
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Technical Indicators Moving Average Convergence/Divergence (MACD)
Charts fast versus slow moving average to spot changes in strength, direction, momentum, and duration of stock price 12 day exponential moving average (fast) 26 day exponential moving average (slow) MACD = 12 day EMA – 26 day EMA
Indicators MACD crosses over 0
(12 crosses over 26) strong buy MACD crosses below 0
(12 crosses below 26) strong sell
Mutual Investment Club of Cornell
Goldman Sachs
Williams %R -100% in last two weeks Current: -76.47%
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Goldman Sachs
Bollinger Bands Sept 12 Lower Bound = 98.98 Sept 12 Price = 99.86
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Goldman Sachs
Moving Average Convergence Divergence (MACD) Current: -5.00%
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Goldman Sachs
Technical Analysis Thesis
Williams %R: -100% in last two weeks, current 76.47% buy
BOLL: Sept 12: Lower Bound = 98.98, Price = 99.86 buy RSI: 37.34 buy/ small 5-10% move downards MACD: -5.00%, no upward acceleration no conclusion
Overall technical analysis: Favorable Entry Point