general body meeting 09.15.11. mutual investment club of cornell agenda announcements ...

General Body Meeting 09.15.11

Mutual Investment Club of Cornell

2

Agenda

Announcements Opportunities Cornell Undergraduate Stock Competition

News Updates American Jobs Act + Eurozone Update Yahoo Implosion

Financials Pitch: Goldman Sachs Group


3

Opportunities

Newsletter (David Kim: sk852) 250 word sample by Saturday, 9/17!

Research Reports Groups of 3 – 4 Closely tied to Education Series


4

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/

mailto:[email protected]





5

News Updates


6

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


7

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.


8

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.


9

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.


10

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.


11

Yahoo!

Aleksandar Zvorinji


12

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


13

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


14

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


15

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


16

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


17

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.


20

Industry Overview


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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.


23

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


24

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.


25

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.


27

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.


28

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


30

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


31

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


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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.


35

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 Overview


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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


42

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%


43

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


44

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


45

Company Overview: Critical Analysis

Goldman not only maintains the highest market share in investment banking but also dominates the global banking scene.


46

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.


47

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


48

SWOT


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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


51

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


54

Technical Analysis

Moving Average Convergence/Divergence is bearish

50 and 200 day moving averages are downward sloping

Support: $99 Resistance: $109 Proceed with caution


55

Valuation

DCF Valuation: $218 Fundamental Valuation: $175 Forward Earnings Valuation: $220.36 Tangible Book Ratio: .76 Benjamin Graham’s Margin of Safety

Rule


56

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


57

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.


QuanTeam


The Pair Trade

Long a Financial Instrument

Short a Financial Instrument

Of Equal Value

Simultaneously

Why?...We believe one stock will outperform the other


The Pair Trade

And If...We lose less money

Thus… The Pair Trade is a Hedge

Gains are less

Losses are less


Goldman-XLF Pair

Proposal: Long ~ $2000 Goldman Short ~ $2000 XLF

Supporting Points Reversion to the Mean Hedge in tumultuous market


Reversion to the Mean

Correlation of XLF and GS 6-Month: 0.95

1-Year: 0.79


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


Hedge in Tumultuous Market Betas:

Goldman: 1.28 XLF: 1.51

12039587796115134153172191210229248267286305324343362381400419438457476495

-4

-3

-2

-1

0

1

2

3

GSXLF


Hedge in Tumultuous Market

If XLF has a higher beta…

It may rise faster; meaning we lose money even if GS has gone up


Technicals


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


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


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


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


Goldman Sachs

Williams %R -100% in last two weeks Current: -76.47%


Goldman Sachs

Bollinger Bands Sept 12 Lower Bound = 98.98 Sept 12 Price = 99.86


Goldman Sachs

Relative Strength Index (RSI) Current: 37.34


Goldman Sachs

Moving Average Convergence Divergence (MACD) Current: -5.00%


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


76

Thanks for coming by!

general body meeting 09.15.11. mutual investment club of cornell agenda announcements ...

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