Recession is Coming. Is Your Channel Management Team Ready?
Investment Analysis Project 1
1. U.K. Value Growth Trans-Atlantic
Hedge Fund
The U.K.’s leading hedge fund in Trans-Atlantic Fixed-Income/Equity investing
2. 1
Table of Contents
Executive Summary……………………………………………………………………………………………………………….P.3
Part One……………………………………………………………………………………………………………………………….P.3
Sectors…………………………………………………………………………………………………………………….P.3-4
ConsumerDiscretionary…………………………………………………………………………………P.3
Technology…………………………………………………………………………………………………….P.3
Communications…………………………………………………………………………………………….P.4
Equities………………………………………………………………………………………………………………….P.5-10
Amazon………………………………………………………………………………………………………
SuperComLtd…………………………………………………………………………………………………
Tesla…………………………………………………………………………………………………
Netflix…………………………………………………………………………………………………
Disney…………………………………………………………………………………………………
IMAX…………………………………………………………………………………………………
FixedIncome…………………………………………………………………………………………………………
River9 (11/01/18)…………………………………………………………………………
TSLA 1.25 (03/01/21)………………………………………………………………………….
SHLD 6.5 (12/01/28)…………………………………………………………………………….
RAD 7.7 (02/15/27)…………………………………………………………………………………
ALUFP 6.5 (01/15/28)………………………………………………………………………………..
TOY 7.375 (10/15/18)…………………………………………………………………………….
AssetAllocation……………………………………………………………………………………………………..
SelectedBenchmark……………………………………………………………………………………………….
3. 2
Table of Contents
Part Two…………………………………………………………………………………………………………………………..
WeeklyAnalysis of PortfolioPerformance…………………………………………………………….
Part Three……………………………………………………………………………………………………………………..
S&P500 & Jensen’sAlpha……………………………………………………………………………………………
Part Four…………………………………………………………………………………………………………………………..
Benchmark Tracking……………………………………………………………………………………………………
4. 3
Executive summary
As determined by The National Bureau of Economic Research (2010) the economy is currently
in an expansionary period of the business cycle coming out of the recession which ended June
of 2009. Based on findings from appendix I through VI I believe that the economy is expanding,
albeit cautiously, presenting an investment opportunity where cyclical stocks and high yield
bonds will do well due to easy access to capital, and low interest rates and inflation. As a result,
there will be a focus on securities within the three sectors which are expected to benefit most
from an expanding economy, and current societal trends: consumer discretionary, technology,
and communications. The asset allocation for this portfolio was based on the CAPM, and used
SD and Beta for measuring risk. The S&P500 was used as the benchmark index; however, there
was a large disparity in the returns of the benchmark and portfolio of 23.18.
5. 4
Part One
Sectors
Consumer Discretionary
Consumer discretionary appears to be an excellent sector to invest in considering its YTD
performance in relation to other sectors of 3.91% (Appendix VIII). Going forward it is expected
to continue to outperform, with low oil prices (Appendix IV) and rising income and consumption
(Appendix III). These, paired with lower unemployment (Appendix I), increasing consumer
confidence (Appendix VI), and an expanding U.S. economy are the driving factors for favoring
consumer discretionary.
Technology
Technology was chosen because of its fast-growing and cyclical nature. As such, we expect this
sector to benefit from the effects of an expanding economy, and societal trends of becoming
ever-more dependent on technology. High consumer discretionary growth is expected to spill
over into technology as retailers are pressed with the challenge of attracting the multi-
channeled consumer. Another advantage, and potentially disadvantage with the current US
economy, is technology’s ability to easily reap the rewards of globalization. For a fraction of the
cost tech companies are able to attract large revenues from foreign markets, but are in danger
of increased costs due to the strong USD.
Communications
Communications is growing fast as a result of disruptive technology in areas like filmand
entertainment, and internet media. Major players are adapting to the integration of technology
6. 5
as opposed to falling behind as a result of its disruption. The sector boasted a relatively good
YTD performance of 1.09% (Appendix VIII), while macroeconomic trends (Appendix III;
Appendix VI; Appendix I), support growth expectations. The communications sector has had a
divergence in share prices and earnings (Appendix X), leading me to believe the sector as a
whole is undervalued. This belief is supported by the distortion between a P/E decrease of
48bp, in contrast to the S&P 500’s 45bp increase (Appendix XII), despite the communications
sector share prices outpacing S&P500 growth by more than 2500% (Appendix XIII).
7. 6
Equities
Amazon
Record low oil prices (Appendix IX) allow Amazon to drastically reduce prices and increase
convenience for consumers. With the transformation from bookstore to superstore,
introduction of Amazon prime in 2005, a video streaming service in 2012 (Mangalindan, 2012),
and talk of drone delivery systems (Guarini, 2014), Amazon has proven its ability to
continuously innovate and reinvent itself; making it a trustworthy investment.
Amazon’s retention ratio and D/E show there is no lack of growth prospects or
reinvestment (Appendix XIX), while their D/A and free cash flow alleviates any worry of over-
leveraging (Appendix XIX). Amazon has seen consistent, and large, revenue increases over the
last 4 years (Appendix XX), in comparison to EBay who had revenues decline sharply (Appendix
XXI). Although Amazon’s revenue growth is not as high as Alibaba’s (Appendix XXII), Amazon’s
revenues are more than 10 times larger, making their growth rates 10 times more impressive
(Appendix XX). Lastly, Amazon appears to be overvalued on P/E basis, but their price to sales is
actually below the average of their peers (Appendix XIX); hinting that they are slightly
undervalued on a sales basis and their P/E ratio is a testament to their financial solidity and
expected future cash flows.
SuperCom LTD.
I expect high consumer discretionary growth to benefit SuperCom, as their products are used in
consumer discretionary as well as other industries which have seen positive growth. For
example transportation and industrials, which have both seen growth of close to 8% (Appendix
XIV) since the same time last year and traditionally do well in an expanding economy.
8. 7
SuperCom pays no dividends allowing it to reinvest all of its profits back into the business
(Appendix XXIII). The company is below the average of its peers for P/E, P/B, and P/S valuation
ratios (Appendix XXIII), despite revenues showing a significant increase in the past year, strong
expected future revenues (Appendix XXIV), and a good EPS (Appendix XXIII). The biggest
indicator of SuperCom’s undervaluation is that their ROC, ROE, ROA, and ROIC are all
significantly higher than its peers (Appendix XXV). I believe that the stock price will raise to
bring these ratios closer to the peer average as the company has low D/E and D/A, and a good
current ratio removing most fears surrounding the company’s efficiency or capital structure
(Appendix XXIII).
Tesla
Tesla’s share price is based mostly on expectations for the future, and is driven by sentiment,
news, and CEO Elon Musk, but shows great potential for revolutionizing the market. Rachel
Layne and Dana Hull (2015) wrote in March that analyst Andrea James from Dougherty & Co.
says Tesla is quietly signing industrial customers and has the potential to add $50-$70 to the
share price with the grid storage opportunity. Further, the article stated that Tesla has won 80%
market share of non-residential grid-storage applications in California, and that if California
keeps on pace with projections in the next two years and Tesla retains market share, revenues
could increase to $2B (Layne and Hull, 2015). On top of promising news surrounding Tesla’s
emerging power storage opportunities, “Tesla's March China sales are up 130%-150% month-
over-month,” (Layne and Hull, 2015), and Musk intends to further Tesla’s presence in China by
adding more charging stations and redesigning the cars to better appeal to the Chinese tastes
(Bloomberg News, 2015). Revenue for Tesla increased by 58% in 2014, and they have a strong
9. 8
current ratio (Appendix XXVI). Tesla has a good P/B and P/S ratio (Appendix XXVI) displaying the
earning power of the assets on Tesla’s books, and the high expected value of future cash flows.
Netflix
Netflix is gaining in popularity among consumers, and is expanding to multiple countries in
order to continue its growth at the same pace it has in the U.S market (Cohen, 2015).
Consumers have a “content-on-demand” attitude, and this is only going to grow as Netflix
enters more markets; gaining a first to market advantage (Knight and Lynch, 2015). Netflix pays
no dividend, and so reinvests its earnings back into the company (Appendix XXVII). Last year
revenue for Netflix increased by 25.83% (Appendix XXVII), net income increased by 72%
(Appendix XXVIV) and Diluted EPS increased by 107.36% (Appendix XXVIV). Netflix sports ROC,
ROE, and ROIC ratios that are much higher than the average of its peers (Appendix XXVIII).
Further, Netflix has solid financial ratios in comparison to peers like their current ratio and D/E
ratio (Appendix XXVII) which shows they have room to take on more debt to finance their
expansion into other markets.
Disney
Disney has been releasing/announced films which/are expected to top the box office like
American Sniper and Star Wars VII and has been able to create additional revenues from these
films through merchandise and theme park attractions (Palmeri, 2015; Sakoui and Bit, 2015).
These releases allowed Disney to beat expected 1Q 2015 EPS and revenue, and provided
further ammunition to do so again in the coming quarters (Freund, 2015). With rising consumer
spending, incomes (Appendix III), and confidence (Appendix VI) I expect sales of movies and
merchandise, as well as attendance at theme parks to continue to rise in the coming quarter.
10. 9
Although Disney does pay dividends, their coverage ratio is high enough to give me assurance
of good future prospects for the company. Disney is in a good position fundamentally with a
good ROIC and ROIC/WACC ratio, as well as an abundance of free cash flow which will allow
them to fund further projects (Appendix XXX). Disney also has a good EPS in relation to peers
considering they have more than 1.25 times the average amount of shares outstanding, and a
strong net profit margin and revenue growth over the past year (Appendix XXXI).
IMAX
IMAX has a very close relationship with Disney, and I expect them to feed off of their success
from films like Star Wars VII (Buckles, T. et al., 2015). IMAX has good future prospects with
sequels like Frozen 2 and Furious 7, and HBO partnerships for Game of Thrones (Buckles, T. et
al., 2015). Also, IMAX is projecting a 28% adj. EBITDA growth rate as their cost base is mostly
fixed (Buckles, T. et al., 2015). IMAX’s ROC, ROE, ROA, ROIC, and free cash flow are well above
the average for their peers (Appendix XXXII). Further, IMAX has a strong current ratio, working
capital, and D/E ratio adding financial robustness to their structure, which makes me think they
are undervalued on a P/E basis (Appendix XXXIII).
11. 10
Fixed Income
Introduction
Because of the short Investment time horizon and expanding economic climate with prolonged
low inflation (Appendix IV) and interest rates there is essentially no inflation or interest-rate
risk, and thus call risk, duration, and convexity are eliminated as factors. There is little expected
event risk either, as the government is unlikely to impose regulation on sectors which help drive
the expansion of the economy. The bonds were chosen in sectors that are expected to see the
most growth with the expanding economy and dovish FED (Riccadonna, 2015). The FED being
dovish works in favor of corporate bonds as credit spreads are high at the moment reducing the
chance of them being narrowed by interest-rate hikes, and because this policy allows more
access to capital reducing credit risk.
River Rock Entertainment Authority (River 9 11/01/18)
This is a defaulted bond which is not rated, but the bond is considered 1st lien, and Sr. secured
debt rated by Moody’s at B3 (Appendix XXXIV). The company’s D/E ratio is 2959.03 (Appendix
XXXV), meaning the company is heavily leveraged. The high proportion of leverage is acceptable
when the company boasts a 2.23 interest coverage ratio, net income growth of 8.54% from last
year, and a ROA of 11.85 with their low WACC cost of debt of 0.9976 (Appendix XXXV). These
ratios are a testament to the company’s ability to pay off its debts effectively, and to generate
cash flow from its assets. There is still the worry of credit risk as the bond is defaulted, but the
organization only defaulted once in May, 2014 since its issuance in 2011, drastically reducing
the bond’s value (Business Wire, 2014). Another worry is the size of issuance, as it might be
hard to trade a private company’s bond, but there were $96.622M issued, and there is still
12. 11
$70.383M outstanding reducing any worry surround the marketability of the bond (Appendix
XXXVI).
Tesla Motors Inc. (TSLA 1 ¼ 03/01/21)
Tesla has a capitalization ratio of 68.33%, and is not overly leveraged (RV of Bonds). With an
interest-coverage ratio of -2.94 (RV of Bond), one begins to worry; however, taking into account
the aforementioned analysis of Tesla and its ability to generate equity funding, high P/B and P/S
ratios, and impressive 58% revenue growth last year (Appendix XXVI) I am confident in their
ability to cover interest payments while funding future projects. I believe the bond to be
undervalued based on a B-u rating (RV of Bond) and that when the stock price raises so will the
value of the bond, as investors will realize the latent value in Tesla’s discounted cash flows.
Sears Roebuck Acceptance Corp. (SHLD 6 ½ 12/01/28 Corp)
Sears has enough assets, with a current ratio of 1.05, and a working capital of 268,000,000 to
support the debt (Appendix XXXVIII), as well as strong cash flow from investing activities which
increased last year by 252% to USD423.56M, and is expected to increase by another 727.44% to
1655.68 over the next 2 fiscal periods (Appendix XXXVIII). These numbers alleviate most of the
credit risk surrounding the bond as Sears has sufficient capital to pay their debts, and can use
the cheaper capital available from current policy to refinance.
Toys R Us (TOY7 ⅜ 10/15/18 Corp)
Toys R Us has a current ratio of 1.28, a working capital of 427,730,000, and a projected increase
in cash flow from operations of 217% from $91.86M to $291M for the coming fiscal period,
which will produce an additional $164.61M in free cash flow to pay down debts (Appendix
XXXVIV). Investors will be willing to pay more for the high coupon payment once they realize
13. 12
that Toys R Us has the capital to pay back its debts in the near future, because of the deep
discount they’re getting it at.
Alcatel-Lucent USA Inc. (ALUFP 6 ½ 01/15/28 Corp)
Alcatel-Lucent USA Inc. has a capitalization ratio of 63%, meaning their leverage is actually not
that high (Appendix XXXVII). Revenues increased by almost 10% last year, and net income at
1.4% (Appendix XXXVII). This coupled with their WACC of debt of 0.73% (Appendix XXXV), and
their 1.45 current ratio, $4.1B working capital, and ROIC of 2.78% (Appendix XXXX) gives me
confidence in their ability to pay their debts, and even grow. Moving forward I believe that
investor demand will increase if the current financial stability of Alcatel-Lucent remains steady,
as it offers a 6.5 coupon in a period of prolonged low interest rates, and has the potential to
upgrade from a BB+ rating (Appendix XXXVII).
Rite Aid Corp. (RAD 7.7 02/15/27 Corp)
Rite Aid Corp. is currently suffering from equity problems with a capitalization ratio of 157%
which heavily devalues the bond (Appendix XXXVII). This would seem like over-leveraging, but
their interest-coverage ratio is healthy at 1.53 (Appendix XXXVII) with a ROA of 3.55%, ROIC of
20.29%, and free cash flows of $368.17M (Appendix XXXXI). Offering a coupon rate of 7.7% on
Sr. unsecured debt in these low interest times with this kind of financial stability gives me full
reason to believe that this bond is undervalued and under-rated at B+ (Appendix XXXVII).
14. 13
Asset Allocation (Appendix XXXXII)
Because there are no penalties for investing smaller amounts of money into the fixed income
market as would normally be true, I have only allocated 30% of the portfolio to the high-yield
bonds due to risk exposure. The equity weightings were selected according to the CAPM model
which determined the securities with the highest expected return. Through this model I
attempted to match a 1.0 beta in order to mimic the risk exposure of the U.S market. For
weighting the fixed income I used the above analysis to determine which bond had the
strongest fundamentals and the highest yields. Based on the asset allocation used the portfolio
had an expected annualized return of 110% with a 1.0 beta, in contrast to the market which
had an expected return of 9.43 with a 1.0 beta. The portfolio’s expected variance was 17.60,
with a SD of 4.195 (Appendix XXXXIII), meaning this portfolio theoretically has a 99% chance of
being profitable as even 3 SD’s away from the mean of 110% is a positive return.
15. 14
Selected Benchmark
I have decided to choose the S&P500 as my benchmark index. The majority of the portfolio
(70%) is in large market cap equities traded on the S&P500, proving to be a good fit on for the
benchmark on the equity side. CNBC found there has been a positive correlation over the last 5
years between the Barclays U.S Corp HY Index and the S&P 500 (Chemi, 2015), making it the
most suitable index to use as a benchmark. I do expect some tracking error due to the
discrepancy in the holdings of the index and this portfolio; however I did organise the asset
allocation of this portfolio to have a beta of 1.0, mimicking the S&P500’s systematic risk level,
and thus price movements.
16. 15
Part Two
Weekly Analysis of Portfolio Performance
In the first week of April the portfolio outperformed the S&P500 by about 3% (Appendix XV).
The increase could have been a result of Tesla’s upgrade to the model S (Ramsey, 2015).
Another possibility is that investors realized the true credibility of River Rock Entertainment
(Appendix XXXXIV), doubling the value of their high yield bonds. Alternatively, Netflix tweeted
that their global streaming hours increased by 54% from 6.5bn in 2014, a number which made
current expectations of subscribership appear heavily understated (BTG, 2015).
The second week was similar in that the portfolio beat the S&P500 again by 5%, with the
S&P actually dropping by 100bp (Appendix XV). In this week the only stock which performed
exceptionally was Netflix with a 25% gain (Appendix XXXXV) after beating expectations for
subscribership and earnings in Q1 (Pett, 2015), leading me to believe my weighting in Netflix vs.
the S&P500 is what caused this outperform.
The third week the portfolio and its benchmark S&P500 had similar returns (Appendix
XV). The portfolio didn’t perform that well but was saved from an 18% increase in Amazon’s
share price (Appendix XXXXVI) after releasing earnings from its cloud computing which were
49% higher from last quarter. One possibility for the S&P500 almost matching returns is that
cloud computing as an industry saw a boost in revenue, with Microsoft and Google also
benefiting among others.
17. 16
The final week of the holding period was the biggest discrepancy with the S&P 500
dropping by 40bp and the portfolio earning over 6% (Appendix XV). I believe this was caused by
investors realizing River Rock’s bonds were undervalued as a result of the defaulted label as
they jumped by 70% (Appendix XXXXIV). Another reason for this increase could have been the
decision to not raise interest rates at the April Fed meeting, causing a higher demand for high-
yielding bonds.
18. 17
Part Three
S&P500 & Jensen’s Alpha
Although achieving a beta of 1.0 was accomplished, we are assuming that all unsystematic risk
has been eliminated. This is not the case as the equities chosen are all within 3 sectors, and
within 5 industries. Moreover, the industries’ revenues, earnings, and costs have similar drivers,
and the companies chosen all play some part in the every industry. This being said, establishing
a beta of 1.0 is still an important objective as we are never going to be truly rid of unsystematic
risk, the portfolio is still relatively well diversified, and based on the macroeconomic analysis
conducted (Appendices I through VII) the other sectors were not optimal choices regardless of
additional diversification.
The expected monthly return of the portfolio based on the CAPM was 6.39%, with a
beta of 1.000315108 (Appendix XXXXII), and a standard deviation of 4.19 (Appendix XXXXIII).
The actual monthly return of the portfolio was 25.27% (Appendix XVII). When we calculate this
against a monthly risk-free rate of 0.052126967% (XXXXVII), and a monthly market return of
2.0925% (Appendix XVI), we get a Jensen’s Alpha of 23.18 in comparison to the S&P500. When
comparing the actual return against the expected portfolio return based on the CAPM, we get
an excess return of 18.88%.
19. 18
Part Four
Benchmark Tracking
This portfolio had a mix of passive and active management. I did attempt to beat the market
through fundamental and sentiment analysis, and I don’t believe markets are efficient. I know
investors are not rational, and do not have access to unlimited information. I think
opportunities can be identified through top down analysis like the one used for this report,
taking into account macroeconomic, sector, industry, and firm level factors. I also believe that
sentiment plays a larger role than any fundamental factors because the market has a hard time
accurately accounting for it. This portfolio did not track the benchmark well with a tracking
error of 4.725, and a correlation coefficient of -.074808 (XXXXVII). I think this relatively high
tracking error stems from the fact that this portfolio has high-yield bonds, and that this
portfolio took into account macro-economic trends and consumer lifestyle trends. However it
could also have been the effect of an odd market climate.
The value of the portfolio at the end of the holding period was $22,076,089.85 USD, earning a
25.27% HPR (Appendix XVII).
20. 19
References
National Bureauof EconomicResearch.(2010). BusinessCycle DatingCommittee,National Bureauof
EconomicResearch.BusinessCycleDating Committee, 20 September.Available from
http://www.nber.org/cycles/sept2010.html [Accessedon4th
,April,2016]
Mangalindan, J. (2012). Amazon's Prime and punishment. Fortune, 21 February. Available from
http://fortune.com/2012/02/21/amazons-prime-and-punishment/ [Accessed April 4th, 2016].
Guarini, D. (2014). Amazon Reveals It Wants To Deploy Delivery Drones. No Joke. The
Huffington Post, 23 January. Available from
http://www.huffingtonpost.com/2013/12/01/amazon-prime-air-delivery-
drones_n_4369685.html [Accessed April 4th, 2016].
Layne, R. and Hull, D. (2015). Tesla in ‘Substantially Better Position’ Than Yr Ago: Dougherty.
Bloomberg First Word, March, 31. Available from Bloomberg Terminal [Accessed April 4th,
2016].
News, Bloomberg. (2015). Musk Reboots Tesla's China Strategy. Bloomberg News, 30 March.
Available from http://www.bloomberg.com/news/articles/2015-03-29/musk-reboots-tesla-
china-strategy-as-range-anxiety-crimps-sales [Accessed April 4th, 2016]
Herald, The Sydney Morning. (2015). The tweet that added $1 billion to company's bottom line.
The Sydney Morning Herald, 31 March. Available from http://www.smh.com.au/it-
pro/business-it/the-tweet-that-added-1-billion-to-companys-bottom-line-20150331-1mc0sq
[Accessed April 4th, 2016].
Cohan, P. (2015). 4 Reasons To Invest In Netflix. Forbes, 21 Jan. Available from
http://www.forbes.com/sites/petercohan/2015/01/21/4-reasons-to-invest-in-
netflix/2/#98404076db2c [Accessed April 4th, 2016].
Knight, E. and Lynch, J. (2015). Arrival of Netflix and SVOD set to change Australian TV. The
Sydney Morning Herald, 28 March. Available from http://www.smh.com.au/business/media-
and-marketing/arrival-of-netflix-and-svod-set-to-change-australian-tv-20150326-1m8zlo
[Accessed April 4th, 2016].
Palmeri, C. (2015). Disney Profit Tops Estimates as ‘Frozen’ Gifts Star for Holidays. Bloomberg
News, 2 March. Available from Bloomberg Terminal [Accessed April 4th, 2016].
Sakoui, A. and Bit, K. (2015). Eastwood’s ‘American Sniper’ Tops Box Office for Second Week.
Bloomberg News, 25 January. Available from Bloomberg Terminal [Accessed April 4th, 2016].
21. 20
Freund, J. (2015). Walt Disney Adj. EPS, Rev. Beat Highest Ests. Bloomberg First Word, 2 March.
Available from Bloomberg Terminal [Accessed April 4th, 2016].
Buckles, T. et al. (2015). IMAX: Management Meetings ReaffirmEarnings Power of Robust Box
Office Outlook and Highlight Longer-Term Opportunities. J.P. Morgan, 21 March. Available from
Bloomberg Terminal [Accessed April 4th, 2016].
Riccadonna, C. (2015). Dot Plot Suggests Fed Is Able, Not Yet Ready or Willing. Bloomberg
Intelligence, 20 March. Available from Bloomberg Terminal [Accessed April 4th, 2016].
Wire, Business. (2014). River Rock Entertainment Authority Announces Failure to Make
Scheduled Interest Payment. Business Wire, 28 May. Available from Bloomberg Terminal
[Accessed April 4th, 2016].
Chemi, E. (2015). The correlation between the S&P 500 and high-yield bonds. CNBC, 15
December. Available from http://www.cnbc.com/2015/12/15/the-correlation-between-the-sp-
500-and-high-yield-bonds.html [Accessed April 4th, 2016].
Ramsey, M. (2015). Tesla to Upgrade Slower-Selling Version of Model S. Wall Street Journal, 8
April. Available from http://www.wsj.com/articles/tesla-to-upgrade-base-version-of-model-s-
1428490801 [Accessed April 4th, 2016].
Greenfield, R. et al. (2015). Netflix Rivaling Broadcast Nets Monthly Viewership as Domestic
Subs Now Streaming Over 2 Hours/Day. BTG, 9 April. Available from Bloomberg Terminal
[Accessed April 4th, 2016].
Pett, D. (2015). Investing: Analysts boost Netflix ratings after stellar Q1 earnings. NPW, 17 April.
Available from Bloomberg Temrinal [Accessed April 4th 2016]
22. 21
Appendix I
Retrievedfrom:Bloombergterminal,2016 (Index USUDMAER* & USURTOT - trackingU-3 & U-6
unemploymentrespectively)
Unemployment
Official unemployment (U-3) and U-6 unemployment are showing a long-term trend
downward returning to pre-recession levels, and remaining below their respective 200-day
moving averages signaling the strength of this downward trend. However, this is a simple
moving average, and not an exponential moving average, and so could be overstating the
strength of this downtrend. As a result it is imperative to look at other indicators to support the
claim the economy is in recovery. For example, just because people have jobs doesn’t mean
they are making more money, and thus have more disposable income.
* U-6 unemployment includes marginally attached workers and those working part-time for
economic reasons
23. 22
Appendix II
Retrievedfrom:Bloombergterminal,2016 (Index ETSLTOTL& USPHTOTL – tracking existing&pending
home salesrespectively)
Pending and Existing Housing Sales
Housing sales are on the rise with a strong upward trend, and with potential sales hinting that existing
sales will continue the upward trend (Appendix II). This hints at further economic stimulation and encourages
me to lean toward sectors which do well during expansionary times. This rapid increase could be a result of a
weak housing market, but regardless is another signal of the economy’s recovery. However, there is a
possibility that the sales are being fueled by an increase in foreign investment, meaning consumers in the US
are not showing increased spending and optimism.
24. 23
Appendix III
Retrievedfrom:Bloombergterminal,2016 - US Personal ConsumptionExpenditure Chained2009 Dollars
YoY SA (PCECHY% Index),USDisposable Personal IncomeChained2009 DollarsYoY (PIDSCWT% Index)
Disposable Income and Consumer Spending
It can be seen that both real disposable income and personal consumption are higher than 2008
pre-recession levels. Disposable personal income shows positive change of almost 1%, and
spending is up almost 2%. Although these aren't promising growth rates in a mature economy,
they do signal growing belief in the economy from consumers and thus consumption for cyclical
stocks is expected to grow. The lack of consistency in the growth could also be a result of an
unsteady global economic climate which is still recovering from the 2008 meltdown, as now
more than ever economies are feeling the effects of globalization and interconnectedness.
25. 24
Appendix IV
Retrievedfrom:Bloombergterminal,2016 – EHPIUSY Index (USConsumerPrice Index (AnnualYOY%))
Inflation
Inflation is sitting well below its 50 day moving average and the 2% target set by the FED. This
counters expectations for promising economic growth; because inflation reflects the growth of an economy to
an extent, meaning this far out from the recession we should be seeing higher rates. However, it is promising
for wages and, coupled with low interest rates, consumption of cyclical products and big purchases like
automobiles and new tech as costs of borrowing are low. The other side of this is that US treasuries will have
low yields for the time being which is adverse to our portfolio’s goal of achieving high returns with minimal risk
as government bonds are excellent hedging tools.
26. 25
Appendix V
Retrievedfrom:Bloombergterminal,2016 – US TreasuryActivesCurve asof 04/01/15
Yield Curve
There is a normal yield curve for active US treasuries which shows investors are confident in
the expansion of economy - spread is 192.56bp as per Market Matrix US Sell 2 year & Buy 30
year bond yield spread at April 1st 2015. Based on the yield curve and spread from 2yr to 30yr
bonds we can expect the economy to expand and inflation to pick up. At the very least, we can
be confident that investors expect the economy to continue expanding based on the current
monetary and fiscal policy in place/expected, and will thus continue to increase spending on
cyclical products and help drive the economy. This being said, based on the shape of the yield
curve from 1 month to 2 years it appears that no rises in interest rates or inflation are going to
take place in the immediate future.
27. 26
Appendix VI
Retrievedfrom:Bloombergterminal,2016 - CONSSENT Index (University of Michigan Consumer
Sentiment Index)/CONSCURR Index (University of Michigan Current Economic Conditions
Index)/CONSEXP Index (The University of Michigan Consumer Expectations Index)
Consumer sentiment in the U.S.
The results from the CONSSENT Index from the University of Michigan which surveys
consumer attitudes and expectations toward personal finances, general business conditions,
and market conditions to determine the change in consumers’ willingness to buy shows
consumer sentiment is on the rise (Appendix VI). These results are coupled with the
CONSCURR Index which shows consumer confidence regarding the general state of the
economy in Continental USA, and the CONSEXP Index which measures consumers’ views for
their own financial situation, as well as prospects for the general economy over the near and
long term (Appendix VI). All of these indices have almost reached the same levels, and in some
cases surpassed, where they were at their peak in 2007 (Appendix VI). This is another indicator
showing that consumer sentiment is good and that the economy is expanding. Although it
ignores the large effect institutional investors have on the economy it does support the
expectation that the economy will continue to grow in the near future.
28. 27
Appendix VII
Retrievedfrom:Bloombergterminal,2016 - YoY% v. QoQ% in US GDP
Real GDP growth
YoY% v. QoQ% growth in US GDP shows growth to be dismal (Appendix VII). It appears that prospects for
company growth are minimal at this time, but consumer sentiment drives share price and the economy heavily.
I expect GDP growth to pick up in the near future, and to not have a heavy effect on the share prices over the
next month, as it appears to be rising for the second quarter of 2015 as a result of a sustained increase in
consumer spending (Appendix III) and decrease in unemployment (Appendix I).
35. 34
Appendix XIV
Retrieved from Bloomberg Terminal, 2016 - Weekly Performance of Portfolio Vs. S&P500 for 04/01/15 - 05/01/15
36. 35
Appendix XV
RetrievedfromBloomberg Terminal,2016 - Comparisonof PortfolioReturns to Benchmark S&P500*
*returnof portfolioingraphdoesnotexactlymatchworksheet(3.5% discrepancy) asBloomberg
interpolatedsome of the bondvalueswhen creatingthisgraphusingpricesoutside of the investment
holdingperiod(ie.BeforeApril 1st
,orafterMay 1st
).
55. 54
Appendix XXXIV
RetrievedfromBloombergterminal,2016 – RV of bonds
Column1
Total Debt to
Total Equity
Interest
Coverage Ratio
Net
Income - 1
Yr Growth ROA
WACC
Cost of
Debt
Coup
on
Bon
d
Opti
ons
TOT_DEBT_T
O_TOT_EQY
INTEREST_COVE
RAGE_RATIO
NET_INC_
GROWTH
RETURN_O
N_ASSET
WACC_CO
ST_DEBT CPN
Non
e
Tesla
Motors Inc.
ED1552584
@TRAC
Corp 287.4410695 -2.937603946
-
209.60040
16
-
7.5028529
89
2.1851399
65 1.25
Non
e
Sears
Roebuck
Acceptance
Corp.
EJ9492061
@TRAC
Corp #N/A N/A #N/A N/A #N/A N/A
-
2.0200410
38
1.9124569
26 6.5
Non
e
Toys R Us
ED1552584
@TRAC
Corp #N/A N/A -0.842592593
-
76.576576
58
-
14.221547
42 #N/A N/A 7.375
Non
e
Alcatel-
Lucent USA
Inc.
DD1151818 194.8580968 -0.197530864
1.3698630
14
-
0.5208565
2
0.7344122
36 6.5
Non
e
Rite Aid
Corp.
DD1089216 9893.688657 1.528190029
-
53.775289
42
2.8966117
44
3.9854196
79 7.7
Non
e
Riverrock
Entertainm
ent
EI850976@
TRAC Corp 2959.03616 2.232136573
8.5403417
98
11.853685
02 0.9976 9
Call
able
68. 67
Appendix XXXXVI
RetrievedfromBloombergterminal,2016 –calculatedinexcel (Alphaandtrackingerror)
Alpha = Rp - [Rf + (Rm - Rf)*B] 23.17686
Where :
Rp = Realized return of portfolio
Rm = Market return 18.88
Rf = Risk-free rate
B = Beta
Rf = 1.84 (See CAPM Asset Allocation worksheet)
Monthly Rf = 1.84^(1/12)-1
0.052126967
Monthly Rm = 2.0925 (See graph on left)
Rp = 25.27 (See portfolio summary)
Beta = 1.000315108 (See CAPM Asset Allocation worksheet)
Expected monthly return of portfolio = 6.39%
Simple Tracking Error = X-Y
Where: 23.18
X = return of portfolio 4.724757
Y = Return of benchmark
Advanced Tracking Error = SQRT(Σ(XI-YI)^2/(N-1)
Where:
N = number of periods
X = return of portfolio
Y = Return of benchmark
*calculated using 4 weekly periods and using
weekly returns of benchmark and portfolio
Excess return of portfolio when compared to
expected return =
Tracking Error using Stdev* =
Tracking Error using returns =
Alpha of portfolio =
Actual Weekly returns Portfolio S&P500
4.97% 1.71%
6% -1%
2.50% 1.70%
6.40% -0.04%
Covariance of Portfolio and S&P500 = 0.0002-
STDEV = 0.017518 0.013431
Correlation Coefficient = -0.74808
