New President - New Team

All,

The past 12 months have been very busy for the Equity Analyst Team.  From the numerous trips to NYC and Boston to working seven days a week on analysis we had an opportunity to learn from one another and to create an organization which is second to none.  All of the ups and down brought our team closer and though many times we felt that the work load was too much for us, overall we benefited tremendously.  I created this team as a training ground for those that want to enter the asset management industry and want to bridge the gap between academia and real world application.  Though I have enjoyed my time as President I think it would be best if I step aside and let another capable person take over the responsibilities.  As we conclude this year I will be giving up my position as President and will become an Advisor of the team.  As I leave my position I will be replaced by Maisy Zhou who will continue to build upon the success which we have experienced.  Maisy will be supported by Dr. Ken Yook and Nathan Foley-Mendelssohn (Portfolio Manager) who have been serving as Advisors.  I hope that you will continue to support the team as you have supported me.

Happy Holidays!
Saliq Khan

Discussion Topic 5/12/11 (Mon)

Topic: China Stocks Rally, Rate Swaps Slide on Reserve Requirement Cut

Link: 

http://www.bloomberg.com/news/2011-12-01/china-stocks-rally-most-in-5-weeks.html

Questions:

1. Do you agree that "China’s decision to cut the reserve-requirement ratio will benefit small banks, brokerages, material producers, property developers and insurance companies the most"? If so, why? If not, who are the biggest beneficial entities instead?

2. It is said that China is shifting its focus from anti-inflation to economic growth stability, do you agree or not? Try to answer the question based on what you know about the overall economic growth, inflation rate, and other indicators of China in the past few years.

3. Please briefly comment on what impacts you think yuan (RMB) will continue to have on global market.

Brief Introduction to ADRs (Part I)

By Rui Li

Based on what we have discussed today, I would like to share my internship experience in Deutsche Bank with you guys. I interned in Global Equity Service Department this year and mainly focused on ADRs. The followings are the brief introduction to ADRs, which is from the Deutsche Bank's advertisement materials to clients. Hope it may be some help.

What are Depositary Receipts?

Depositary Receipts (DRs) are a derivative-type instrument issued by a depositary bank, an agent of the underlying issuer of securities.

DRs evidence ownership of certain rights and entitlements to the underlying shares, as well as imposing obligations on the holders and beneficial owners of DRs by virtue of such ownership.

Shares underlying DRs are held in custody in the applicable local market of the foreign issuer by the depositary bank are registered in the name of the depositary bank or its appointed nominee.

DRs are customarily issued in book-entry form through the U.S. clearing system of DTC and/or the European clearing systems of Euroclear and Clearstream, depending on the structure of the DR program, but may also be issued in physical certificated form in the case of ‘American’ depositary receipts.

DRs trade in U.S. dollars and settle and clear in either the U.S. markets (through DTC), in the Euromarkets of London and Luxembourg (through Euroclear and Clearstream, Luxembourg), or in a combination of both the U.S. and Euromarkets with settlement through all three clearing systems.

Historically, DR program establishments tended toward international public offerings listed on major U.S. stock exchanges by blue-chip, mostly European, non-U.S. issuers.  More recently, tendencies have seen greater focus from emerging market issuers completing international offerings listed on European stock exchanges.

Why Do Investors Buy Depositary Receipts?

DRs enable investors to acquire and trade non-U.S. securities with ease of settlement, foreign exchange procedures, absent the need for local custody set up and associated costs

DRs are usually denominated in U.S. dollars with dividend and other payments paid in a foreign currency other than U.S. dollars in respect of the DRs being converted into U.S. dollars by the depositary bank and distributed, net of conversion and distribution costs, to DR holders

DRs diversify an issuer’s investor base and widen the portfolio pool available to investors in satisfying U.S. and European investor appetite for overseas, particularly emerging, markets

DRs simplify the trading and settlement of foreign equities - trading and settling just like U.S. or European securities

Many U.S. bank and pension fund portfolios may be prohibited by their charters from purchasing foreign securities.  American Depositary Receipts (ADRs), however, are recognized as U.S. domestic securities and are eligible for investment by such portfolios

Why Do Companies Issue Depositary Receipts?

To raise capital by extending into a wider pool of capital and investors

To facilitate higher valuation of stock

To diversify shareholder base into wider geographies

To increase visibility and issuer name recognition in international markets

To improve liquidity of underlying shares

To create an equity financing tool for use in mergers and acquisitions

To enable the structure and set-up of Employee Stock Option Plans

(to be continued...)

An illustrative graph to adopt for stock pitching

*The above graph is created by Tom Konrad CFA

So...as we were talking about stock pitching today during the meeting, I found this amazing graph that fits my interest a lot. As you may know, I am in for everything about energy. But I am not talking purely about energy sectors - what I am saying is, it may be a good idea to start looking at your portfolio (if you have one) and break down to their performance - you would then realize whether you are making the right choice:

1. Choose your benchmark (ex. PBW as above)
2. Pick up ten (or more/less as you want) stocks
3. Trace down their performance by looking at their quarterly financial statement
4. Done!

As you can see, the graph above shows a not very fortunate picture: 5 out of 10 stocks were completely slipping downwards. But, my suggestion is to be very cautious towards holding/selling some of these stocks - because remember, this graph only shows very limited information of the whole company. You definitely want to dig into more details on its exact stock price and more importantly, I would suggest looking around, see what other stocks in the same sector are performing, especially its macro environment and outlook - after all, stock pitching is about investment in future (no matter short-term/long-term), as well as picking up the "comparative advantage".

But still, one question I haven't figured out, how do you choose benchmark(s)?

- Cathy Xuege Lu

Discussion Topic 2/12/2011 (Fri)

Topic: Stocks soar after central banks ease banks' access to dollars, reducing fears of credit crunch

Links:

1. http://online.wsj.com/article/SB10001424052970204012004577069960192509068.html

2. http://finance.yahoo.com/news/stocks-leap-central-banks-coordinated-144638713.html

Questions:

1. What do you think are the reasons behind the move of central banks this week?

2. Considering the positive performance of stock market after central banks' sudden action, do you think it will sustain, and for how long?

Jobs Lost = Weight Lost

I thought it would be interesting to do a regression analysis on the unemployment rate in the U.S. vs. weight loss vs. weight gain, but unfortunately there is only one type of correlation and that is time vs. weight gain in the U.S.  The line just goes up every year....we are one rich (fat) economy.

Back to the main topic.  The unemployment numbers were posted today and it seemed like a good portion of the college students became optimistic about the prospect of finding a job.  The economy added 120,000 jobs last month, but someone should let them know that the reason the unemployment rate dropped from 9% to 8.6% this month is not because there are that many more jobs which became available over the course of this month, but because people are so frustrated and discouraged with this economy that they have decided to sit on the sidelines.  At 64% participation rate in the labor force, we have just experienced the lowest level of participation since the early 1980s.  The other element was the number of people who decided to part-time jobs so they could to pay their bills.  Both of these factors played into the massive drop in the unemployment rate.  Sorry to burst your bubble, but it was going to happen sooner or later!

The good news which came out of today's jobs numbers is that the number of jobs created in September and October were revised up and this had a positive impact on the unemployment rate.  Once again I have to be the bearer of bad news: the unemployment numbers tend to be better during the year end due to temporary employment for the holiday season.


- Saliq Khan

American Airlines Lands in Bankruptcy

With the holiday travel season coming, it is terrible news that American Airlines has filed for bankruptcy protection.   American Airlines will be the sixth major U.S. carrier to seek bankruptcy protection this decade.  Additionally, many travelers have already purchased their American Airlines airplane tickets in advance to get a fair price for air plane tickets.   The US economy is still trying to recover, the American Airlines bankruptcy news is not helping to build consumer confidence in the market place.    But how does this impact the travelers?  The planes will keep flying, frequent-flier miles are still good, and reservations are still honored ( Navigating AA's Bankruptcy Filing: What Fliers Can Expect to Happen Next 11/30/2011, The Wall Street Journal, pg A5).   It is good news that the travelers will not be affected from this.

Analysts viewed AMR's filing as broadly positive for the airline industry, in part because American is expected to reduce excess capacity that has led to unprofitable routes.  Assuming a successful reorganization, AMR may be smaller with a cost structure that could be profitable.

Enjoy your holiday season,


Ben  Brock