Transcript Hunt Chapters 1-5 - Villanova Student Managed Fund

A Time to Be Rich
 Chapter One - Lindsay Blum, Tara Gatto
 Chapter Two - Lauren Maughan, Rick Inciardi
 Chapter Three - Richard Greiner, Mark Wyand
 Chapter Four – Adam Dekel, David Grimner
 Chapter Five – Kate Washburn, Ryan Gilligan
Chapter 1: Three Fundamental
Elements of Prosperity
 Home Investment
 Higher Education for Children
 Money for retirement
Two Important Facts
 Cycles of Economy are regular and
repeat themselves
 Understanding the rhythm of the
business cycle is crucial to successful
investing
Five Phase Economic Cycle
 Natural order of cycle: Ease-off and
Plunge, followed by Revival,
Acceleration, and Maturation
 Lengths are unpredictable
 Each phase is characterized by
distinct signals
 Growth period lasts longer than
recession phase
Expectations
Investment strategy
Components of GNP
Fluctuations of inflation
Interpreting consumer spending
trends and consumer debt
 Importance of elections and summit
meetings
 Deceptiveness of news reports
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Chapter 2: The Five Phases of the
Economy
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Ease-Off
Plunge
Revival
Acceleration
Maturation
Phase One - Revival
 The revitalization of business and consumer
activity that ends a recessionary phase
 RED FLAG EVENT – GNP turns positive
 Declines in mortgage rates and financing
rates
 Interest rate and inflation begin to rise
from pressure on credit demands and on
prices
Phase Two - Acceleration
 RED FLAG EVENT– Inflation begins to rise
 Consumer spending becomes more
confident
 Housing activity picks up speed
 Businesses start to rebuild inventories and
spend more on plant and equipment
Phase Three - Maturation
 RED FLAG EVENT– Consumer spending
drops, and Business spending continues to
increase
 Economy continues going because of
optimistic businesses
 Foundation begins to crumble with dual
pressures of accelerating inflation and
rising interest rates
Phase Four – Ease Off
 RED FLAG EVENT– GNP turns negative
 Inflation and interest rates may continue to
rise
 Housing and big ticket items fall off
severely reflecting consumer concern
 Businesses continue spending
Phase Five - Plunge
 RED FLAG EVENT– Peaking of interest rates
 Businesses suffer and begin liquidating
inventories rapidly
 Employment drops sharply and corporate
profits plummet
 Eventually, interest rates and inflation come
down and declining rates set the stage for
Revival
Summary
 Two of the economy’s principal parts: net
consumer and government spending
 Actions of the Federal Reserve underlie
these major spending and investment shifts
 The Fed uses its indirect control over the
supply of money to alternately pump or
deflate the economy
 Increase in supply – Fed easing
 Decrease in supply – Fed tightening
Chapter 3: General Investing
Guidelines
 Choosing a fund
 No load funds
 Family of funds
 Deal with manager (no broker)
 Review manger surveys (WSJ,
Bloomberg)
 Automatic reinvestment
Guidelines Continued
 Small initial investment ($1,000)
 Check-writing capability/Liquidity
 Past performance
 Management fee
 Bottom line: flexibility, liquidity, diversity
Types of Funds
 Money Market (most conservative)
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Provide income, no capital appreciation
Virtually risk-free
Good retreat for uncertain times
Tax-exempt available
Comprised of:
 T-Bills
 CD’s
 Commercial Paper
Types of Funds
 Intermediate/long-term bond funds
 Income and capital appreciation
 Tax-exempt available
 Mix of government and investmentgrade corporate bonds
 Riskier funds include junk bonds
Types of Funds
 Broad-based equity funds (riskiest)
Best for capital appreciation
Index funds available
Growth and value funds
Following economic cycle will help to
properly invest with these funds
 Wide range of industries
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Other Investments
 Other riskier investments include:
 Gold
 Commodities
 Foreign equities and debt
In General…
 Know your risk tolerance!
 Do not risk more than you can afford
to lose
 Aim to invest between one third and
one half of your assets later in life
Chapter 4: Investor Risk
Profile
1) Determining our risk profile
2) Achieving investing goals within
parameters
3) Utilizing business cycle beliefs with
risk profile to remain flexible
throughout investment process
Risk Profile
 4 Types
 Highly Conservative
 Start with $1,000
 All Stock and Bond investment
 Cautious
 Up to 25 percent of available funds.
 Mostly Stock and Bond, tiny percentage gold and
foreign currency.
 Aggressive
 Up to 50 percent of available funds.
 ¾ in stock and bonds, ¼ gold and foreign currency.
 High Roller
 50 percent or more of available funds.
 Actively trading investments and alternative investment
 Risk Profile+SRI Investment
Guidline=Room for Agression
 Double Check
 Ease in and out depending on current
business cycle analysis
 Don’t commit all at once
Remember…
 Common Sense
 Homeruns not necessary
 Be Comfortable
Chapter 5: √ Checklist for
Indicators
 Indicators are worthless unless compared
 Indicators that are “relatively immune to revision”
are most reliable
 First reports are released as preliminary reports
and final revisions (sometimes a year later) are
called benchmark revisions
 Notice the time span they are useful and applicable
 i.e. annualized inflation rates
 Is it real (inflation adjusted) or nominal
(unadjusted)
Hunt relies on the following
indicators:
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Money Supply
Certain aspects of CPI and PPI
Certain aspects of GNP
And the following 5 other indicators that are the focus
of Chapter 5
Best 5 Economic Indicators
 Initial Unemployment Claims
 Average Manufacturing Workweek
 Non-farm Payroll Employment
 Hours worked
 Industrial Production
Initial Unemployment Claims
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Hunt’s most reliable indicator, reported each Thursday
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Measures new claims for unemployment compensation under all
state programs
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Short warning before expansion – turns negative near transition from
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Random, short-lived ups and downs – recommends smoothing
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Claims rise at beginning of Ease-Off stage & only decline right
before Revival stage
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Complimentary Indicator – Help Wanted Ads
Plunge to Revival
average
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Reflects monthly change & level of number of openings in existing & new jobs
Reliable but precedes economic change very closely
Rises shortly after expansion and falls soon after expansion matures – mirroring health
of labor market movements
Best Indicators
 Average Manufacturing Workweek
 Released 1st Friday each month with few
revisions
 Repetitive pattern – manufacturers increase
workweeks as demand rises & vice versa
 Non-Farm Payroll Employment
 Released on 1st Friday each month
 Increases right after Revival stage begins,
following hours worked
 Begins to fall as expansion matures
Best Indicators
 Hours worked
 Released on first Friday of every month with few
revision
 Turns upward early in Revival
 Declines as expansion matures but before non-farm
payroll employment
 Industrial Production
 Released approximately mid-month with moderate
revisions
 The Fed estimates the physical output of the nation’s
mines, factories, and utilities
 Turns up after Revival
 Declines very late in Maturation and continues to fall
in recession
Other High Quality Indicators
 Housing Starts and Building Permits
 Measures when construction begins and permits are
filed – not directly related
 Permits turn up late in Plunge, Starts soon follow
 Permits turn down just after Maturation begins,
Starts soon follow
 Bottoming of housing market is a prerequisite for
start of economic revival
 Composite Index of Leading Economic Indicators (LEI)
 Useful but overrated
 Contains many useful indicators that were already
described
Unreliable Indicators
 Retail Sales & Durable Goods Orders: Frequent and major
revisions, and underestimate actual strength
 Purchasing Managers Survey: doesn’t reflect changing
nature of economy
 Unemployment Rate: “Political football” & poorly calculated
 Corporate Profits: Released too late to be meaningful
 Consumer Sentiment Surveys: Reported irregularly &
represents Present condition not Future trends
Economic Life Cycle & Indicators
 How do we monitor the progress of
our economy using these indicators?
REVIVAL
 Onset - Building permits and housing starts
bottom out
 Early in Stage - Drop in initial unemployment
claims and increase in help wanted advertising
 Strong assurance stage is reached -
sustained upswing in industrial production
(3-6 month gain)
 Late in Stage – Rise in corporate profits
ACCELERATION
 Key indicators of Revival remain positive
 Business capital kicks in
 First sign that acceleration is ending - Drop
in average manufacturing workweek
(follow for 3-6 months)
 When sinking trend in the growth rate of
non-farm payroll employment occurs,
Maturation Stage is usually within 6 months
MATURATION
 First sign - Decline in building permits and
housing starts
 Midway - Pronounced drop in help wanted
 About 3 -12 months from onset of Ease-off
is a noticeable rise in unemployment claims
& negative trend in Index of LEI’s
 Ends with significant and consistent
slippage in industrial production levels &
indicate recession on the way
Economic Phases
 EASE-OFF
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Virtually all major
indicators show sharp
negative trends for 1-2
months
Dramatic drops in nonfarm payroll employment,
hours worked,
manufacturing workweek,
and industrial production
Trends in indicators are
critical in identifying
the transition from
Ease-off to Plunge
 PLUNGE
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Negative Ease-off trends
continue
First sign of recovery Increase in average
manufacturing workweek
Ends with Decrease in
initial unemployment
claims & Increase in nonfarm payroll employment
Confirm it is ending &
Revival is underway with
building permits and
housing starts
Using these indicators to invest
 Identify trends in individual indicators
 Compare them to trends in other
indicators
Questions?