Global Capital Markets
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SESSION 1: GLOBAL CAPITAL MARKETS 7 October 2009
Duke Investment Club Analyst Training Program
A n a l y s t T r a I n I n g P r o g r a m
Agenda •
IntroducJons, disclaimer, and general comments
•
DefiniJon of global capital markets
•
Global financial markets •
Equity, commodity, and fixed income markets
•
How a securiJes market works
•
Following global equiJes
•
Equity overview
•
Debt overview
•
Primary versus secondary markets
•
QuesJons and concluding comments
1
Duke Investment Club
IntroducJons
Duke Investment Club Analyst Training Program, Fall 2009 Instructors: •
Karan Advani
•
Taylor Rhyne
•
Sam Wass
A n a l y s t T r a I n I n g P r o g r a m
•
2
Duke Investment Club
IntroducJons
Duke Investment Club Analyst Training Program, Fall 2009
A n a l y s t T r a I n I n g P r o g r a m
•
•
Composed of 7-‐8 classes, with the regular meeJng Jme TBU (I know a lot of you have conflicts) •
Tuesday, October 13th
•
Tuesday, October 20th
•
Tuesday, October 27th
•
Sunday, November 3rd
•
Tuesday, November 8th
•
Tuesday, November 10th
•
Tuesday, November 17th
Last meeJng will likely involve assigned analyst teams pitching a new stock to the enJre class – this should include, but is not limited to idenJficaJon of investment thesis, execuJve summary of business operaJons, financial analysis for past 3 years, and evaluaJon of equity performance metrics •
The training program is designed to take you through each of these steps, so if it looks daunJng now, don’t worry – the next 7 weeks should be looked at as building a pitch from the ground up 3
Duke Investment Club
Disclaimer and general comments We’re students, just like you
We highly encourage you to challenge what we’re saying – if you see a mistake, tell us, even if it’s in front of the whole class. This is pracJce for us, too
•
We will be the first to acknowledge that we’re full of any four leber word you’d like to subsJtute in, but the reason we’ve started this class is because we find this stuff really interesJng. Hopefully, you do too
•
The people to your led and right may one day run the government, an investment bank, a consulJng firm, or become the next Warren Buffet (get to know him or her)
A n a l y s t T r a I n I n g P r o g r a m
•
4
Duke Investment Club
DefiniJon
A n a l y s t T r a I n I n g P r o g r a m
• Worldwide, including securiJes, markets, and investors interacJng internaJonally
Global
• Financial resources available for use • Assets or the financial value (or market value) of those assets
Capital
• Physical and electronic forums that facilitate the exchange of goods, assets, and financial securiJes • Market supply and demand influences prices of items traded in that market
Markets
A market in which individuals and insJtuJons trade financial securiJes. OrganizaJons and insJtuJons in the public and private sectors also oden sell securiJes on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.
Source: Investopedia
5
Duke Investment Club
Global financial markets
Currency & commodity exchanges Fixed Income exchanges
A n a l y s t T r a I n I n g P r o g r a m
Equity exchanges
Americas
Europe
Asia & EM
• Dow Jones Industrial Avg (US) • S&P 500 Index (US) • NASDAQ Composite (US) • NYSE (US) • Bolsa Index (Mexico) • Bovespa Index (Brazil)
• DJ EURO STOXX 50 (EU) • FTSE 100 Index (GB) • CAC 40 Index (France) • DAX Index (Germany) • IBEX 35 Index (Spain)
• CSI 300 Index (China) • Nikkei 225 (Japan) • Hang Seng Index (Hong Kong) • BSE Sensex 30 (India)
• Chicago Board of Trade • NY MercanJle Exchange • US Futures Exchange • Brazilian MercanJle & Futures Exchange
• London Metal Exchange • European Energy Exchange
• Shanghai Futures Exchange • Tokyo Commodity Exchange • Tokyo Grain Exchange • Dubain Gold & CommodiJes Exchange
• Barclays (Lehman) Aggregate Bond Index • JP Morgan Gov’t Bond Index • CSFB High Yield II Index • Bear Stearns HY Index
• FTSE UK Gilts Index Series
• JP Morgan Emerging Markets Bond Index
6
Duke Investment Club
How markets work
Trading securiJes on exchange floors, through clearinghouses, and OTC ExecuJng trades on a physical securiJes exchange floor
Caterpillar (NYSE: CAT)
A n a l y s t T r a I n I n g P r o g r a m
Buyer
Bid $50.745
Ask $50.755
Bid/Ask Spread = $(50.755 – 50.745) = $0.010 Buyer tells broker TD Ameritrade he wants to buy 100 shares Order given to Floor Trader A at the NYSE
Seller
Seller tells broker at Scob Trade she wants to sell 100 shares Order given to Floor Trader B at the NYSE
Traders negoJate unJl Trader A agrees to buy from Trader B: 100 shares transferred at $50.75
The bid/ask spread helps gauge the liquidity of a security – the wider the spread, the more negoJaJng that’ll need to be done before a transacJon can occur. Wider spread = Less liquid & likely riskier 7
Duke Investment Club
How markets work
Trading securiJes on exchange floors, through clearinghouses, and OTC
A n a l y s t T r a I n I n g P r o g r a m
ExecuJng trades through a clearinghouse
•
Oden used in debt and equity originaJon (e.g., company IPOs)
•
Clearinghouse concept is more suitable for electronic exchanges than for physical ones
•
Clearinghouse acts as the trader on both sides of the transacJon, profiJng from the spread between the actual purchase and sale prices Buyer tells clearinghouse she wants to sell 500 shares of CAT for $50.75 per share Clearinghouse buys 500 shares for $25,375 Clearinghouse finds buyer who wants 500 shares of CAT at a maximum of $51.00 per share Clearinghouse pockets the difference between their purchase price and sale price: [ 500 shares x $51.00 per share ] -‐ $25,375 = $125 profit 8
Duke Investment Club
How markets work
Trading securiJes on exchange floors, through clearinghouses, and OTC ExecuJng trades in over-‐the-‐counter (OTC) markets
•
Buyers and sellers trade in private forums, where no centralized market exists; middlemen convey buy-‐ or sell-‐orders between two sides of a trade, or buyers and sellers interact directly •
A n a l y s t T r a I n I n g P r o g r a m
•
•
Trades take place over the phone or internet, never through formal security exchanges
Pros •
Extremely rapid growth of OTC markets
•
Less regulaJon makes execuJng trades faster and easier in most cases
•
SomeJmes the only way to hold stock of very small-‐cap companies
•
Lack of transparency can create sizeable market dislocaJons that prudent investors can seize upon
Cons •
Lack of transparency leads to illiquidity during crises
•
Current lack of regulaJon and unclear definiJon of trading rules creates hazards for investors
•
Centralized exchanges reduce trading costs
•
First-‐mover advantage becomes a significant factor 9
Duke Investment Club
Following global markets I want to analyze a stock, what do I do next?
Quick, basic info • • • •
Market & economic news sources
Current price Historical price DescripJon of business Company news
A n a l y s t T r a I n I n g P r o g r a m
Financial raJos • • • •
EBITDA Margin Current RaJo Leverage RaJo ROA, ROE, etc.
Financial statements • • •
Always use SEC’s EDGAR system first Company Investor RelaJons Pages
10
Duke Investment Club
A n a l y s t T r a I n I n g P r o g r a m
Equity versus Debt
Duke Investment Club
Overview of financial securiJes Equity and equity-‐like securiJes
A n a l y s t T r a I n I n g P r o g r a m
•
Here are a few ways of thinking about equity: •
Anyone can claim ownership over a physical object, since ownership is a noJonal concept. Equity (i.e., a share of stock) is the physical representa=on of that ownership stake
•
Equity = Assets – LiabiliJes (debt) = Net Assets
Security
Equity
Maturity
None
Security (Lien)
Lowest lien
(last claim on company assets in event of bankruptcy)
Low -‐ High
Risk
Yes
Ownership claims Periodic payment type
Dividends, if any
Collateral requirement
None Dividends are taxable
Tax effects 12
Duke Investment Club
Overview of financial securiJes Equity and equity-‐like securiJes
A n a l y s t T r a I n I n g P r o g r a m
•
Different types of equity exist, and each category abracts a different type of investor. One of the primary disJnguishing factors between equity classes is the type of voJng right that comes with it: •
Class A versus Class B shares: difference in the number of votes per share
•
Preferred stock:
•
•
Usually do not have voJng rights
•
Higher lien on issuer’s assets than common stock
•
Typically has dividend that must be fully paid out before any dividends can be paid to normal shareholders
Callable preferred stock: hybrid debt/equity instrument •
•
Issuer has the legal right to redeem stock at a certain price (i.e., at a predetermined date, the issue is allowed to go to all the shareholders and say, “I’m giving you $X per share and you give me the stock you own”)
ConverJble preferred stock • Issue has the legal right to convert preferred stock into a predetermined number of common shares per preferred share
13
Duke Investment Club
Overview of financial securiJes Debt and debt-‐like securiJes
A n a l y s t T r a I n I n g P r o g r a m
•
SomeJmes you’ll hear that debt is the opposite of equity, but this isn’t really true. In fact, debt and equity oden have very similar components: •
Debt and equity both represent a company’s “liability” to a respecJve party: the company owes its earnings to its equity holders, and it owes its assets to its debt holders
•
Both can pay periodic fixed amounts to the stakeholders
•
Investments in debt require extensive consideraJons of the equity financing component of a company’s capitalizaJon structure, and vice versa •
•
•
The existence of either debt or equity on a company’s balance sheet dramaJcally determines what the market will allow that company to issue in the future
That said, there are differences between the two, primarily determined by who gets what in the event of a record-‐breaking quarter, or in the event of a bankruptcy: •
Claim on earnings: equity holders want the company they’re invested in to do well, so the value of their stock increases; debt holders don’t care what happens, as long as they get their interest payments
•
Claim on assets: debt holders get the stores, clothing, and brand name of Abercrombie and Fitch if it ever goes bobom-‐up, and the equity holders would probably get nothing
Where is this happening now?
14
Duke Investment Club
Overview of financial securiJes Debt and debt-‐like securiJes
Flow chart of stakeholder claims on assets First claim on assets Least risk
Senior debt Secured Unsecured
A n a l y s t T r a I n I n g P r o g r a m
Subordinated debt Senior Junior
Mezzanine/hybrid debt PIK Converts
Preferred stock Last claim on assets Most risk
Common stock 15
Duke Investment Club
Overview of financial securiJes Debt and debt-‐like securiJes
Debt
Security Maturity
Finite
(dependent on placement in capital structure, company ra=ngs, etc.)
Collateral security
Security (Lien)
Variable
Low – Medium
A n a l y s t T r a I n I n g P r o g r a m
Risk
No
Ownership claims Periodic payment type
Typically fixed
Collateral requirement
Yes
Tax effects
Interest payments typically are tax deducJble
16
Duke Investment Club
Primary versus secondary markets
A n a l y s t T r a I n I n g P r o g r a m
•
Primary markets exist when a new issue is brought to market •
IniJal public offerings (IPOs) are an example of an issue in a primary market
•
When Wal-‐Mart issued 4.125% notes maturing in 2020, an investment bank sold all $550 million to a group of investors – these investors comprise the primary market for these bonds. The first Jme one of these investors sells a bond to someone else, the secondary market is formed
•
Investors in primary markets look for very different types of investments than those moving around in the secondary markets
Guggenheim Partners $550mm 4.125% notes, due 2020
Primary investors CS Asset Management Guggenheim Partners PIMCO Etc.
Secondary investors
PIMCO
17
Duke Investment Club
A n a l y s t T r a I n I n g P r o g r a m
QuesJons and Comments
Duke Investment Club
Duke Investment Club Analyst Training Program
A n a l y s t T r a I n I n g P r o g r a m
Agenda •
IntroducJons, disclaimer, and general comments
•
DefiniJon of global capital markets
•
Global financial markets •
Equity, commodity, and fixed income markets
•
How a securiJes market works
•
Following global equiJes
•
Equity overview
•
Debt overview
•
Primary versus secondary markets
•
QuesJons and concluding comments
1
Duke Investment Club
IntroducJons
Duke Investment Club Analyst Training Program, Fall 2009 Instructors: •
Karan Advani
•
Taylor Rhyne
•
Sam Wass
A n a l y s t T r a I n I n g P r o g r a m
•
2
Duke Investment Club
IntroducJons
Duke Investment Club Analyst Training Program, Fall 2009
A n a l y s t T r a I n I n g P r o g r a m
•
•
Composed of 7-‐8 classes, with the regular meeJng Jme TBU (I know a lot of you have conflicts) •
Tuesday, October 13th
•
Tuesday, October 20th
•
Tuesday, October 27th
•
Sunday, November 3rd
•
Tuesday, November 8th
•
Tuesday, November 10th
•
Tuesday, November 17th
Last meeJng will likely involve assigned analyst teams pitching a new stock to the enJre class – this should include, but is not limited to idenJficaJon of investment thesis, execuJve summary of business operaJons, financial analysis for past 3 years, and evaluaJon of equity performance metrics •
The training program is designed to take you through each of these steps, so if it looks daunJng now, don’t worry – the next 7 weeks should be looked at as building a pitch from the ground up 3
Duke Investment Club
Disclaimer and general comments We’re students, just like you
We highly encourage you to challenge what we’re saying – if you see a mistake, tell us, even if it’s in front of the whole class. This is pracJce for us, too
•
We will be the first to acknowledge that we’re full of any four leber word you’d like to subsJtute in, but the reason we’ve started this class is because we find this stuff really interesJng. Hopefully, you do too
•
The people to your led and right may one day run the government, an investment bank, a consulJng firm, or become the next Warren Buffet (get to know him or her)
A n a l y s t T r a I n I n g P r o g r a m
•
4
Duke Investment Club
DefiniJon
A n a l y s t T r a I n I n g P r o g r a m
• Worldwide, including securiJes, markets, and investors interacJng internaJonally
Global
• Financial resources available for use • Assets or the financial value (or market value) of those assets
Capital
• Physical and electronic forums that facilitate the exchange of goods, assets, and financial securiJes • Market supply and demand influences prices of items traded in that market
Markets
A market in which individuals and insJtuJons trade financial securiJes. OrganizaJons and insJtuJons in the public and private sectors also oden sell securiJes on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.
Source: Investopedia
5
Duke Investment Club
Global financial markets
Currency & commodity exchanges Fixed Income exchanges
A n a l y s t T r a I n I n g P r o g r a m
Equity exchanges
Americas
Europe
Asia & EM
• Dow Jones Industrial Avg (US) • S&P 500 Index (US) • NASDAQ Composite (US) • NYSE (US) • Bolsa Index (Mexico) • Bovespa Index (Brazil)
• DJ EURO STOXX 50 (EU) • FTSE 100 Index (GB) • CAC 40 Index (France) • DAX Index (Germany) • IBEX 35 Index (Spain)
• CSI 300 Index (China) • Nikkei 225 (Japan) • Hang Seng Index (Hong Kong) • BSE Sensex 30 (India)
• Chicago Board of Trade • NY MercanJle Exchange • US Futures Exchange • Brazilian MercanJle & Futures Exchange
• London Metal Exchange • European Energy Exchange
• Shanghai Futures Exchange • Tokyo Commodity Exchange • Tokyo Grain Exchange • Dubain Gold & CommodiJes Exchange
• Barclays (Lehman) Aggregate Bond Index • JP Morgan Gov’t Bond Index • CSFB High Yield II Index • Bear Stearns HY Index
• FTSE UK Gilts Index Series
• JP Morgan Emerging Markets Bond Index
6
Duke Investment Club
How markets work
Trading securiJes on exchange floors, through clearinghouses, and OTC ExecuJng trades on a physical securiJes exchange floor
Caterpillar (NYSE: CAT)
A n a l y s t T r a I n I n g P r o g r a m
Buyer
Bid $50.745
Ask $50.755
Bid/Ask Spread = $(50.755 – 50.745) = $0.010 Buyer tells broker TD Ameritrade he wants to buy 100 shares Order given to Floor Trader A at the NYSE
Seller
Seller tells broker at Scob Trade she wants to sell 100 shares Order given to Floor Trader B at the NYSE
Traders negoJate unJl Trader A agrees to buy from Trader B: 100 shares transferred at $50.75
The bid/ask spread helps gauge the liquidity of a security – the wider the spread, the more negoJaJng that’ll need to be done before a transacJon can occur. Wider spread = Less liquid & likely riskier 7
Duke Investment Club
How markets work
Trading securiJes on exchange floors, through clearinghouses, and OTC
A n a l y s t T r a I n I n g P r o g r a m
ExecuJng trades through a clearinghouse
•
Oden used in debt and equity originaJon (e.g., company IPOs)
•
Clearinghouse concept is more suitable for electronic exchanges than for physical ones
•
Clearinghouse acts as the trader on both sides of the transacJon, profiJng from the spread between the actual purchase and sale prices Buyer tells clearinghouse she wants to sell 500 shares of CAT for $50.75 per share Clearinghouse buys 500 shares for $25,375 Clearinghouse finds buyer who wants 500 shares of CAT at a maximum of $51.00 per share Clearinghouse pockets the difference between their purchase price and sale price: [ 500 shares x $51.00 per share ] -‐ $25,375 = $125 profit 8
Duke Investment Club
How markets work
Trading securiJes on exchange floors, through clearinghouses, and OTC ExecuJng trades in over-‐the-‐counter (OTC) markets
•
Buyers and sellers trade in private forums, where no centralized market exists; middlemen convey buy-‐ or sell-‐orders between two sides of a trade, or buyers and sellers interact directly •
A n a l y s t T r a I n I n g P r o g r a m
•
•
Trades take place over the phone or internet, never through formal security exchanges
Pros •
Extremely rapid growth of OTC markets
•
Less regulaJon makes execuJng trades faster and easier in most cases
•
SomeJmes the only way to hold stock of very small-‐cap companies
•
Lack of transparency can create sizeable market dislocaJons that prudent investors can seize upon
Cons •
Lack of transparency leads to illiquidity during crises
•
Current lack of regulaJon and unclear definiJon of trading rules creates hazards for investors
•
Centralized exchanges reduce trading costs
•
First-‐mover advantage becomes a significant factor 9
Duke Investment Club
Following global markets I want to analyze a stock, what do I do next?
Quick, basic info • • • •
Market & economic news sources
Current price Historical price DescripJon of business Company news
A n a l y s t T r a I n I n g P r o g r a m
Financial raJos • • • •
EBITDA Margin Current RaJo Leverage RaJo ROA, ROE, etc.
Financial statements • • •
Always use SEC’s EDGAR system first Company Investor RelaJons Pages
10
Duke Investment Club
A n a l y s t T r a I n I n g P r o g r a m
Equity versus Debt
Duke Investment Club
Overview of financial securiJes Equity and equity-‐like securiJes
A n a l y s t T r a I n I n g P r o g r a m
•
Here are a few ways of thinking about equity: •
Anyone can claim ownership over a physical object, since ownership is a noJonal concept. Equity (i.e., a share of stock) is the physical representa=on of that ownership stake
•
Equity = Assets – LiabiliJes (debt) = Net Assets
Security
Equity
Maturity
None
Security (Lien)
Lowest lien
(last claim on company assets in event of bankruptcy)
Low -‐ High
Risk
Yes
Ownership claims Periodic payment type
Dividends, if any
Collateral requirement
None Dividends are taxable
Tax effects 12
Duke Investment Club
Overview of financial securiJes Equity and equity-‐like securiJes
A n a l y s t T r a I n I n g P r o g r a m
•
Different types of equity exist, and each category abracts a different type of investor. One of the primary disJnguishing factors between equity classes is the type of voJng right that comes with it: •
Class A versus Class B shares: difference in the number of votes per share
•
Preferred stock:
•
•
Usually do not have voJng rights
•
Higher lien on issuer’s assets than common stock
•
Typically has dividend that must be fully paid out before any dividends can be paid to normal shareholders
Callable preferred stock: hybrid debt/equity instrument •
•
Issuer has the legal right to redeem stock at a certain price (i.e., at a predetermined date, the issue is allowed to go to all the shareholders and say, “I’m giving you $X per share and you give me the stock you own”)
ConverJble preferred stock • Issue has the legal right to convert preferred stock into a predetermined number of common shares per preferred share
13
Duke Investment Club
Overview of financial securiJes Debt and debt-‐like securiJes
A n a l y s t T r a I n I n g P r o g r a m
•
SomeJmes you’ll hear that debt is the opposite of equity, but this isn’t really true. In fact, debt and equity oden have very similar components: •
Debt and equity both represent a company’s “liability” to a respecJve party: the company owes its earnings to its equity holders, and it owes its assets to its debt holders
•
Both can pay periodic fixed amounts to the stakeholders
•
Investments in debt require extensive consideraJons of the equity financing component of a company’s capitalizaJon structure, and vice versa •
•
•
The existence of either debt or equity on a company’s balance sheet dramaJcally determines what the market will allow that company to issue in the future
That said, there are differences between the two, primarily determined by who gets what in the event of a record-‐breaking quarter, or in the event of a bankruptcy: •
Claim on earnings: equity holders want the company they’re invested in to do well, so the value of their stock increases; debt holders don’t care what happens, as long as they get their interest payments
•
Claim on assets: debt holders get the stores, clothing, and brand name of Abercrombie and Fitch if it ever goes bobom-‐up, and the equity holders would probably get nothing
Where is this happening now?
14
Duke Investment Club
Overview of financial securiJes Debt and debt-‐like securiJes
Flow chart of stakeholder claims on assets First claim on assets Least risk
Senior debt Secured Unsecured
A n a l y s t T r a I n I n g P r o g r a m
Subordinated debt Senior Junior
Mezzanine/hybrid debt PIK Converts
Preferred stock Last claim on assets Most risk
Common stock 15
Duke Investment Club
Overview of financial securiJes Debt and debt-‐like securiJes
Debt
Security Maturity
Finite
(dependent on placement in capital structure, company ra=ngs, etc.)
Collateral security
Security (Lien)
Variable
Low – Medium
A n a l y s t T r a I n I n g P r o g r a m
Risk
No
Ownership claims Periodic payment type
Typically fixed
Collateral requirement
Yes
Tax effects
Interest payments typically are tax deducJble
16
Duke Investment Club
Primary versus secondary markets
A n a l y s t T r a I n I n g P r o g r a m
•
Primary markets exist when a new issue is brought to market •
IniJal public offerings (IPOs) are an example of an issue in a primary market
•
When Wal-‐Mart issued 4.125% notes maturing in 2020, an investment bank sold all $550 million to a group of investors – these investors comprise the primary market for these bonds. The first Jme one of these investors sells a bond to someone else, the secondary market is formed
•
Investors in primary markets look for very different types of investments than those moving around in the secondary markets
Guggenheim Partners $550mm 4.125% notes, due 2020
Primary investors CS Asset Management Guggenheim Partners PIMCO Etc.
Secondary investors
PIMCO
17
Duke Investment Club
A n a l y s t T r a I n I n g P r o g r a m
QuesJons and Comments
Duke Investment Club
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