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Flashcards in Analysis Deck (94):

Analysis that is concerned with

  • Monetarist policies as implemented by the FRB through its open market committee
  • Fiscal vs. monetary policy
  • Economic indicators, leading, lagging, and coincident
  • Specific company balance sheet and income statement information

Fundamental Analysis


Measurement of total national output of goods and services

Gross Domestic Product (GDP)


Measurement that gauges inflation by measuring costs in constant dollars. Inflation is defined as too many dollars chasing too few goods and services.

Consumer Price Index (CPI)


First stage of the economic cycle where inflation is experienced and culminates at the peak of the economy.

Expansion Phase


When the economic cycle lingers at the economy's peak, we sometimes experience continuing inflation and rising prices with no economic growth.



A period of falling prices when decline follows the peak of the economic cycle, where too few dollars are chasing too many goods and services.



Two consecutive quarters of decline in the market is called a...



Six consecutive quarters of decline is called a...



When the decline phase of the economic cycle ends and the economy bottoms out, this is called the...



Involves the president and congress passing bills and appropriations that influence economic activity

Fiscal Policy


Primary tool of fiscal policy that allow congress to lower taxes which increases economic activity, or raise taxes to decrease economic activity, as well as increase transfer payments, such as social security or tax rebate programs, to stimulate the economy.

Federal taxation and spending


What government body is able to spend money they do not possess, and can authorize borrowing the money needed to stimulate the economy?



What government body is able to increase its own spending on capital projects, military, and or social programs to stimulate the economy?

Federal Government


What happens when the government decreases spending?

Economic activity decreases


During the great depression, this economist developed the economic theory that advocated using fiscal policy to jump-start the economy to full employment. He believed that the economy runs at an equilibrium that is determined by income and spending, and aggregate demands. If people are out of owkr, they don't spend. The government has responsibility to stimulate the economy to full employment.

John Maynard Keynes

Keynesian Theory


Doctrine that says as long as the government does not meddle with the economy, business will take care of itself. Stable interest rates, money supply, and low inflation achieved through monetary policy will enable business to drive the economy to full employment.

Supply Side Economics


Entity that is mainly based in New York that controls a system of member banks in major cities across the US and uses monetary policy.

Federal Reserve Bank (FRB)

The Fed


If the FRB believes that the economy is growing too quickly (which might cause inflation), it will tighten the money supply to slow the economy. What does this do?

It makes money scarcer and causes interest rates to rise.


If the FRB wishes to stimulate the economy, it will ease the money supply. What does this do?

It causes interest rates to drop, and speeds economic growth.


The most powerful tool for controlling monetary policy that is an overnight cash reseve that each federal reserve member bank must maintain each night, which is lowered to increase money supply, and raised to tighten money supply. It is powerful because it has a multiplier effect throughout the economy. Each night, every member bank calculates this. If they are short, they borrow cash from another member or the man Fed in NY.

Reserve Requirement


Rate set by the Fed that the FRB charges member banks for loans to meet their overnight loan requirement.

Discount Rate


How often does the FRB meet to consider whether or not to change the discount rate?



If a member bank is short funds to satisfy its reserve requirement, what does the bank do?

Attempt to borrow from another member bank.


The interest rate assessed when member banks lend to each other, which is the average of all interest rates charged by member banks for these overnight loans. It is extremely volatile because it can literally change overnight. It is not set by the FRB.

Fed Funds Rate


Most often used FRB tool where treasuries in the secondary market are bought and sold to slow or stimulate the economy.

Federal Open Market Operations


Entity that buys or sells securities in the secondary market through primary government securities dealers to help stimulate or slow the economy. 

Federal Open Market Committee (FOMC)


If the Fed is buying treasuries, they are putting money into the economy. What does this do to the economy?

It increases the money supply and stimulates the economy.


If the Fed is selling treasuries, they are pulling money out of the economy. What does this do to the economy?

This shrinks the money supply, which slows the economy.


Measure of money supply that equals cash and demand deposits such as checking accounts. FOMC operation has the greatest effect on this measure.



Broader measure of money supply that equals M1 plus savings account and some money market funds.



Broadest measure of money supply that equals M2 plus institutional investors and money markets.



International, decentralized, unregulated and high risk market, whose major participants are central banks and large multi-national corporations. There is no systematic reporting system for last sale information.

Interbank System


In the Interbank market, foreign currencies are traded in large blocks. What is the value of these blocks?

$1-$5 million


How long are spot transaction periods?

1 or 2 days


How long are forward transaction periods?

1, 2, 6, 9, 12, or 18 months


When the US dollar is strong, foreign currencies are weaker. This makes foreign goods cheap, so US imports increase and dollars flow out of the US. What does this do to the dollar?

The outflow weakens the dollar and creates a deficit trade balance.


As the dollar weakens, foreign currencies by comparison are stronger. This makes American products cheaper abroad, and U.S. exports to increase. What does this do to the US dollar?

The dollar grows stronger


When the dollar is strong, imports goes up. The dollar...

Gets weaker


When the dollar is weak, exports increase, causing the dollar to...

Get stronger


Bond and yields rise, US dollar is strengthened as FRB is attacking inflation and imports rise because of the stronger dollar's purchasing power. Exports decline because the stronger US dollar means weaker foreign currencies. What is happening to the interest rate?

Interest rate is rising


Raising interest rates causes the FRB to pursue the tight money policy by selling government securities to banks and broker/dealers. Short term rates rise above bond yields, which causes an...

Inverted yield curve


An inverted yield curve often leads to large scale investor movemene into long term debt instruments. This is called...



The lowest interest rate that is set by the FRB to be charged to any member bank for borrowing.

Discount Rate


Slightly higher interest rate for overnight borrowing between Federal Reserve member banks. This is the most sensitive money market indicator and is first to be affected by changes in the discount rate.

Fed Funds Rate


Interest rate that is slightly higher than fed funds, earned by banks when invested short term. It includes the repo rate, commercial paper, bankers' acceptance, and CD rates. 

Money Market Rates


Money Market instrument created when a bank dealer sells collateralized securities with a promise to buy them back.

Repurchase Agreement (Repo, buy back, or matched sales)


Unsecured corporate note with maturity ranging from 30 to 270 days.

Commercial Paper


Import/export paper

Banker's Acceptances


Money Market instrument that requires a minimum investment of $100,000

Jumbo CDs


Rate that banks charge to their best customers, which is also earns higher rate than money market rates

Prime rate


Rate charged to broker/dealers by banks for customer margin purchases, which is the highest interest rate. 

Call/Loan Rates


Economic indicator that estimates future economic activity in a business cycle. It is determined by the US Commerce Department and the Conference Board, a nonprofit agency, and are conceptually negative, because they lead the way to recession more than to prosperity. They consist of large ticket consumables plus a few other items.

Leading Indicator


What indicators are these?

  • Consumer confidence
  • Durable goods, appliance, automobile and other large ticket consumables
  • Machine tool orders
  • Building permits
  • Housing starts
  • The S&P 500 
  • Claims for unemployment and length of manufacturing workweek
  • Index of consumer expectations
  • The yield curve

Leading Indicators


Indicators that are current indices that show the current phase of the cycle, and the more current index, the more coincident.

  • Personal income
  • Index of industrial production
  • Manufacturing and trade sales
  • Gross Domestic Product, sum of all goods and services produced in the country, formerly GNP (GDP)

Coincident Indicators


Indicators that indicate the status of the economy in the past few months, including

  • Employment
  • Reported corporate profits
  • Business Inventories

Lagging Indicators


What are the NYSE market indicators?

  • Dow Jones Average
  • Dow Jones Industrial Average (DJIA)
  • Standard and Poor's 500 (S&P 500)
  • NYSE Composite Index


The oldest and most widely quoted market indicator. It consists of 65 stocks (30 industrial, 20 transports, and 15 utilities). Since market direction cannot be determined by movement in the industrial portion, if transportation and utilities move in the same market direction, all three categories determine the overall confirmation of market direction.

Dow Jones Average


Most widely quoted index, and averages the movement of 30 widely held stocks. However, it is a very narrow measure of NYSE activity because there are more than 3,000 issues listed on the exchange.

Dow Jones Industrial Average (DJIA)


Broader measure of NYSE activity and is comprised of the 500 larges market cap stocks in the US.

Standard and Poor's 500 (S&P 500)


Broadest, most accurate measure of NYSE activity because it includes all common issues traded on the exchange (Approximately 1,700)

NYSE Composite Index


Broadest measure, covering more than 6,500 stocks

NASDAQ Composite Index


Market indicator that consists of the market value of more than 7,000 NYSE, NYSE AMEX and OTC issues headquartered in the U.S. It is the broadest market indicator.

Wilshire Index


Industry that has regular, pronounced cycles of growth and contraction. A stock from this industry performs well in a rising market, but suffers in a falling market. Cyclical companies produce durable goods, which sell well in healthy economic phases but do not sell well in weak phases. 


Examples: Large appliances and automobiles, heavy equipment and airplanes

Cyclical industries


Industry that has less pronounced cyclical variation. Stocks in this industry do not experience dramatic growth swings in up markets or declines in weak markets. They tend to have steady, predictable performance through all economic phases. They produce consumable goods such as food, alcohol, tobacco, drugs, cosmetics, or clothing. Demand for these lower priced consumable goods tends to be steady through up and down markets.

Defensive Industries


Industry that prospers in economic decline phases and underperforms in economic growth phases. Examples include the pawn shop and asset repossession industries. By adding stocks from these industries, a portfolio has a greater possibility of positive performance through a down market.

Counter Cyclical Industries


Industries that are new, rapidly developing market sectors. These are typically fueled by new technological advances. Examples are internet and biotechnology industries. Investing in these industries involves greater risk, but offer greater potential rewards.

Growth Industries


Financial statement of a corporation that summarizes a company's assets, liabilities and shareholders equity at a specific point in time. These three components allow the investors and managers to see what the company owns and owes, as well as the amount invested by the shareholders.

Balance Sheet


Financial statement that shows a company's performance over a specific accounting period. It is also called a profit and loss statement, and allows the investors and managers to see whether the business made or lost money during the reported period.

Income Statement


Current Ratio, which is current assets vs. current liabilities. 

Working Capital


Quick ratio, which is current assets less inventory divided by current liabilities.

Acid Test


Current Assets - Current Liabilities = ?


Measures entity's liquidity or solvency - its ability to pay its short-term obligations. A positive number indicates the company has sufficient current assets to pay current debts. A negative number indicates that the company is insolvent.

Net Working Capital


Current Assets / Current Liabilities = ?


Another liquidity measure that gauges the entity's ability to pay current liabilities. A number greater than 1 means the company can pay its obligations with current assets. A number less than one means that the company has insufficient current assets to meet current liabilities.

Current Ratio


(Current Assets - Inventory) / Current Liabilities = ?


Stricter measurement of the entity to pay its short term obligations because it considers only cash and cash equivalents. Inventory is subtracted from the other current assets.

Quick Ratio (Acid Test)


(Par Value of Common + Retained Earnings + Paid In Capital) / Total Long-Term Capitalization (Stockholders' Equity + Bonds) = ?


This ratio measures the portion of total capitalization which is common stockholders' equity. From a creditor's standpoint, a high ratio is good, because it shows that the entity is not highly leveraged, or deeply in debt. Some analysts might view this negatively because in their opinion, the company is too conservative to maximize profitability.

Common Stock Ratio


Par Value of Bonds / Total Long-Term Capitlization = ?


This ratio is the opposite of the stock ration. It measures the portio of total capitalization which is long term debt, or leverage. A lower ratio indicates that the entity uses less leverage; it operates more conservatively. Generally speaking, a ratio which exceeds 30-40% concerns an analyst.

Bond Ratio 


(Net Income - Preferred Dividend) / Common Shares Outstanding = ?


This measures the portion of earnings which is available to common stockholders after the preferred stock has received its dividend.

Earnings per Common Share


(Net Income + Convertible Bond Interest) / (Outstanding Common Shares + Common Shares Resulting from Conversion)


Measures the earnings available to common if all convertible securities were converted to common stock. Smaller number than EPS because company's earnings are divided among a greater number of common shares.

Fully Diluted Earnings Per Share


Market Price / Earnings Per Share = ?


Most commonly referenced ratio by analysts. It compares the common stock's price to its share of earnings this year. This ratio indicates how fairly priced the stock is compared to comparable stocks.

Price / Earnings Ratio


Annual Dividend / Earnings Per Share = ?


This ratio measures the "generosity" of the board of directors. It measures the portion of earnings which the board chooses to distribute to the shares. The remainder of earnings is kept by the board in retained earnings.

Dividend Payout Ratio


Net Income + Current Depreciation + Amortization = ?


Actual cash generated by operations, as opposed to net income reportable to the IRS. By adding noncash deductions to net income, we calculate this actual cash figure.

Cash Flow


Total Liabilities / Stockholders' Equity = ?

Debt / Equity Ratio


Costs of Goods Sold/ Average Inventory = ?


Ratio that measures how quickly inventory is sold. A higher number indicates faster speed, and indicates more efficient management and lower inventory loss risk.

Inventory Turnover Ratio


Net Income / Revenue = ?


Ratio that measures how much of each revenue dollar is net income. A higher ratio is better.

Margin of Profity Ratio, or Profit Ratio


Earnings Before Interest and Taxes / Interest Expense = ?


Ratio that measures how easily the entity can pay interest on its outstanding bonds. A higher number is better.

Interest Coverage Ratio



(Total Shareholder Equity - Preferred Equity) / Total Outstanding Common Shares = ?


If company was liquidated and all parties were paid according to priotiy, book value per share is the residual per share left for the common stock.


Net Income After Preferred Dividend / Common Stockholders' Equity = ?


This measures the return which the corporation achieves on common stockholders' equity. A higher return indicates better management.

Return on Common Equity


Analysis used by market makers and traders, particularly day-traders and option players; its usefulness is the determination of price and time. It is market-driven, charts and graphs centered, focused on advance/decline lines and moving averages. Among its chief concerns are beta risk, and systematic risk, and market risk.

Technical Analysis


This person knows market movements, support lines for purchasing stock, and resistance lines for selling stock. Most helpful when telling you when to buy and sell.



Reversal of an upward trend toward lower stock prices. This trend reversal could lead to a consolidating market or flat market, as well as a declining market, and lower prices.

Head and Shoulders Formation


Reversal of a downward trend toward higher stock prices. 

Inverted Head and Shoulders Formation


What are the factors that technical analysts value for pointing the direction of stock prices?

  • 200 Day Moving Average
  • Advance/Decline Line
  • Put/Call Ratio
  • Short Interest Theory


Difference between beta and actual return obtained from an investment. Negative value indicates underperformance while a positive one represents a better than expected return.



Measurement of reaction of a particular security in relation to the movements of the market as a while. The higher value, the more potential for volatility.



Model that is used to determine the value of a security. The model uses the security's beta, a theoretical risk-free rate of return, and the time value of money. This model addresses the return taht the security should yield given its risk level. That yield is equal to the risk-free rate of return plus a premium for assuming the risk of the investment.

Capital Asseet Pricing Model (CAPM)