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Bloomberg Answers The Primacy of GDP Knowledge Check 1  Inaccurately because the scope of GDP measurements can change. Knowledge Check 2  It went down. Knowledge Check 3  Sweden performed better. Knowledge Check 4  Consumer spending accounts for two-thirds of the U.S. economy. When the number of unemployed consumers rises, there is less consumer spending. SECTION QUIZ 1. Here is a chart showing both nominal GDP growth and real GDP growth for a country. Which of the following can be a true statement at the time the chart was captured? a. The country has deflation. The bottom line is nominal growth and the top line is real growth. 2. Which of the following lines is the best leading economic factor? a. PMI 3. The “misery index” is often cited in the media as a way to measure consumer pain. It is defined as the inflation rate plus the unemployment rate. Review and identify the country with the highest “misery index.” a. Argentina 4. What typically happens to nonfarm payrolls, the PMI indicator, and housing starts at the onset of a recession in the United States? a. Nonfarm payrolls go DOWN, the PMI indicator goes DOWN, the housing starts goes DOWN. Monitoring GDP SECTION QUIZ 1. Which of the following qualities of economic indicators do investors prize the most? a. Timeliness of release. 2. Why is the release of GDP statistics less interesting to investors than the release of other economic indicators? a. Because GDP statistics are released well after other economic indicators. 3. Which of the following important U.S. economic indicators is only available on a quarterly basis? a. GDP 4. Which economic indicator is most directly linked to unemployment? a. Nonfarm payrolls. Forecasting GDP Knowledge Check 1  Above Expectations Knowledge Check 2  Deceleration Knowledge Check 3  Minimal Change SECTION QUIZ 1. These charts show data for four countries as of early 2016. For each country, the purple line denotes historic real GDP growth. The white line denotes the consensus estimated real GDP growth. The red line denotes the most pessimistic analyst forecast. The green line denotes the most optimistic analyst forecast. For which country is there the most controversy among the analyst community about 2016 growth? a. RUSSIA 2. What is the main reason that investment banks create estimates of economic indicators? a. To know when specific economic data points are a positive or negative surprise. 3. Which of the following is the biggest pitfall of economic indicators? a. They do not consistently presage turning points. 4. Here is a chart displaying estimates of the initial jobless claims indicator, one of the main unemployment statistics in the U.S. It measures the number of new applicants for unemployment benefits. What was the level of the analyst with the most optimistic outlook? a. 260 Currency Market Mechanics Knowledge Check 1  JAPAN Knowledge Check 2  Both countries had large dollar-denominated debts. Knowledge Check 3  107.89 SECTION QUIZ 1. Allison lives in America and has just retired. It is early 2016. She has long had dreams of cruising the fjords on the west coast of Norway, visiting Buckingham Palace in the United Kingdom, seeing the cherry blossoms in Japan, and going to the top of the Eiffel Tower in France. She last considered all four options on New Year’s Day 2008. She would like to select the trip to go on based on which country’s currency has subsequently weakened the most against the U.S. dollar. Where should she go on vacation? a. NORWAY 2. Review the currency pair charts for the Barbadian dollar against the Jamaican dollar, the Czech koruna against the Polish zloty, the Nigerian naira against the Ghanaian cedi, and the Hong Kong dollar against the Macanese pataca. Which pair is pegged. a. The Hong Kong dollar against the Macanese pataca 3. Which of the following is NOT an example of a failed peg? a. Hong Kong dollar against the U.S. dollar in 1997. 4. Use the chart below to answer the question. How many Danish crowns (DKK) will buy 100 Japanese yet (JPY)? a. 5.360 Currency Valuation Knowledge Check 1  China Knowledge Check 2  The currency strengthens Knowledge Check 3  A surprise change in inflation expectations SECTION QUIZ 1. What does the Big Mac index show? a. How currencies may be overvalued or undervalued 2. Which of the following are short-term drivers of currency valuation? a. Surprise changes in interest rates, inflation, and trade 3. By what mechanism do interest rates affect currency values? a. Global investors are attracted by higher bond yields in high interest rate countries 4. Which of these headlines could move a currency pair? a. U.S. Stocks Rally on Fed’s Surprise Reduction of the Interest Rate Central Banks and Currencies SECTION QUIZ 1. What is the most common target inflation rate for an advanced economy? a. 2% 2. What was the primary goal of Abenomics? a. To halt the vicious cycle of deflation 3. Here is the deflationary cycle. What steps connect the lower left gray arrow to the upper right blue arrow? a. Prices Decline 4. Were the two oil crises in the 1970s linked to deflation or inflation? a. Inflation Currency Risk Knowledge Check 1  They are probably heavy exporters Knowledge Check 2  Indonesia Knowledge Check 3  126 Knowledge Check 4  40 yen Knowledge Check 5  EUR 4,717 more SECTION QUIZ 1. Why would Jack Welch suggest putÝng all company plants on barges? a. To respond quickly to changes in the currency markets 2. Samsung is based in South Korea and reports in South Korean won. Samsung sells its products around the world and the geographic breakdown of its 2015 revenues is in the first chart. The other charts show how some major world currencies moved against the South Korean won through the course of 2015. Of the currencies shown, which currency movement boosted Samsung’s revenue growth the most? a. DOLLAR 3. Legendary investor Warren Buffet said, “Gold gets dug out of the ground… Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” Based on this quotation, what quality of gold is he referring to? a. Its storage costs 4. Which of the following options is the best way for investors to manage currency risk? a. By locking in forward rates for known foreign payments The Roots of the Bond Market Knowledge Check 1  Surplus Knowledge Check 2  Taiwan Knowledge Check 3  U.S. Government Bonds are considered low risk Knowledge Check 4  Because the repayment amounts and timings are fixed for ordinary bonds SECTION QUIZ 1. Why does the United States have a strong reputation for creditworthiness? a. Because it has the right to tax the wealthiest population on earth. 2. What is one reason why foreign governments lend to the U.S. government? a. To build liquid FX reserves. 3. What does one yellow bar depict in this debt distribution diagram? a. Coupon Repayment 4. Which one of the following actors benefits when interest rates go up? a. An investor who is about to buy bonds. Bond Valuation Knowledge Check 1  Investors do not alter the calculation. Knowledge Check 2  There is no general rule. Knowledge Check 3  Both countries are highly creditworthy. Knowledge Check 4  A 4% annual yield on a credit risk-free 10-year government bond from the mythical country of Utopia Knowledge Check 5  A 5% annual yield on an investment in 10-year U.S. government bonds. SECTION QUIZ 1. What is the primary reason for U.S. government bond yield to ripple through the bond market? a. The large government bond market competes for investors’ attention via yields. 2. A rise in which of the following measures would typically send a government bond price up? a. Creditworthiness. 3. Which of the countries shown makes the greatest relative use of short-term government financing? a. Norway. 4. How do investors compare bonds? a. By comparing the yields of single bonds. Central Bankers and Interest Rates Knowledge Check 1  Wartime activities Knowledge Check 2  3% SECTION QUIZ 1. Here is a chart from the ILBE function displaying U.S. 10-year inflation expectations as of early 2017. At the point in time shown, where is the country’s 10-year inflation expectation in relation to the Central Bank’s inflation target? a. 0.0239% above 2. Investors who fear rising inflation may buy Treasury Inflation Protected Securities (TIPS). How od TIPS shield lenders from inflation? a. By compensating investors for inflation. 3. What is the Federal Reserve’s favorite inflation gauge? a. Core PCE 4. Here is the output gap in the U.S. in early 1975. What was likely the Fed interest rate policy? a. To cut interest rates. The Yield Curve and Why It Matters Knowledge Check 1  To compensate lenders for the greater risk of long-term loans compared to short-term loans. Knowledge Check 2  Corporate bond issuers go bankrupt more frequently than governments, as they do not have a tax base to fall back on in hard times. SECTION QUIZ 1. What impact will a tightening of the corporate spread most likely have on a company? a. A tendency to expand the borrowing capacity of the company. 2. What are the three main transmission mechanisms by which the yield curve affects the economy? a. Corporate impact, global impact, consumer impact. 3. What is the 10-year to 3-month term premium of the following yield curve? a. 2.398% 4. The purchase of which of the following products is most affected by interest rates? a. A house. Movements in the Yield Curve SECTION QUIZ 1. What is the primary driver of the left-hand end of the yield curve? a. Central bank interest rates. 2. Which yield curve is most likely linked to a booming economy? a. B 3. The two yield curve in the chart are from September 10, 2001 and from October 10, 2001. What do you think the Federal Reserve did with interest rates in the month following the attacks of September 11, 2001? a. Cut interest rates. 4. Why does the yield curve tend to invert shortly before a recession? a. An inverted yield curve means that bond traders are predicting interest rate cuts, and interest rate cuts happen in response to a recession. Introducing the Stock Market Knowledge Check 1  IPOs incentivize entrepreneurs to innovate as IPOs provide a way for entrepreneurs to monetize their work. SECTION QUIZ 1. Why do company manager-owners smile when they ring the stock exchange bell at their IPO? a. An IPO crystallizes the value of the manager-owners’ stake 2. The Dow Jones Industrial Average Index has an unusual weighting methodology. Unlike the S & P 500, it is weighted by share price. Here are 22 of the 30 members of the Dow Jones as of mid-June 2015. If all the shares went up by 5%, which share on the screen shown would have the biggest contribution to an upward movement in the index? a. Goldman Sachs 3. In 1999, James Glassman and Kevin Hassett published a book called “Dow 36,000.” At the time, the Dow Jones Industrial Average Index was just under 12,000. Which of the following is a potential substitute for the book title? a. “The Sum of the Share Prices of All 30 Dow Jones Members Will Triple.” 4. Here is a chart of the index value for the S&P 500 and the United Kingdom’s main equity index, the FTSE 100, from the end of 2008 to early 2015. The labels have been removed. One index has clearly outperformed the other. Over this period, there was a technology boom and an oil crash. Here are pie charts showing the early 2015 index compositions by industry for both the S&P 500 and the FTSE 100. Which index outperformed? a. The S&P 500 Index. The Nature of Equities Knowledge Check 1  Her mortgage payments and necessities are fixed. Knowledge Check 2  A shareholder in a booming economy Knowledge Check 3  170% Knowledge Check 4  200% SECTION QUIZ 1. Why are equities volatile? a. Due to the residual nature of earnings. 2. Which of the following statements is true? a. When you buy an equity, the most you can lose is 100% and your potential gain is unlimited. 3. In the example highlighting the differences between bond holders and shareholders, we equated surgeon Jenny to a shareholder. Which row of the budget planning table shows the amount to which she as a shareholder would be entitled? a. D. 4. You but the stock of four consumer goods companies at the end of 2004 and hold them until August 2010. Here are the TRA (Total Return) charts from Bloomberg for all four stocks. The “Buy Price” in the top left-hand corner is the price you paid for each stock. The price of the stock in August 2010 is noted in the chart’s legend. The legend also states the Dividend Adjusted Value in 2010, which is the value of the stock including reinvested dividends over the holding period. For which stock did the bulk of the total return come from dividends? a. Procter & Gamble. Equity Research Knowledge Check 1  Both are estimated in advance by analysts. Knowledge Check 2  United Continental Knowledge Check 3  MTU Aero Engines Knowledge Check 4  A comparison of the commercial prospect of new aircraft models. Knowledge Check 5  Median age of society Knowledge Check 6  China’s Aluminum Demand Weathers Real-Estate Slowdown So Far SECTION QUIZ 1. When an analyst is looking at a company for the first time, which of the following four activities does he do first? a. Defines the industry or industries in which the company operates. 2. Here is a table from the Bloomberg Intelligence copper dashboard which shows the different end-users of the “red metal.” Which of the following Bloomberg headlines would likely be of most interest to a copper trader? a. China’s Construction Slowdown Dents Copper Consumption, Prices 3. Here is a breakdown of post-it note inventor 3M’s revenue by industry. Which of the following industry drivers should be of most interest to a prospective investor of 3M? a. The change in postal volumes. 4. Company X was expected to have earnings per share of $0.52 for the upcoming quarter. On the day of the results, the company reported earnings per share of $0.83. What happened to the share price when the stock market opened? a. There is not enough information to tell. Absolute Valuation Knowledge Check 1  Coca-Cola because it has a higher market capitalization Knowledge Check 2  $100M Knowledge Check 3  Short-term forecasts Knowledge Check 4  Making the assumptions upon which to project future performance. Knowledge Check 5  Future profits are uncertain Knowledge Check 6  It determines how risky a stock is in comparison to the overall stock market. Knowledge Check 7  $11 Knowledge Check 8  Enterprise Value = Market Cap – Cash + Debt SECTION QUIZ 1. Which of the following stocks is most sensitive to the movement of the overall stock market? a. Amazon 2. Which of the following assigns the same relative weightings to short-term and long-term outcomes as the absolute variation process? a. A fishery exceeding fishing quotas. 3. Here is the WACC function for U.S. drug company Pfizer. The WACC calculation has been hidden. What is the WACC? a. 8.2% 4. A rise in which of the following inputs will increase an absolute variation? a. Earnings Estimates Relative Valuation Knowledge Check 1  The cash flow from equities can continue indefinitely while the cash flow from most bonds comes to an end. Knowledge Check 2  The decline in the P/E ratio more than offset earnings growth and this pushed the market cap down. Knowledge Check 3  The estimated growth can be dramatically wrong. Knowledge Check 4  A stock’s P/E ratio can remain above or below market average for extended periods. SECTION QUIZ 1. Here is a chart of the NASDAQ Composite, the world’s main technology index. It peaked in the dotcom bubble on March 10, 2000. The P/E ratio later peaked above 500. In hindsight, this is widely agreed to have been a bubble. In March 2015, the index value for the first time since then surpassed the peak. Why might some investors at that point have argued “this time it’s different”? a. Earnings grew substantially, meaning that the P/E ratio in early 2015 was only around 30.3x. 2. The World Equity Index function shown contains two valuation metrics for the S&P 500. The Nike description contains the same two valuation metrics. How does Nike’s valuation compare to that of the S&P 500? a. Nike is more expensive than the S&P 500 on both a P/E and dividend yield basis. 3. If the earnings per share of a company is $1 and the earnings yield is 2%, what is the price per share? a. $50.00 4. This chart shows a scatterplot with the x-axis being the estimated sales growth and the y-axis being the estimated P/E multiple. Given this data alone, which of the following companies may warrant further analysis by a portfolio manager looking to buy an insurance company for her portfolio? a. Chubb.