10 different companies selected to watch with relation to their stock prices - Coursework Example

? Table of Contents Executive Summary…………………………………….2 Introduction…………………………………………….2 Stock fund creation…………………………………..3 Overview of Sector…………………………………3 UK……………………………………………..3 United States……………………………….6 Steps taken to diversify……………………………8 Assessment of risk profile………………………..10 Stock fund value……………………………………….10 Stock fund performance………………………………12 Percentage of decrease……………………………..12 Overall Performance……………………………..12 Comparison with Dow and Auto Sector………..15 Shares highlighted – best, worst and why……..16 Summary of performance………………………………..19 Conclusion………………………………………………………20 Bibliography…………………………………………………….21 Executive Summary In this project, our team selected 10 different companies to watch with relation to their stock prices. Each of these stocks are a part of the banking sector. Seven of the stocks are companies based in America. Two are based in the UK, and one is based in Canada. The objective of this project is to pick stocks which will rise in value during the length of this project, which spanned from April 16 to May 14. Additionally, an analyses of the banking sector in the UK and the United States is explained, because the environmental and exogenous issues which surrounding the banking sector will impact if the stocks will rise or fall during the time period. What was found was that the banking stocks lost much of their value during the time period, with two exceptions, both of which were smaller banks. Introduction Stock prices are inevitably affected by different events in the world. In this case, we are entering a period of instability in Europe, as well as recovering from a global recession which was largely caused by the meltdown of the large banks in the UK and especially the United States. Because of this recession, the UK has been forced to implement austerity measures which, among other things, cuts financial resources to its largest banks. Because these financial resources were important to these banks, in that it helped the banks recover from the recession and lend money, it stands to reason that the largest banks might be affected. Moreover, in the United States, the banks are going through a transition period with greater regulation. That said, a recent scandal involving JP Morgan Chase, which lost $2 billion in trading losses, show that the Wall Street banks might still be engaging in risky behaviour. Because of these factors, the stocks in our portfolio lost money, so the objective was not met, in that the objective was to pick stocks which would rise in value. This paper will explain how much the $10,000,000 fund was worth, week by week, and how much it was finally worth, along with explanations as to why the stocks performed the way that they did. Also included is a comparison of our stocks with stocks from the Dow Jones average and the automotive sector. The automotive sector’s performance was similar to the banking performance, which denotes that stocks, in general, are having a rough go. Stock Fund Creation Overview of Sector Because the banks which have been selected are banks based both in the UK (HSBC and Barclays) and the United States (every other bank on the list except the Bank of Canada), the main thrust of this analysis will involve the banking sectors in these two countries. United Kingdom As noted above, HSBC and Barclays is based in the UK. The UK’s banking sector is having a difficult time right now because of the austerity measures that the UK has implemented, which has caused Moody’s to downgrade the rating of 12 UK financial institutions (US Banks Downgraded as Confidence Slumps). To understand why this downgrade might happen, a brief overview of the Parliamentary cuts, and how these cuts have affected the financial sector in this country. Grimshaw & Rubery (2012) notes that the UK Parliament previously instituted financial interventions which were designed to assist the banks, including quantitative easing. As Joyce et al. (2012) notes, in quantitative easing, the Central Bank of the UK purchased assets and cut interest rates steeply. As the result of this, the effect was that the Central Bank’s assets were tripled in relation to the GDP. The Central Bank also purchased corporate bonds and commercial paper, with the objective of increasing liquidity and trading in the banking sector. Liquidity was also increased because the banks in the UK sector had more access to Central Bank Reserves and customer deposits. This increased liquidity was designed so that the banks would have been able to make more loans, but this did not happen because of the overall weakness in the financial sector and because this extra cash flow was used to reduce the banks’ balance sheets (Joyce et al., 2012). While the UK banks were having problems lending money even with financial interventions, they will have even more problems lending money and will experience more liquidity problems because the UK Parliament has instituted austerity measures which cuts may financial interventions from the budget. These financial intervention cuts represent a large portion of the UK overall cuts, which will make lending tighter than ever before (Johnson 2011). Indeed, as shown by the recent Moody’s downgrade, which was blamed on the UK austerity measures regarding the UK financial institutions, the UK banks’ greatest weakness is the uncertainty of how much the withdraw of financial interventions will affect the UK banks, the overall lack of liquidity, and the slow recovery of the country and the rest of the world. Another major weakness, or an issue at the very least, is the threatening European recession and the potential fallout from Greece defaulting and withdrawing from the Euro. At the moment, according to Accenture (2012), this is only a threat, because the banking industry has not yet been affected by the potential recession. Accenture (2012) states that a new recession in Europe would affect not just the economy, which would indirectly affect banks, but also directly affect the banks as well. This is because the banks would be subjected to higher capital requirements (Accenture, 2012). As for the strengths of the UK banking industry, one strength is that they are increasing their social responsibility. Gibbons (2011) has studied the initiatives taken by various UK banks which have addressed social concerns, noting that the 2008 banking collapse has affected low-income individuals disproportionately, because, among other reasons, credit access has been restricted for this section of the population, therefore banks have the responsibility to help those in need. Moreover, Gibbons (2011) has also identified a concentration upon more responsible lending practices as being an important aspect of financial corporate social responsibility. To this end, Gibbons selected 12 banks to study regarding their corporate social responsibility practices. Gibbons (2011) looked at a number of banks, including HSBC, Santander Credit Agricole, Barclays, Royal Bank of Scotland, Lloyd’s, BNP Paribas, Commerzbank, Nationwide Building Society, La Caixa, and Co-Operative Financial Services. Gibbons (2011) found that several of the banks studied, including Barclays plc, The Royal Bank of Scotland, BNP Paribas, Lloyd’s Banking Group and Nationwide Building Society have instituted programmes to address responsible lending practices. Every firm, aside from HSBC, studied by Gibbons (2011) further have stated that they have placed a greater value of corporate ethics and values. Many of the firms studied have also loosened their lending practices, making credit easier for those in need. Further, many of the banks have invested in programmes for financial education, and every firm has instituted additional practices which are designed to help those in financial need. This additional layer of corporate social responsibility, which includes the implementation of responsible lending practices, the added emphasis on ethics and values, and the programmes which are designed to help the underprivileged is a strength for the UK banking sector. The reason why this would be considered to an overall strength is because these programmes may help the image of the UK banking sector, overall, and give consumers confidence that the banks are becoming more responsible than they were in 2008. The banks who have instituted financial education programmes, and have supported these, along with the banks who have loosened their lending practices for the underprivileged are further assisted by the image that the banks care about their consumers. United States The United States, like the UK, has been grappling with a recession for the better part of the last three years. Like the UK sector, it is facing a number of challenges, but also has a number of strengths. Among its strengths, according to Standard and Poor, which has conducted a risk assessment for the banking sector in the United States, is the fact that the United States’ economy is diversified, productive and flexible. Another major strength, according to the report, is the strength of the US dollar. The strength of the dollar helps to compensate for the enormous debt of the country and also is the reason why foreign currency minimally funds the banking industry. The Standard and Poor goes on to state that the economic risk score is very low, because the per capita GDP is $48,114, and the economy of the United States is diversified and highly competitive. Moreover, because consumers are increasing their savings and lowering their debt, the future strength of the economy bodes well. Standard and Poor also noted that banks in the United States have stopped selling and using high risk products, and that the funding channels, which supported many of the high-risk practices, have disappeared (Standard and Poor, 2011). Standard and Poor (2011) further note that the government of the United States is highly supportive of the banking industry, in that it has consistently found ways to contain risk and fallout when the large banks are about to fail. Because the country is so wealthy, and has such a large amount of financial resources, the country is able to assist banks with regulatory capital forbearance, new capital instruments and open-bank assistance (Standard and Poor, 2011). While the United States’ banking sector has many strengths, there are weaknesses as well. For instance, JP Morgan Chase’s recent disclosure of a $2 billion trading loss indicates that banks might still be making risky decisions (van Doorn, 2012). Further, Standard and Poor state that the banking industry is in the process of correction after collapse of the banking industry in 2008, therefore the banks are still processing the fallout from this collapse. This means that the banks still have losses from this period. Moreover, the housing prices have continued to decline, for the fifth straight year. Consumers are also decreasing their mortgage debt, which means that private credit is dropping by an average of 3.4% annually over the past four years (Standard and Poor, 2011). Further, Standard and Poor has assessed the competitive dynamics of the banking industry to be at high risk. This is because Standard and Poor (2011) predicts that the United States banking industry, which is currently undergoing a possible overhaul of its regulatory framework, will begin using new high-risk, high-margin products which would replace the old ones which would be restricted under the new regulatory rules. Standard and Poor further states that the banking industry is unstable because of the high concentration of wealth in the top banks – the top three banks in the United States control 38% of the market, and the top 10 banks control 59% of the market (Standard and Poor, 2011). Steps Taken to Diversify The banks selected for this project are diversified. One of the steps taken to diversify is that the banks selected come from two different countries, with one of the banks coming from Canada. This is a diversification because the two countries, the UK and the United States, each have different challenges and strengths, therefore each of the country’s banking industries will have different risks that they will face. If one country’s banking sector experiences losses as a whole, then this will not necessarily affect the banks based in the other country, and vice versa. If our team had selected only United States banks, then any shocks felt by the United States would impact all of the stock. The same for only UK banks. In this way, with the portfolio diversified between both countries, there is the possibility that each country’s shocks will be counteracted by the other. Moreover, the portfolio is diversified in that the stocks are not just concentrated in large banks, but smaller ones as well. In Standard and Poor’s risk assessment of the United States’ banking industry, it indicated that the fact that most of the banking industry’s wealth is concentrated in a few big banks is the reason why the competitive dynamics of the banking sector is at a high risk, and that the smaller banks do not contribute the risk profile (Standard and Poor, 2011). This would mean the possibility that if the larger banks take large risks, as they can afford to do, because of their enormous assets, then the smaller banks will not take the same risks. Further, the large banks are the reason for the 2008 financial meltdown, and the smaller banks did not play a large role in this meltdown. Since the smaller banks are not taking the same risks as the larger banks, this is another way to diversify the portfolio, because, if the large banks lose money because of the risks that they are taking, it will not affect the smaller banks as much. We expect the smaller banks will provide stability and security, if not a large margin of gains and losses, while the larger banks, with their continued risky behavior, will provide the largest gains and losses. Assessment of Risk Profile The overall risk profile of this fund is high. The reason for this is because, while the fund is diversified in that it has invested in smaller banks, such as Bank of Hawaii and First Republic Bank, as well as the Royal Bank of Canada, the rest of the banks in this profile would be considered to be large banks. Included in the profile are five of the largest banks in the United States – JP Morgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs – and Standard and Poor predicts that the large banks will continue to engage in risky practices. Moreover, the largest bank in the UK, HSBC, is also part of the portfolio, along with Barclay’s, which is another large bank in the UK. As in the United States, the large banks were responsible for the banking crisis in 2008. Because seven out of the ten stocks are concentrated in banks which have a history of engaging in risky practices, this makes the portfolio high risk. Stock Fund Valuation The fund began with $10,000,000. Please note that all numbers for this project came from Yahoo! Finance. For the purposes of this exercise, the fund was spread evenly throughout the 10 banks. The first week that the team invested was the week beginning April 16. Therefore, the first week assessed will be April 23. At Bank of Hawaii, the opening stock price was $46.81, so the team bought 21,363 shares of this stock. At Barclay’s, the opening stock price was $213.10, so the team bought 4,693 shares. The Royal Bank of Canada had an opening stock price of $56.26, so the team was able to buy 17,775 shares of this stock. Goldman Sachs had an opening stock price of $117.12, so the team bought 8,538 shares of this company. Wells Fargo had an opening stock price of $33.18, so the team bought 30,138 shares of this company. Bank of America had an opening purchase price of $8.87, so the team bought 112,739 shares. Citigroup had an opening purchase price of $34.82, so the team bought 28,719 shares. First Republic Bank’s opening purchase price was $32.36, so the team bought 30,902 shares. HSBC’s opening purchase price was $543, so the team bought 1,842 shares. JP Morgan Chase’s opening purchase price was $43.38, so the team bought 23,052 shares. Total Value of Funds Week 1 - $9,774,577 Week 2 - $9,895,701 Week 3 - $9,704,486 Week 4 (Final Valuation)- $9,173,052 Stock Fund Analysis Percentage of Decrease The fund decreased 8.17%. Overall Performance The fund decreased in the first week by 2%. During this same time, from the Down Jones increased by .05%, going from 12,850.80 to 12,927.17. The fund decreased in the second week, by the close of the day April 30, by 1%, as compared to the first week. The Dow Jones increased during this period of time .2%, as compared to the week of April 16. April 16 was 12,850.80 and April 30 was 13,213.63. In the third week, the week closing May 7, the fund decreased by 3%. Comparatively, Down Jones ended at 13,008.53, which is an .1% increase from April 16. In the fourth and final week, the fund decreased 8% from its beginning. Comparatively, during this period of time, the Dow Jones decreased by .01%, going to 12,695.35. Our Fund v. Dow Jones When comparing our fund to the automotive sector, the results are somewhat comparable. As a basemark, the combined shares of General Motors, Toyota, Ford, Honda and BMW were $220.30. General Motors was trading at $23.60 a share, Toyota was trading at $80.54 a share, Ford was trading at $11.36 a share, Honda at $35.16 a share and BMW at $69.64 a share. In the week of April 23, the combined total for these companies was $226.05 – GM was trading at $23.53, Toyota at $82.29, Ford at $11.55, Honda at $36.53 and BMW at $72.15. This is an increase of 3%. In week two, the week of April 30, the combined shares for this industry was $215.18 – General Motors was at $22.36, Toyota at $78.63, Ford at $10.67, Honda at $34.29 and BMW at $69.23.. This, compared to week one, represents a decrease of 2%. The week three, the total for the industry was $215.04, which represents a decrease of 2% - GM was at $22, Toyota was at $80.71, Ford was at $10.58, Honda was at $34.30 and BMW was at $67.45. In week four, the total value of these companies was $200.40 – GM was at $21.18, Toyota was at $76.06, Ford was at $10.01, Honda was at $32.21 and BMW was at $60.94. This represents a decrease of 9%. Why did our fund perform the way that it did in comparison to the Dow and the automotive sector? In reviewing the numbers, it seems that the weeks which were compiled for this report were tough weeks, in general. The numbers for the automotive sector are very similar to the numbers with the banking sector – the first three weeks either lost or gained slightly, then crashed in week four. Even the Dow Jones had a decrease in week four, after posting modest increases for the first three weeks of this project. According to an article by the CNN Money Staff, a clue as to why the stocks took such a drastic plunge on that day is related to the European crisis. On this article written on May 14, the plunge in the Dow Jones average is due to the uncertainty in Europe, and this was the day the European finance ministers would be meeting to discuss the future of Europe, in particular the situation regarding Greece and the possibility that Greece would exit the Euro (CNN Money Staff). It can be inferred that this is a crisis which was brewing throughout the weeks that these stocks were watched, therefore it would have an impact upon the banking sector, because a shock such as Greece exiting the Euro would be felt most keenly in the banking sector, so this could be a reason why the stocks consistently lost money throughout this period. Moreover, on the Thursday before May 14, which was the date that the stocks plunged, JP Morgan Chase announced that it had a trading loss of $2 billion, which ramped up speculation that the banks were still engaging in risky practices and did not learn from the 2008 meltdown (Van Doorn, 2012). Shares Highlighted – Best and Worst and why In reviewing the shares over the course of the four weeks, some winners and losers can be discerned. Bank of Hawaii actually posted a modest gain over the course of the four weeks – it gained $7,479 in the first week compared to week on, which is a .07% gain; in week two, it gained $44,437 compared to week one, which was roughly a 4% gain; in week three, it gained $45,291 compared to week one, which was also roughly a 4.5% gain; and, in week four, when the overall value of the stock plunged, it gained $33,969 compared to week one, which is a 3% gain. The only other stock which made any money at all was First Republic Bank – in week one, it increased by $14,512, which was a 1.5% gain; in week two, it increased by $20,693, which was approximately a 2.1% gain; in week three, it increased by $9,877, which was approximately a 1% gain; and, in week four, it increased by $26,564, which represented approximately a 2.5% gain. There were also some major losers. One of the biggest losers was Bank of America, which ended up at $828,631, which was a loss of $171,369. This was a loss of 17%. Citgroup lost even more, however, ending up at $808,152, which means that it lost $191,848, or just over 19%. JP Morgan, which ended up at $825,031 was also a large loser. It lost just under $175,000, which means that it lost just under 17.5%. Goldman Sachs lost just under $150,000, ending up at $851,836, which is just under 15%. Barclays was the other bank which lost over $100,000, ending up at $890,731, which means that it lost just under $110,000, or 11%. Wells Fargo, the Royal Bank of Canada and HSBC had relatively modest losses, losing $23,000, $58,000, and $11,000 respectively. The chart below details the stock values over the course of this assignment What seems obvious is that the smallest banks – Bank of Hawaii and First Republic – seem to be inoculated against what is happening in the rest of the world, in particular, Europe. Europe is experiencing a large crisis right now, a crisis which has been brewing all during the period of time when these stocks were watched. The largest banks lost value during this time, as it is uncertain how the European situation will affect the financial industry. Moreover, the largest banks are the banks which received the government help during the 2008 crisis. In the UK, the large banks received the financial help in the form of the quantitative easing. As the UK Parliament has signaled that these financial assistance programmes would soon be ending, this most likely affected the UK stock as well. In the United States, Standard and Poor indicated that it expected that the large banks would continue with their risky practices, only creating new risky practices, as opposed to going back to the same risky practices. It also indicated that the largest banks virtually control the sector. Therefore, it stands to reason that the large banks, which dominate and virtually control the banking sector in the United States, would disproportionately bear the risks to financial instruments should Europe fall into another crisis and Greece exits the Euro. Moreover, the stocks are probably going ever lower because of the threat that these banks are continuing their risky practices, as evidenced by JP Morgan Chase admitting to a $2 billion loss and counting. This last factor is surely a major reason for the banks plunging on May 14. Summary of Performance The performance of the banks in this portfolio did not do very well at all. As a whole, our group lost over $817,000 on these stocks. As predicted, the smaller banks and the larger banks behaved very differently during this period of time. The reason why the group decided to invest in some smaller banks is because these banks would presumably be more stable, in that they are not known for taking the kind of risks that the larger banks take, and they are less likely to be largely impacted by exogenous world events. This is because they do not control the financial sector in the way that the large banks do. So, while these banks offer stability, they do not necessarily offer the large gains that larger banks might offer when things go well. Neither do they offer the large losses, however. What was found in this project is that the large banks, in this particular economy, with the world events occurring the way that they are, and Europe perhaps heading into a recession, and uncertainty around Greece, coupled with suspicion that the large banks are still engaging in risky practices, are rapidly losing stock prices. Since the overall objective for this practice was to select companies which rise in price, the objectives were not met, although lessons were certainly learned. Conclusion During this period of time, the banking sector did not do well, so the stocks for the large banks in the United States and the UK lost much of their value. The reasons for this is most likely the European situation, because Europe might go into another recession due to the situation in Greece and other countries, and this affects the banking industry, especially the large banks. Moreover, because the UK is withdrawing much of its financial support for banks, this will also inevitably affect stock prices. What was learned during this project is that, during unstable times in the world, banking stocks are not the best purchase, especially stocks for large banks. 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