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General Body Meeting 09.29.11. Agenda. Announcements Elections News Updates HP’s CEO Shuffle AIDS Cure? Portfolio Rebalancing TEF BWP Macro Pitch. Elections. Thursday, November 3 rd Positions: President Vice President Chief Investment Officer Portfolio Manager
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Agenda • Announcements • Elections • News Updates • HP’s CEO Shuffle • AIDS Cure? • Portfolio Rebalancing • TEF • BWP • Macro Pitch
Elections • Thursday, November 3rd • Positions: • President • Vice President • Chief Investment Officer • Portfolio Manager • Vice President of Public Relations • Voting: Invested Members and Regular Attendees • Letter of intents by Saturday, 10/29
Healthcare: HIV/AIDS Research Update • Discovery: New method to remove disguise that enables HIV to deceive immune system • Potential for vaccine • Gilead holds a dominant position in the HIV/AIDS drug market: Truvada, Atripla, and Viread Conclusion: • Although there is potential, a vaccine is far off • Would require animal/human testing and FDA approval
HP News Update AleksandarZvorinji
HP Update • As mentioned before: Key Concerns • Weakness in personal computer and big uncertainty • Expected Q3 targets below analysts’ targets • Netbook decline • Analysts recommendations: hold
HP Update • HP fires its CEO Leo Apotheker on September 22 • Formerly CEO of software giant SAP • Fired after on board for only 11 months. • “Lack of execution and communication” • His strategy focused on high-margin businesses like software and cloud computing. • Opted to end webOS project, which was a failure. • Stock down ~50% since the start of his tenure
HP Update • Meg Whitman named new CEO • Whitman CEO of eBay for 10 years, 98’-08’ • New outlook: to steer HP into the software business • Solid understanding of the firm and its products after being on the board of directors for 8 months. • Proven track of execution and strong communication • Customer focused • Good as interim-CEO but not as long-term CEO • Bad choice: inexperienced in HP’s core areas, enterprise • Better: Enterprise chief or PC chief
TEF: Add to Position Dan Han
Telefonica (TEF) • Undervalued gem of Europe with dominance in Emerging Markets • Management committed to maintaining and increasing dividend (10.45% yield, historically 50-60% payout ratio) • EV/EBITDA and P/E Values on the lower spectrum compared to peers. • Operating Margin outperform peers
BWP: Add to Position Mihir Patel
BWP • Dividend Play • Dividends – Six Months Ending 06/2011 - $205.2 mm (vs. Six Months Ending 06/2010 - $196.8 mm) • Trailing Annual Dividend Yield1 – 8.2% • Forward Annual Dividend Yield2 – 8.1% • 5 Year Average Dividend Yield2 – 7.0% 1 Data derived from multiple sources or calculated by Yahoo! Finance 2 Data provided by Morningstar, Inc.
BWP • Capital Gain • Current Trading Price - $25.80 ( 1.42%) • Analyst Mean Target1 - $31.77 1 Data provided by Thomson/First Call
BWP • Contractual Operations • Substantial portion of operating capacity has been contracted for under firm agreements with a weighted average life of approximately 6 years • Distributions – Increased each quarter since 2005 IPO • Investment Grade Credit Ratings – S&P, Moody’s, Fitch • CapEx • Estimated 2011 total Capex of $250 mm (vs. 2010 $212.6 mm) – Increased CapEx primarily due to integrity management, reliability, and pipeline maintenance
Long DAX, Short Euro Financials Macro Team European Coverage Group
A Different Type of Pitch • “When there is blood in the streets, buy” • Baron Rothschild • Items to consider: • Long-term potential v. short-term distortions • Market expectations • This is a two-part pitch
Thesis • Markets are expecting highly unlikely worst case scenarios • German fundamentals remain strong in the long run • Shorting European financials provides downside protection
Analysis of European Banks • Concerns of Europe’s banks have been simmering in the background • Unstable support system • Sovereign default could overwhelm these bank’s capital reserves • Sovereign debt is not the only concern • “Stressed country debt”
Unstable Support System • Capital concerns amidst a widening debt crisis and slow growth • IMF projects a potential of €300 billion (about $409 billion) in losses for European Banks • Christine Lagarde calls for “urgent recapitalization” • How will banks secure capital? • Lenders do not want to take more exposure to Europe • Downgrade of SocGen and Credit Agricole • Policy makers in denial
Sovereign Default • If Greece fails to secure its next tranche of aid • Likely hood is lower than before • By far the worst case scenario • Stress tests in July omitted default scenario • Added pressure for banks to raise capital fast • Institutions could require a bailout
Foreign claims of banks from the U.S., U.K., Germany and France Source: Bank of International Settlements
Stressed Country Debit • Sovereign Debit is not the only debit exposure • Other areas of concern • Commercial mortgages • Residential mortgages • Corporate debt • Makes situation more complicated • Policy makers must balance fiscal deficit (good for sovereign debit) reform and economic growth reform
Exchange Rates • Rate one currency is exchanged for another • 1.3562 EUR/USD • Determine price of imports/exports • Ex: Germany large exporter • Affect the realized return on an investment • Currency risk • Fluctuate with uncertainty and fear of Default contagion in Europe
Flight to Quality • Shift from Euro to US dollar denominated assets in debt crisis
Earlier News • Only Greece, (2% of Eurozone GDP) • Single bailout • Other countries within debt limits (3%)
Changes • Dramatic spread beyond Greece • Banking sector affected • Default became possible • Awareness • ESM
Political Incentives • Troika • International • Protests in Greece • Perception of Euro Countries • Protests in Germany • Elections
The ESM • Replacement of ESFS • Germany: from 210 to 119 billion • Total Volume: 440 billion • Enough Cash to Prevent „Domino“ Effect • Germany passed the law today with an absolute majority
German Economics • (Globally) Export oriented • Composition of DAX • Financial Sector may be Volatile • German Debt • Comparison to USA/USD
Worst Case Scenario • 50% Refinancing of Greek debt • ESM prevents collapse of Eurozone • German Economy not dependent • Volume of Eurozone GDP v.s. Debt
Quantitative Justification • Debt dynamic equation: • ΔD/Y(t) = (r-g/1+g)*D(t-1) – PB/Y(t), • Explanation: • r is the 10-year real Treasury yield • g is the real GDP growth rate • D/Y is debt-to-GDP ratio and • PB/Y is the primary balance as a share of GDP. • Primary Balance: Government net borrowing or net lending excluding interest payments on consolidated government liabilities.
Pitch • Long DAX, short European Financials • Long $2,500 EWG • Short $1,000 EUFN • Dividend of EWG: 7.02% • Dividend of EUFN: 6.49% • Carry: 3.78%
DAX- German Stock Exchange • Bollinger Bands • Bands indicating two standard deviations above or below the EMA
DAX- German Stock Exchange • Relative Strength Index (RSI) • Compares the magnitude of recent gains to recent losses over 14 days
DAX- German Stock Exchange • WLPR • Compares a stock's close to the high-low range over 14 days
DAX- German Stock Exchange • Moving Average Convergence Divergence (MACD) • Difference between 26 day EMA and 12 day EMA • Signal Line – 9 day EMA
DAX- German Stock Exchange • Technical Analysis • Thesis • MACD-Showing positive momentum; likely to continue track to zero- indicating either sideways trading, or positive upside • RSI- Middle of Road (46.21); indecisive • BOLL- Indicating stiff resistance at the EMA, breaking on the upside indicates strong positive momentum, failure to break suggests downwards momentum • WLPR- Points to strong growth over the past week and suggests buying may soon be overdone • Overall Recommendation: Neutral • Possible $20.00 Limit Entry Order; $20.00 marks point where price has broken the EMA resistance