A Time to Be Rich Chapter One - Lindsay Blum, Tara Gatto Chapter Two - Lauren Maughan, Rick Inciardi Chapter Three - Richard Greiner, Mark Wyand.

A Time to Be Rich Chapter One - Lindsay Blum, Tara Gatto

Chapter Two - Lauren Maughan, Rick Inciardi

Chapter Three - Richard Greiner, Mark Wyand

Chapter Four – Adam Dekel, David Grimner

Chapter Five – Kate Washburn, Ryan Gilligan

Chapter 1: Three Fundamental Elements of Prosperity

Home Investment Higher Education for Children Money for retirement

Two Important Facts

Cycles of Economy are regular and repeat themselves

Understanding the rhythm of the business cycle is crucial to successful investing

Five Phase Economic Cycle

Natural order of cycle: Ease-off and Plunge, followed by Revival, Acceleration, and Maturation

Lengths are unpredictable Each phase is characterized by

distinct signals Growth period lasts longer than

recession phase

Expectations

Investment strategy Components of GNP Fluctuations of inflation Interpreting consumer spending

trends and consumer debt Importance of elections and summit

meetings Deceptiveness of news reports

Chapter 2: The Five Phases of the Economy

Ease-Off Plunge Revival Acceleration Maturation

Phase One - Revival The revitalization of business and consumer

activity that ends a recessionary phase RED FLAG EVENT – GNP turns positive Declines in mortgage rates and financing

rates Interest rate and inflation begin to rise from

pressure on credit demands and on prices

Phase Two - Acceleration RED FLAG EVENT– Inflation begins to rise Consumer spending becomes more

confident Housing activity picks up speed Businesses start to rebuild inventories and

spend more on plant and equipment

Phase Three - Maturation RED FLAG EVENT– Consumer spending

drops, and Business spending continues to increase

Economy continues going because of optimistic businesses

Foundation begins to crumble with dual pressures of accelerating inflation and rising interest rates

Phase Four – Ease Off RED FLAG EVENT– GNP turns negative Inflation and interest rates may continue to

rise Housing and big ticket items fall off

severely reflecting consumer concern Businesses continue spending

Phase Five - Plunge RED FLAG EVENT– Peaking of interest rates Businesses suffer and begin liquidating

inventories rapidly Employment drops sharply and corporate

profits plummet Eventually, interest rates and inflation

come down and declining rates set the stage for Revival

Summary Two of the economy’s principal parts: net

consumer and government spending Actions of the Federal Reserve underlie

these major spending and investment shifts The Fed uses its indirect control over the

supply of money to alternately pump or deflate the economy Increase in supply – Fed easing Decrease in supply – Fed tightening

Chapter 3: General Investing Guidelines

Choosing a fund No load funds Family of funds

Deal with manager (no broker) Review manger surveys (WSJ,

Bloomberg)

Automatic reinvestment

Guidelines Continued Small initial investment ($1,000)

Check-writing capability/Liquidity

Past performance

Management fee

Bottom line: flexibility, liquidity, diversity

Types of Funds

Money Market (most conservative) Provide income, no capital appreciation Virtually risk-free Good retreat for uncertain times Tax-exempt available Comprised of:

T-Bills CD’s Commercial Paper

Types of Funds

Intermediate/long-term bond funds Income and capital appreciation Tax-exempt available Mix of government and investment-

grade corporate bonds Riskier funds include junk bonds

Types of Funds

Broad-based equity funds (riskiest) Best for capital appreciation Index funds available Growth and value funds Following economic cycle will help to

properly invest with these funds Wide range of industries

Other Investments

Other riskier investments include:

Gold

Commodities

Foreign equities and debt

In General…

Know your risk tolerance!

Do not risk more than you can afford to lose

Aim to invest between one third and one half of your assets later in life

Chapter 4: Investor Risk Profile

1) Determining our risk profile2) Achieving investing goals within

parameters 3) Utilizing business cycle beliefs with risk

profile to remain flexible throughout investment process

Risk Profile 4 Types

Highly Conservative Start with $1,000 All Stock and Bond investment

Cautious Up to 25 percent of available funds. Mostly Stock and Bond, tiny percentage gold and

foreign currency. Aggressive

Up to 50 percent of available funds. ¾ in stock and bonds, ¼ gold and foreign currency.

High Roller 50 percent or more of available funds. Actively trading investments and alternative investment

Risk Profile+SRI Investment Guidline=Room for Agression Double Check Ease in and out depending on current

business cycle analysis Don’t commit all at once

Remember…

Common Sense Homeruns not necessary Be Comfortable

Chapter 5: √ Checklist for Indicators Indicators are worthless unless compared

Indicators that are “relatively immune to revision” are most reliable

First reports are released as preliminary reports and final revisions (sometimes a year later) are called benchmark revisions

Notice the time span they are useful and applicable i.e. annualized inflation rates

Is it real (inflation adjusted) or nominal (unadjusted)

Hunt relies on the following indicators: Money Supply Certain aspects of CPI and PPI Certain aspects of GNP And the following 5 other indicators that are the focus

of Chapter 5

Best 5 Economic Indicators Initial Unemployment Claims Average Manufacturing Workweek Non-farm Payroll Employment Hours worked Industrial Production

Initial Unemployment Claims

Hunt’s most reliable indicator, reported each Thursday

Measures new claims for unemployment compensation under all state programs

Short warning before expansion – turns negative near transition from Plunge to Revival

Random, short-lived ups and downs – recommends smoothing average

Claims rise at beginning of Ease-Off stage & only decline right before Revival stage

Complimentary Indicator – Help Wanted Ads Reflects monthly change & level of number of openings in existing & new jobs Reliable but precedes economic change very closely Rises shortly after expansion and falls soon after expansion matures – mirroring health

of labor market movements

Best Indicators

Average Manufacturing Workweek Released 1st Friday each month with few

revisions Repetitive pattern – manufacturers increase

workweeks as demand rises & vice versa Non-Farm Payroll Employment

Released on 1st Friday each month Increases right after Revival stage begins,

following hours worked Begins to fall as expansion matures

Hours worked Released on first Friday of every month with few

revision Turns upward early in Revival Declines as expansion matures but before non-farm

payroll employment Industrial Production

Released approximately mid-month with moderate revisions

The Fed estimates the physical output of the nation’s mines, factories, and utilities

Turns up after Revival Declines very late in Maturation and continues to fall

in recession

Best Indicators

Other High Quality Indicators

Housing Starts and Building Permits Measures when construction begins and permits are

filed – not directly related Permits turn up late in Plunge, Starts soon follow Permits turn down just after Maturation begins, Starts

soon follow Bottoming of housing market is a prerequisite for

start of economic revival

Composite Index of Leading Economic Indicators (LEI) Useful but overrated Contains many useful indicators that were already

described

Unreliable Indicators

Retail Sales & Durable Goods Orders: Frequent and major revisions, and underestimate actual strength

Purchasing Managers Survey: doesn’t reflect changing nature of economy

Unemployment Rate: “Political football” & poorly calculated

Corporate Profits: Released too late to be meaningful

Consumer Sentiment Surveys: Reported irregularly & represents Present condition not Future trends

Economic Life Cycle & Indicators

How do we monitor the progress of our economy using these indicators?

REVIVAL

Onset - Building permits and housing starts bottom out

Early in Stage - Drop in initial unemployment claims and increase in help wanted advertising

Strong assurance stage is reached -

sustained upswing in industrial production (3-6 month gain)

Late in Stage – Rise in corporate profits

ACCELERATIONACCELERATION

Key indicators of Revival remain positive

Business capital kicks in

First sign that acceleration is ending - Drop in average manufacturing workweek (follow for 3-6 months)

When sinking trend in the growth rate of non-farm payroll employment occurs, Maturation Stage is usually within 6 months

MATURATION

First sign - Decline in building permits and housing starts

Midway - Pronounced drop in help wanted

About 3 -12 months from onset of Ease-off is a noticeable rise in unemployment claims & negative trend in Index of LEI’s

Ends with significant and consistent slippage in industrial production levels & indicate recession on the way

Economic Phases

EASE-OFF Virtually all major

indicators show sharp negative trends for 1-2 months

Dramatic drops in non-farm payroll employment, hours worked, manufacturing workweek, and industrial production

Trends in indicators are critical in identifying the transition from Ease-off to Plunge

PLUNGE Negative Ease-off trends

continue First sign of recovery -

Increase in average manufacturing workweek

Ends with Decrease in initial unemployment claims & Increase in non-farm payroll employment

Confirm it is ending & Revival is underway with building permits and housing starts

Using these indicators to invest

Identify trends in individual indicators Compare them to trends in other

indicators

Questions?