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General Body Meeting 09.15.11
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Mutual Investment Club of Cornell Agenda Announcements Opportunities Cornell Undergraduate Stock Competition News Updates American Jobs Act + Eurozone Update Yahoo Implosion Financials Pitch: Goldman Sachs Group 2
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Mutual Investment Club of Cornell Opportunities Newsletter (David Kim: sk852) 250 word sample by Saturday, 9/17! Research Reports Groups of 3 – 4 Closely tied to Education Series 3
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Mutual Investment Club of Cornell Cornell Undergraduate Stock Competition Intercollegiate Stock Competition Reception: 5:30pm on Tuesday, 9/20 Email njy3@cornell.edu with resume by Sunday, 9/18njy3@cornell.edu Presentations: Wednesday @ Statler Hotel Amphitheater Open to public First round: 9:00am – 11:00am Final round: 12:30pm – 1:30pm http://www2.johnson.cornell.edu/parkercenter/undergradstockpitch/ 4
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Mutual Investment Club of Cornell News Updates 5
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Mutual Investment Club of Cornell American Jobs Act White House Talking Points: Cut the payroll tax in half “Rebuilding and Modernizing America” Extend unemployment insurance Deficit Neutral Will it work? Some bipartisan support A decent alternative to limited monetary policy options Some kick in the short-run, but questionable long-run impact 6
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Mutual Investment Club of Cornell European Central Bank Dr. Jürgen Stark, member of the executive board (unofficially: chief economist) resigned. Considered a major advocate of European economic stability Result=>Investors highly insecure, volatile markets. Dax 52 Week Low (4,965 -12th) Euro at 6 month low. 7
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Mutual Investment Club of Cornell Endangered Countries Greece: Troika to return next Monday (19) Portugal: 4 billion euro from IWF. Positive outlook towards meeting goals. Spain: CDS insurance premium for treasury bonds at record value Italy: placement of 5 year government bonds reached new record high (5.6%). Ratings of European banks at as low as 2009 after the collapse of Lehman Brothers China recently tripled its investment in the Eurozone. 8
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Mutual Investment Club of Cornell Germany Following the Verdict of Germany’s Constitutional Court, the German Parliament needs to approve measures to establish the ESM. ESM: Successor to the ESFS, with a greater capacity and efficiency. The German Minister for Economics, Philip Rösler stated that letting Greece default on its debt can be considered. This gave rise to the idea that Germany would be willing to let this happen, but Rösler is the head of a small, failing party. German Chancellor Angela Merkel distanced herself and German policy from the idea of Greece defaulting. Ongoing debate. Ruling coalition divided. 9
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Mutual Investment Club of Cornell Exchange Rates 6 month low compared to USD. DAX is also at a low. Considering German financial potential, it is undervalued. Would be a possible investment option, if one had credible evidence the current value was a floor and would increase. Recommend following and tracking closely. 10
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Mutual Investment Club of Cornell Yahoo! 11 Aleksandar Zvorinji
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Mutual Investment Club of Cornell Yahoo News Update CEO Carol Bartz fired over the phone – Sept 7 lack of turnaround of the company Tim Morse (CFO) named interim CEO Bartz joins board to later be fired after Forbes interviewing saying she got fucked by the board Investors seem happy Bartz is out of the picture Angst shifted toward the board chairman Roy Bostock Daniel Loeb at Third Point (5.2% ownership): board and management needs sweeping changes, fresh eyes and a big turnaround 5 CEO’s over last 10 years 12
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Mutual Investment Club of Cornell Yahoo News Update Yahoo over the last few years… Been losing to Google for quite some time Missed social media and mobile apps Yearlong discussion to get back on track Independent directors: not doing as well as it could 10 year search engine deal with Microsoft, Bing powered search but 50-50 split of ad revenue Ad revenue down from $1.8B to $1.5B y-o-y Communication: losing to Gmail and Facebook 13
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Mutual Investment Club of Cornell Yahoo News Update Bartz’s time at Yahoo Goal to increase time spent on Yahoo, but decreased by 33% since she was appointed CEO Failed reaching a series of performance targets Focused on cost cutting and incremental improvements Lack of focus on products and innovation Made the company run better, focusing on deals 14
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Mutual Investment Club of Cornell Yahoo News Update Looking ahead Acquisition as a whole or sold off in parts $16B market value: private equity firms sniffing around as well as AT&T Product driven CEO, focusing on innovation, social media, video and mobile. Strategy: CEO product focused and COO operations 15
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Mutual Investment Club of Cornell Stock Stock rose 7% during September 7th Option prices of Yahoo rose by 14%, signaling expected stock volatility Valuation: Third Point ($20), Barclays ($18) Lower P/E at 17 compared to AOL at 23 16
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Mutual Investment Club of Cornell Financials Sector Pitch: Goldman Sachs John Troncoso Matt BurnsBilly Maselli Bobby Wong Alex Lucken 17
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Mutual Investment Club of Cornell Goldman at a Glance 18 Goldman Sachs Group, Inc.NYSE: GS Price$107.97 52-Week Range$99.78-175.34 Price to Earnings10.62 Dividend $1.40/1.38% Market Capitalization52.68B
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Mutual Investment Club of Cornell Thesis We rated Goldman Sachs a buy despite negative market sentiment and poor price performance over the past year. Goldman is a best-in-class brokerage franchise with a solid market position over many businesses. Goldman has one of the strongest balance sheets in the financial sector. Goldman has a long track record and has repeatedly proven to be a high caliber company that will outperform over the long-term. Short-term speculation and investor fear have driven Goldman’s price down creating value for rational investors with longer time horizons. 19
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Mutual Investment Club of Cornell Industry Overview 20
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Mutual Investment Club of Cornell Investment Banking Services Investment banks engage in: Equity and debt underwriting Mergers and acquisitions advising Corporate finance services Fixed income, currency, and commodity trading 21
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Mutual Investment Club of Cornell Industry Snapshot 22 1.Goldman Sachs: 18.3% 2.J.P. Morgan Chase & Co: 15.9% 3.Bank of America Corporation: 14.6% 4.Morgan Stanley: 14.6% 5.Citigroup Inc.: 7.7% Market Share Goldman Sachs holds the largest percentage of market share within the Investment Banking Industry. Annual growth has contracted sharply over the past 5 years, but this trend seems to be at an end.
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Mutual Investment Club of Cornell Investment Banking and the Economy Stock market performance affects: IPO offerings Also affected by consumer sentiment During strong markets, IPO’s become more likely Values of AUM and associated fees M&A Activity – related to corporate performance. Dependent on company earnings, business confidence, and economic outlook 23
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Mutual Investment Club of Cornell Bernanke and the Banking Sector Bernanke vowed to keep the Federal Funds rate near 0 through 2013. Potential of a QE3 or similar program has increased in recent weeks. Bernanke’s willingness to intervene monetarily is good news for banks. 24
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Mutual Investment Club of Cornell European Crisis Greece is at the center of a European Union crisis. “PIGs” Continued volatility from the summer. ‘Orderly default’ is more becoming more likely. Shock resignation of top German ECB official Juergen Stark. 25
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Mutual Investment Club of Cornell Possible Contagion to Banks According to the Bank for International Settlements, US banks have approximately $32.7 billion of credit guarantees linked to Europe. This number does not include any hedges employed by US banks, so the actual exposure is far less. 26
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Mutual Investment Club of Cornell Investor Fear and Recent Volatility The volatility index was up nearly 100% over the summer. Recent market volatility has lead to sharp declines in global markets. Investors are currently extremely cautious. Pessimism and fear have created value in the markets, especially within the financial sector. 27
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Mutual Investment Club of Cornell Regulations: Basel III In 2009, the Basel Committee developed new global standards to address systemic risks among banks. Improve the ability of banks to absorb economic shocks Improve risk management and governance Strengthen bank’s disclosures Standards: Greater focus on common equity; 4.5% of risk-weighted assets. Capital conservation buffer of 2.5% of risk-weighted assets Total of 7%, plus 2.5% for ‘systemically important firms’ (9.5%). 28
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Mutual Investment Club of Cornell Dodd-Frank: Highlights of Legislation Consumer Protection agency with authority and independence Ends Too Big to Fail Bailouts Imposing tough new capital and leverage requirements No longer will the government prop up individual firms Transparency and accountability for ‘exotic instruments’ End Goal: Protects Investors 29
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Mutual Investment Club of Cornell Fannie Mae and Freddie Mac Lawsuits Last week, the overseeing body of Fannie Mae/ Freddie Mac sued 17 large financial firms. Blame the firms for luring the government-run mortgage giants into troubled loans. The lawsuits are filed against (among others): Goldman Sachs Bank of America Citigroup JP Morgan Credit Suisse 30
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Mutual Investment Club of Cornell Competitive Landscape The financial crisis has caused an overall consolidation of the market for financial services. Bank of America acquired Merrill Lynch; Morgan Stanley acquired Washington Mutual and Bear Sterns. Lehman Brothers and Bear Sterns no longer exist. Goldman Sachs is at the top in terms of revenue generated in the US and globally. 31
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Mutual Investment Club of Cornell Competitor Comparison 32
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Mutual Investment Club of Cornell Competitor Comparison 33 Goldman Sachs Morgan Stanley JPMorgan Chase and Co. Bank of America Price to Earnings 10.6227.587.21-- Price to Book.74.48.75.34 Debt to Assets32.3025.5836.0735.75 Return on Assets.95.69.84-.10 Profit Margin18.1714.3616.91-2.03
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Mutual Investment Club of Cornell Investment Banking: Critical Analysis Investment Banks have been hit hard over the past few years but there is light at the end of the tunnel. Despite the perception that Goldman’s strongest years are behind it, Goldman has maintained market share. S & P 500 companies now have more than $1.2 Trillion in cash. As uncertainty fades, expect a lot of M & A. 34
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Mutual Investment Club of Cornell Investment Banking: Critical Analysis (2) Goldman employs some of the smartest and savviest people on Wall Street. They will adapt quickly to the new landscape Remember what Warren say about wary markets Regulation is never as tough and stringent as originally proposed 35
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Mutual Investment Club of Cornell Company Overview 36
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Mutual Investment Club of Cornell Company Background A premier global investment banking, trading, and asset management company with leading market shares across its businesses Goldman weathered the financial crisis better than most and is in a fairly secure financial footing Strong management team that kept Goldman strong under financial crisis remains Lloyd Blankfein – Chairman and CEO Gary Cohn – President and COO 37
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Mutual Investment Club of Cornell Company Background (2) Four separate segments of operations Investment Banking Investment Management Investing and Lending Institutional Client Services (majority of revenue) Leading bank in Mergers and Acquisitions and Investment Banking (20.2% global) 38
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Mutual Investment Club of Cornell Sales Breakdown Goldman’s revenue structure is diverse enough to help reduce exposure if one field declines. 39 2010 SalesMillions of DollarsPercent of Total Market Making13,67830 Interest Income12,30927 Investment Banking 4,81010 Investment Management4,66910 Commissions & Fees3,5698 Other6,93215 Total45,967100
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Mutual Investment Club of Cornell Balance Sheet Coming out of financial crisis, management has increased liquidity Actively de-leveraged firm since 2007 Significantly reduced high risk assets This is largely responsible for the decreased margins that we have been seeing at Goldman. 40 AssetsDec 10Dec 09Nov 08Nov 07Nov 06 Cash93,51974,95415,74011,8826,293 Net Receivables81,88771,64730,53122,88713,223
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Mutual Investment Club of Cornell Revenue Goldman has seen revenue declines over the past few years but it has faired better than many of its competitors Goldman’s large international exposure may reduce exposure to domestic uncertainty 41
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Mutual Investment Club of Cornell Income Analysts are predicting that net income will recover in 2012. As cost cutting measures take hold, profit margins will expand. 42 Dec 10Dec 09Nov 08Nov 07Nov 06 Total Net Income 8,35413,3852,32211,5999,537 Net Profit Margin 18.17%25.90%4.33%13.19%13.75%
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Mutual Investment Club of Cornell Ethics Concerns Has been involved in a number of high profile scandals over the past few years European Sovereign Debt Crisis Insider Trading Fraud Business Principles and Standards Committee Report Formed on May 7, 2010 to review business standards and practices Eight Month Review with 39 recommendations for change Overseen by Board of Directors with advice from private consulting firms for more reliability 43
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Mutual Investment Club of Cornell 14 Business Principles Created 30 years ago to define the fundamental way Goldman should run business Put clients first Make an unusual effort to recruit the best Stress teamwork Etc... Business Principles and Standards Committee Report affirmed the 14 principles and showed the need to strengthen certain principles 44
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Mutual Investment Club of Cornell Company Overview: Critical Analysis Goldman not only maintains the highest market share in investment banking but also dominates the global banking scene. 45
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Mutual Investment Club of Cornell Company Overview: Critical Analysis Goldman does not have as significant exposure to many of the mortgage related lawsuits as competitors. In the event of industry settlements, Goldman’s EPS at risk is only $.63 or 6% of total EPS. 46
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Mutual Investment Club of Cornell Company Overview: Critical Analysis The importance of Goldman’s strong balance sheet cannot be stressed enough Goldman is still the best in the business and recruits the best talent in the industry Goldman’s partner system is unique within the investment banking realm and is a great competitive advantage Goldman’s high risk, high reward days are a thing of the past 47
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Mutual Investment Club of Cornell SWOT 48
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Mutual Investment Club of Cornell Strengths Global Market Leader- Very strong brand name within the financial sector International Focus- Office branches located around the world Employees- Extensive recruiting at elite universities around the globe ensures that they have the top talent in the financial sector 49
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Mutual Investment Club of Cornell Weaknesses Percentage of Trading Revenue within Total Revenue- recent laws have limited how much risk firms can assume which has reduced the amount of pre-tax revenue made Public Perception- Overwhelmingly negative public perception of Goldman Sachs and how they have run their business Litigation Issues- Goldman Sachs has been involved in a few very costly lawsuits that have negatively affected both profitability and public perception 50
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Mutual Investment Club of Cornell Opportunities International Clients- as international markets continue to recover, investment banking activities will continue to increase and Goldman Sachs has excellently positioned themselves to profit from this growth Emerging Markets- As markets like China, India, and Brazil continue to grow, Goldman Sachs’ strong international presence will allow them to be involved in a wide variety of business ventures 51
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Mutual Investment Club of Cornell Threats Increasing Financial Regulations- Increases in financial regulations will limit the profitability of the firm Competition- The financial industry is highly competitive due to the limited number of clients to work for and deals completed each year 52
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Mutual Investment Club of Cornell Critical Analysis: SWOT Goldman Sachs’ has committed itself to expanding into key international markets Australia and Brazil Goldman is working on its public perception but it will take some time and it may lose clients Goldman purposely avoided acquiring any competitors in 2008 to keep itself lean and adaptive 53
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Mutual Investment Club of Cornell Technical Analysis Moving Average Convergence/Divergence is bearish 50 and 200 day moving averages are downward sloping Support: $99 Resistance: $109 Proceed with caution 54
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Mutual Investment Club of Cornell Valuation DCF Valuation: $218 Fundamental Valuation: $175 Forward Earnings Valuation: $220.36 Tangible Book Ratio:.76 Benjamin Graham’s Margin of Safety Rule 55
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Mutual Investment Club of Cornell Summary Goldman maintains its claim as the premier investment bank in the industry Fear has driven the stock price down, creating value History has proven that Goldman will overcome Buying with a margin of safety 56
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Mutual Investment Club of Cornell Recommendation Buy 13 shares of Goldman Sachs at $107.97 for a total cost of $1,403.61 and continue to watch it in the coming weeks to buy on any significant drops. 57
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Mutual Investment Club of Cornell QuanTeam
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Mutual Investment Club of Cornell The Pair Trade Long a Financial Instrument Short a Financial Instrument Of Equal Value Simultaneously Why?... We believe one stock will outperform the other
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Mutual Investment Club of Cornell The Pair Trade And If... We lose less money Thus… The Pair Trade is a Hedge Gains are less Losses are less
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Mutual Investment Club of Cornell Goldman-XLF Pair Proposal: Long ~ $2000 Goldman Short ~ $2000 XLF Supporting Points Reversion to the Mean Hedge in tumultuous market
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Mutual Investment Club of Cornell Reversion to the Mean Correlation of XLF and GS 6-Month: 0.95 1-Year: 0.79
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Mutual Investment Club of Cornell Reversion to the Mean When testing for occasions of GS trading 1 standard deviation below XLF over the past 500 days Pair Trade Profited 60 times at 4.3% Pair Trade Lost 59 times at 4.0% Currently GS is only.24 standard deviations below XLF
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Mutual Investment Club of Cornell Hedge in Tumultuous Market Betas: Goldman: 1.28 XLF: 1.51
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Mutual Investment Club of Cornell Hedge in Tumultuous Market If XLF has a higher beta… It may rise faster; meaning we lose money even if GS has gone up
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Mutual Investment Club of Cornell Technicals
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Mutual Investment Club of Cornell Technical Indicators Williams %R (WLPR) Oscillator (between -100 to 0), shows whether stock is trading high, low, or somewhere in between recent trading range Measure of current price in relation to high and low of past n days %R = close (today) – high (n days) x 100 high (n days) – low (n days) Indicators: %R = Five trading days since -100% reached; %R < -90% strong buy %R < -80% buy %R > -20% sell %R= Five trading days since 0% reached; %R > -10% strong sell
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Mutual Investment Club of Cornell Technical Indicators Bollinger Bands (BOLL) Shows two standard deviations below and above moving stock price Lower bound = mean[close, n] – 2*stdev[close, n] Upper bound = mean[close, n] + 2*stdev[close, n] Indicators: Stock price < lower band buy Stock price > upper bound sell
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Mutual Investment Club of Cornell Technical Indicators Relative Strength Index (RSI) Momentum oscillator (between 0 and 100) Momentum = rate of the rise or fall in price Calculates as ratio of average higher closes to average lower closes Positive trading period: U = close(now) – close(previous) Negative trading period: D = close(previous) – close(now) RS = EMA(U,n) EMA(D,n) RSI = 100 – [100/ (1+ RS) ] Indicators: RSI < 30 strong buy RSI < 40 buy RSI > 60 sell RSI > 70 strong sell
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Mutual Investment Club of Cornell Technical Indicators Moving Average Convergence/Divergence (MACD) Charts fast versus slow moving average to spot changes in strength, direction, momentum, and duration of stock price 12 day exponential moving average (fast) 26 day exponential moving average (slow) MACD = 12 day EMA – 26 day EMA Indicators MACD crosses over 0 (12 crosses over 26) strong buy MACD crosses below 0 (12 crosses below 26) strong sell
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Mutual Investment Club of Cornell Goldman Sachs Williams %R -100% in last two weeks Current: -76.47%
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Mutual Investment Club of Cornell Goldman Sachs Bollinger Bands Sept 12 Lower Bound = 98.98 Sept 12 Price = 99.86
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Mutual Investment Club of Cornell Goldman Sachs Relative Strength Index (RSI) Current: 37.34
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Mutual Investment Club of Cornell Goldman Sachs Moving Average Convergence Divergence (MACD) Current: -5.00%
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Mutual Investment Club of Cornell Goldman Sachs Technical Analysis Thesis Williams %R: -100% in last two weeks, current 76.47% buy BOLL: Sept 12: Lower Bound = 98.98, Price = 99.86 buy RSI: 37.34 buy/ small 5-10% move downards MACD: -5.00%, no upward acceleration no conclusion Overall technical analysis: Favorable Entry Point
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Mutual Investment Club of Cornell Thanks for coming by! 76
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