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What Can the Fed and Government Do? Q&A | John McNichol | 3-24-20 | Investing in Value Stocks


we’ll get afternoon everyone John
McNichol here and welcome to this special session on investing in value
stocks you know a lot of things been happening in the markets over the last
month month and a half there’s a lot of questions out there so what we’re gonna
do is we’re gonna answer a few of the questions that we’ve heard about the Fed
so make sure you stick around and once again do appreciate those you that are
here whether you’re here live or listening to the archived session and a
special shout out for those you that are new to TD Ameritrade welcome to the
family let’s take care of a disclosures and we’ll get right into it and let’s go
a little bit back there little quick on the draw
remember stock markets are volatile and it can decline significantly in response
to adverse issue or political regulatory market or economic developments
certainly we all understand that by now also keep in mind options not suitable
for all investors as a special risk inherent to options trading and make
sure to make note of the transaction costs consider in u.s. exchange listed
stocks ETFs and options trades which are 0 however $0.65 fee for the options
trades now we probably won’t be doing any of this today but in some of the
various sessions that the paper-money application is for educational purposes
and successful virtual trading during one time period does not guarantee
successful investing of actual funds during a later time period as market
conditions change continuously as always all investing involves risks including
the risk of loss all right well I’m gonna go ahead and go a full screen this
is something new ya may see that our background may be a little bit different
here as I’ll transition to a full screen because this is a little bit of a Q&A
we’re gonna talk a little bit about the Fed today and then with some time
permitted we’ll show you some too fools on the thinkorswim platform or
correction on the TD Ameritrade website concerning value investing now some of
you may have joined me last week as I jumped in last minute to cover that
valuation value class normally taught by Michael Fairborn we do appreciate those
you adjusting to our schedule you can see in the background here I’m in my
work from home configuration may need to do a little more style in here we got
the lights tone down hopefully a little relaxing here and you can see and hear
me okay awesome and I did not see that comment there Ricardo I’m not sure I
understand the full question there but we did go ahead and look for I believe
some very relative valued stocks there and with the market after pulling back
multiple percentages a lot of stocks losing half of their value whether over
the course of the last month or over the last four years some investors may be
looking out there to kind of nibble but we’re gonna talk about today is more
along the lines of the Fed from some of the questions now you know a lot of you
may be familiar with well you know the Fed goes ahead and raises interest rates
as they’ve done in previous years going back into 2018 and in the nineteen and
then they also cut rates and certainly a lot of the discussion that’s occurred is
the Fed pretty much cut in rates close to zero based off of the current events
with the the coronavirus and also with the slowdown or potential slowdown of
the economy so let’s take a little deeper dive on that you know and one of
the questions was you know is lower in interest rates all the Fed can do well
one of the reasons why the Fed lowers rates is to try and stimulate
borrowing which borrowing money gets spent it enters into the economy and
hopefully continues moving through the economy not only from a business
perspective but also from a consumer perspective as consumers may borrow more
based off of lower interest rates and therefore may potentially spend more as
well but is that the only thing that the Fed can do short answer’s no now the
answer as far as you know what else can they do they can do quite a few other
things and they’re actually doing some of those right now for instance one term
which goes to another question is quantitative easing and what is
quantitative easing quantitative easing is when the Federal Reserve essentially
prints money whether physically or electronically to finance purchase of
government Treasuries from the financial institutions in an effort to port extra
money in the economy that effort also has a tendency of keeping those interest
rates down now with that you know the reason for doing that quantitative
easing is to try and you know foster maximum employment you know idea being
that if there’s money flowing in companies would spend that money to go
ahead and generate more revenue on the company and as there’s more demand for
those products they’ll have a tendency to continue to hire and likewise
employed individuals that are earning an income are gonna go ahead and hopefully
spend that money as well and keeping that economy going so foster that
maximum employment encourage lending as well whether to businesses as well as to
individuals which would intense to encourage borrowing by having those
lower interest rates and that’s the other main reason is to complement some
of those lower interest rates now you know all who sound like some great
things but you know what’s what’s the catch you know
certainly there’s not a free lunch when it comes to that and as with many
problems is trying to balance things out the good and the bad between them so
some of the cons as far as quantitative easing is it drives inflation much
higher now there has been previous times over the last few years we’re and going
back to the last crash in the market where the government has instituted
quantitative easing as we came in the current crisis was declared to be the
the fourth QE although it wasn’t called QE initially and then now with a lot of
the actions that are being taken it’s being referred to as with a QE to
eternity or QE forever you know until they decide to change that but there are
some cons one of the cons being driving inflation higher although we haven’t
necessarily seen that occur at least from a broad perspective at least yet
there are some economists you know projecting that it will happen at some
point you know whether it’s some of the actions that they’re taken now or
possibly in the future may drive that another idea is that you know it may
create havoc on international trade with the Fed the Fed does you know create and
these dollars that can potentially flood the market and in in that you know it’s
what’s called a reserve currency which the dollar is we’ll talk a little more
about that in a bit so other things is it can be a threat to
the US dollar as many countries may get frustrated with the currency
manipulation all of the US has acute accused other countries like China and
others of manipulating their currency as well there may be potential shift at
some time where some countries may not utilize the dollar
as that reserve currency however that generally has yet to happen also one of
the things is some of the benefits of QE don’t outlast the programs for instance
you know when interest rates started to rise again after QE the equities market
didn’t like that we did have a pretty good drop almost moved into bear
territory back in 2002 2018 like what we can do is let’s say we go ahead and
switch a chart so we can go ahead and bring that up we got a longer-term chart of the market
this is over the last three years let’s go ahead and bring it out a bit further what we’re looking at right now is
essentially the bull run from the election 2016 to the highs in January we
basically gave back well almost 80% of those games going
back to the election concerning the S&P 500 some investors are looking at a
bounce not to move too far away from the Fed but you may hear terms of investors
looking to quote nibble to possibly deploy capital to look for value making
assumptions that the market may bounce from here there’s no guarantee that’ll
happen but we’ve seen a market discount itself by 50 percent or more in some
cases going back over the last few years now if I go ahead and look a further out
to the entire bull market you know there were various times over these last 10
years where there had been that quantitative easing and things started
slowing down going into 2018 we can see how the market didn’t quite go up as
much at that point you know I did have some drawing tools here maybe highlight
a little bit of that here is a correction
which almost turned into a bear market in the end of 2018 there was a bit of
pressure to lower rates and seem that that did play out so we can move this
out of the way there and then this is currently where we are right now now get
back to our discussion on the Fed as we transition back is you know one of the
other unfortunate and we’re recognizing this across the board
whether it’s things such as student loans consumer debt auto loans lower
interest rates unfortunately encourage that because for
many people they think of things in the payment and if one has low interest
rates that creates a lower payment however over time those payments can add
up and then if interest rates rise the cost to manage that debt becomes
increasingly higher for individuals as well as corporations as well so that’s
QE so what are some of the other actions that the government can take to help the
economy well up until this presentation did not take a look to see what the
federal government is doing as far as with Congress if they have passed
anything concerning as far as backstop in income or providing some income to
those workers that are out of the job you know there’s a lot of servers
restaurants hotels particularly in the hospitality have been crushed is trying
to find if there’s some relief for them as well as for small businesses
instituting low-cost loans there’s been some discussion as well as far as
providing loans that would not have to be paid back as long
as they went towards payroll at least for a fixed period of time so there’s
quite a few things that the government is doing in that regard in other cases
you know what is the Fed can do besides lowering interest rates or in the case
of QE you know go out there and buy different bonds those bonds are we refer
to as security purchases and you know currently the Fed is able to buy those
longer-term or by various Treasury debt to basically try and keep the prices up
on those Treasuries and if the Treasuries are rising those interest
rates are going to be lower so they have somewhat control over that other things
I and this is a concern it gets into one of the other questions that someone had
they can backstop the money market mutual funds so money markets are
basically funds that are relative liquidity a lot of people in retirement
accounts when they move money out of stocks they may move them into these
money markets which are priced daily you may have the term and typically you know
the the you know the value is a dollar kind of a cash value however there have
been times where the buck was been broken going back to the last financial
crisis there are some concerns that that can occur again
Sallah report that goldman sachs put in a billion dollars to support their money
market fund in-house as there were people drawing money from those areas
there other things that and this has actually been occurring from the Fed
actually going back to the end of the last quarter last year when price the
market was still going higher they were doing what are called repo operations
and what the Fed is basically repurchase agreements kind of shorter term
instruments when it comes to lending and again trying to continue to add that
liquidity in the market they try to be that last funding
source when a lot of these various instruments don’t work as they’re
originally intended they can also directly lend the banks and they could
temporarily relax some of the regulatory requirements federal government’s trying
to do some of that when it comes to for instance helping out to get more
supplies to first responders and healthcare professionals to try and you
know help with the epidemic and likewise possibly reduce some regulations that it
comes to employment as well as for current employers and they can actually
potentially lend directly to some of those major corporate employers some
employers at some perceived to be more strategic to the national economy like
Boeing not only for transportation off but also military defense possibly
companies like General Electric are some examples if the government determines
that they are a you know goes part towards the national strategy they may
step in to help along that way so there’s a lot of things that can happen
as well the Fed is also helped in the past – from on the foreign side from
other foreign governments and tandem with other central banks which are
called international swap lines there and also may even support local
municipalities and states that issue municipal bonds so you know there’s been
a lot of talk that the Fed has zero out has very few arrows in its quiver with
the perception is that once we hit zero interest rates or kind of even go
negative that there’s nothing that the Fed can do however that would be
incorrect as we’ve discussed want some of the many things that the Fed can do
what are some other things other questions that were asked as well was we
covered what actions that the Fed can do we
talked about quantitative easing now we know that the Fed now can do more than
just lower interest rates another thing that can come into play here as well and
there is a question that was asked was you know what is a reserve currency now
a reserve currency is a large currency that is maintained by central banks and
other major financial institutions and they could be utilized to prepare for
investments and transactions on international trade and international
debt obligations and this can influence their domestic exchange rate some
examples of what reserve currency is used for is a large percentage
commodities like gold and oil are priced in reserve currency cause in other
countries to hold the currency to pay for these goods so that begs a question
what is the reserve currency well it is the US dollar getting back to the
argument we talked about earlier as far as you know the con against too much
easing as other countries may get tired of the of the flood of the market in
dollars although right now the world is looking for those dollars and and the
Fed has been continuing to work towards that so the u.s. is currently the
reserve currency that can change in the future but certainly there hasn’t been
at least major steps for that occur there had been talks in Russia and China
to try and do more trade directly without utilizing the dollar that may be
occurring in certain areas but it is not widespread and probably the last
question that we have and this is an important one and probably hits home
more than anything is will the banks run out of money just like we’ve seen and
you know unfortunately with the the fear of disease and being locked at home
people rushing to buy toilet paper supermarkets clear and
of everything it comes to the question is well can people run on the bank and
absolutely I’m sure people have gone to the bank to withdraw money as part of a
safety measure so they have some cash thinking about the worst-case scenario
that they’re unable to make electronic payments or the order that’s some
perception that that may occur some things that consider is as far as with
the FDIC and they have they have been quoted in press release is that no one
has lost a single dollar based off of their deposits insured by the FDIC which
currently I believe is up to two hundred and fifty thousand dollars now banks
have reported that they have temporarily ran out of cash as again you know people
whether they’re trying to get toilet paper food or anything a great demand
they may be taking out more money than they expect to be withdrawn on any given
day but according to the FDIC you know deposits are safe you know should one
take cash out that’s gonna be a personal decision however you know a lot of
pundits would say you know be cautious about that because once you take the
money out it is not going to be insured in any way it’s gonna be whoever is
holding those dollars so if someone digs up underneath your mattress then we know
that that can certainly be an issue let’s see some comments Ricarda mentions
about the Fed employs hundreds of economists there’s certainly a lot of
smart people trying to figure this out and decisions will be made there’s
always gonna be some pros and cons for that and all we can do is hope for the
best on that agustin says could you explain why to take in consideration to
win buying value stocks well since we went ahead and finished our discussion
on the Fed and do appreciate those you that asked those questions
let’s go ahead and finish up and we’ll take a
look on the platform as far as what one may consider for value stocks and a
great follow up would probably go ahead and reference in some of our previous
archive sessions on value investing so let’s go ahead and do that we’ll
transition back to the platform thank you for your patience here today and
we’re going to go ahead and bring up the TD Ameritrade before we bring up the TD
Ameritrade website some of the common valuation tools that one may consider
here and here’s some of the common terms value growth and income you know if
you’re new to this session guess what we have a course that focuses on each of
these qualities value growth and income when you go to the TD Ameritrade website as I go ahead and bring that up go to
education and stocks right in this area here as it loads up education and stocks
you may see some of our courses right up on the top
stocks fundamental analysis this is a great course to learn about some of in
more in-depth on the components that are discussed in this webcast each and every
week and if we go down to all stocks content and select course we can see there’s technical analysis
there’s fundamental analysis which focuses on value and some components are
growth and also income investing for those you that are interested in
dividends a lot of stocks a pan hired not necessary in higher dividends but
their yield is much higher because these stocks are less Christ or priced less
than where they’ve been in a lot of cases just a little more than a month
ago they go back to our slide these are some of the common ratios that one may
search for to find examples of value stocks such as p/e ratios price to sales
price to book when one’s earnings are as a ratio greater than its price then it
should have a lower ratio so higher earnings higher sales a higher book
value relative to where the price is now these ratios should be lower most stocks
all of these ratios should be lower in some cases significantly compared to
where we were not too far long ago the PEG ratio is another ratio that one may
incorporate to look for earnings growth so it’s not just that a company is
undervalued but does it have potential for growth going forward now one of the
tools that you can use is there is a screener on the TD Ameritrade website we
also have some scans onto thinkorswim platform once again if you go back on
our education tab and go to webcasts education and webcasts one if I go into
the archives these are our upcoming webcasts I’m going to talk about one of
these in a moment let me go to the archived you can search by instructor
I’m John McNichol so I’m gonna go ahead and bring up John McNichol and one you
can go back and look at is generate an income in your portfolio this is a
webcast that I did last week that basically may help you put together a
scan looking for some stocks that may be paying some decent dividends and
potentially may demonstrate some value to expand out on go back one here and
what we’ll do is we’ll wrap up by going to one of our screeners here I go into
research and screeners now a lot of these criteria are discussed in the in
in the fundamentals analysis course so it would encourage you to go ahead after
this session if this is your first time here and go ahead and look at that
course for some of these search criteria I have an example that I’ve already
created for value I’m gonna go in and click on that and there’s gonna be a lot
of stocks compared to where we had about a little more than a month ago that may
appear on here and as far as modifying any of these screens I’m going to click
on modify and you’ll see some of the same criteria that are in the course as
well as on the previous slide that I had under fundamentals and valuation on the
valuation there’s p/e ratio there’s price to book and there’s price to sale
we also have another criteria called return on equity this is one we talked
about last week in the income class as well that points towards growth and we
also have an example of volume to go ahead and filter out some less traded
stocks now again there’s quite a few results here
what one may want to do is as they start looking at some examples and a lot of
this is based off of past performance not indicative future performance but
you look to see how some of these companies may have done prior to the
current events were they positive and some investors may go off the assumption
that of things as things come back that they may demonstrate more growth so when
one goes ahead and selects the stock can go to fundamentals and look for
information cash flows prog going to be one of the key indicators going forward
our is cash still coming out and by going on cashflow look to see these
trends and are they going positive some of these are a little on the negative
side in this example their operations are positive but as far as investing in
financing are a little more on the negative just going positive so to be a
good visualization to go through okay hey thanks for the comments Ricardo
hopefully a few other people may understand yes we’ve seen some wide
moves in the market well beyond into velocity that many people have assumed
so again follow up to this class is go into the stocks and go into the
fundamental stocks fundamental analysis once there you can look at some of the
examples of value investing some of the criteria that we just looked at there is
even a sample investing plan as well for value which has some of the same search
criteria here so this will be your homework if you choose to
accept it and all of these criteria accessible in the screener on TD
Ameritrade another thing I’ll ask for you to do hopefully you like some of
more of this timely discussion on what’s going on in the markets in this case our
topic was the Fed I would like for you to consider if you look at our schedule
for webcast is once they’re looking at tomorrow our webcast calendar tomorrow
and this is going to be on our trader Talks Channel it’s titled today’s market
and what can you do the good friend Pamela is going to teach that at looks
like that’ll be 6:00 p.m. Eastern Time 4:00 p.m. in the great state of Utah and
hopefully folks you learn something new today we appreciate all the patients
that are TD Ameritrade clients as more importantly you that are with us here
this evening on all the transitions we’ve been doing we know a lot of daily
life has been upset hopefully you can see the great efforts that TD Ameritrade
education is taken to be here as here I am in the comfort of my own home in the
basement they’re teaching you tonight so hopefully you like my decor and I look
forward to teaching you in the future as well so remember go ahead and tune in
tomorrow for that for that class on what are the markets doing and what are we
going to do about it with Pat and I look forward to seeing you at some of our
other sessions in the future now remember folks you know in order to
demonstrate the platform that we were looking at we were looking at some
actual symbols keeping in mind TD Ameritrade does not make recommendations
or determine the suitability of any security or strategy for individual
traders any investment decision you make in your self-directed account is solely
your responsibility so Tommy’s ow Ricardo everyone else that’s with us
thank you so much for being here and we’ll talk again real soon
good night everybody

Stephen Childs

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