December Stock Portfolio

PetroChina currently has a price of $83 while its Graham calculated intrinsic value (V*) is $149.  Other metrics worth noting are its Market Cap and Cash amounts which are $140 Billion and $10 Billion respectively with a total Debt of $10 Billion.  With OPEC cutting Oil supplies in order to reach their "fair" value of $75 per barrel, Oil prices should return this estimated value some time next year.

Shaw Group is an engineering, construction, and industrial services company.  What makes this company intriguing is its 20% vested interest in Westinghouse Group which specializes in Nuclear Power plant designs and equipment.  The Nuclear Industry was easily the largest donor to The President-Elect Barack Obama's compaign so it remains to be seen if these donations will turn into future profits for the Shaw Group.  Also worth noting is the Shaw Group current price of $19 while Grahams calculated intrinsic value (V*) is $25.  It has a Market Cap  of $1.1 Billion and $927 Million Cash with $1.1 Billion of Debt.

Symbol	% of Assets	Description	Dividend Yield	Industry
CCU	35.93	Compania Cervecerias Unidas	7.84	Alcoholic Drinks
C	7.34	Citibank	9.44	International Banks
PTR	31.05	PetroChina	4.19	Oil & Gas
BRK.B	11.79	Berkshire Hathaway Inc.	0.00	Insurance
SGR	7.27	Shaw Group	0.00	Metal Products
SBUX	5.17	Starbucks	0.00	Restaurants
CASH	1.45	Cash	1.04%	Cash

Federal Interest Rate

What is the Federal Interest Rate?

• When the Federal Reserve announces an interest rate cut/increase they are talking about the "nominal" rate, which is the rate at which Banks borrow money from the Federal Reserve.  
  

Why would the Bank ever want to borrow money from the Federal Reserve?

• Banks must maintain a minimum amount of cash reserve by law.  This reserve is usually 10% of the total amount of cash deposits held by the Bank.   When Banks want to make loans, they must ensure they have enough capital reserve to meet the minimum legal requirement.

When is it better for the Bank to borrow from another Bank?

• When the Federal Reserve raises the nominal interest rate, other Banks may have excess cash (borrowed at the lower nominal rate) that they can lend to other banks at a negotiated rate called the "effective" rate.  A basic rule of thumb is effective rate is always greater than nominal rate.  (E > N)

How does a Federal Interest Rate cut affect me?

• Lower nominal interest rates encourage banks to borrow more cash from the Federal Reserve and effectively encourages banks to loan money to you at a lower interest rate.

Why are Banks not loaning money?

• Banks are not loaning money because they no longer have enough reserve to cover the bad mortgages since Banks are no longer receiving payments for these loans; not to mention that the homes are now worth less than their original loan amount (called negative equity) so even selling these homes wouldn't pull Banks out of the "red".

So why isn't the Federal Reserve buying up bad mortgages?

• I don't know.

Intrinsic Value

Being an engineer I've always felt comfortable only after I see the numbers inside a formula. I've always wished to find such a magical formula to help me evaluate my stock interests. After scouring the internet and investment books for such a formula I finally found one while reading my Warren Buffet Biography "The Snowball". It was created by Benjamin Graham, who Warren Buffet studied under during his Columbia MBA days. The formula is simply called the Benjamin Graham formula and it calculates the intrinsic value of a stock based on current AAA Corporate Bond yield and a stock's Earnings Per Share (EPS).

The Graham formula proposes to calculate a company’s intrinsic value V* as:



V*: Intrinsic Value
EPS: the company’s last 12-month earnings per share
8.5: the constant represents the appropriate P-E ratio for a no-growth company as proposed by Graham
g: the company’s long-term (five years) earnings growth estimate
4.4: the average yield of high-grade corporate bonds in 1962, when this model was introduced
Y: the current yield on AAA corporate bonds

I currently use this formula on all my investments as it helps me evaulate a stock's potential. Other key numbers I look for are Cash vs Market Cap and Cash vs Debt. Warren Buffet as well as Jim Cramer are huge advocates of undervalued stocks that possess equal Cash to Market Cap values. I also like to incorporate Cash to Debt because any company with a huge debt tells me that their management is either being too ambitious or being sloppy with the accounting books.