UPDATE

🌤️ Happy Tuesday

Good morning. We hope the rest of last week was productive for you, and you were able to carry over that trend into Monday. Looking forward, This Saturday will be the Autumn Equinox.

This means that for a short time during the Earth’s orbit, days and nights will be the same length in both the northern and southern hemispheres 🌎

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Read time: 3 minutes

WEEK IN REVIEW

👀 All Eyes on Fed Meeting Wednesday

Chairman Powell leads Jan 2019 meeting, via Flickr

This Wednesday, Federal Reserve officials are set to meet to discuss economic performance and the fight against inflation. The sharpest tool at the Fed’s disposal to combat inflation is increasing interest rates; this week, however, the Fed isn’t expected to raise rates any higher.

• Currently, the effective federal funds rate (interest rate/cost of borrowing) sits somewhere between 5.25 - 5.50%. This, by the way, is the highest rate in the past 22 years. With no new rate hike expected in the immediate future, borrowers may breathe a sigh of relief, but that doesn’t mean rate hikes are done.

The Wednesday meeting is critical as it will shine a light on the Fed’s expectations about whether or not they believe rate hikes will come, and potentially how much higher they will need to be.

• Jeanna Smialek at the New York Times summarized that investors are more concerned about policymakers’ long-term plans than about anything that happens tomorrow. (Source: NY Times).

📈 Market Performance

S&P 500 (1-day), via Google Finance

Despite analysts predicting the markets being all clear of a rate hike, the S&P has begun to react strongly in anticipation.

• Between mid-day Monday and the time of this issue’s release, the index lost about 24 points as media sources are making predictions about what will be announced at the meeting.

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MARK IT. EXPLAINED

💵 DCF: Why Do Investors Use it? (Updated)

DCF Equation by Rahul Kannam, via MARK IT.

DCF stands for discounted cash flow. It’s important because it helps value a company using the internal or external cash flows (usually used for expenses). Valuation is essential in understanding whether or not to invest in a company, and the associated research allows you to understand the financial situation of said company. This is key because you can truly understand if this company, for example, doesn’t have enough money to pay its debt six months from now.

• The variables here are the discount rate and the cash flow(s). The discount rate is used because of the principle that a dollar today is worth more than a dollar tomorrow. This is considered the "time value of money."

• Using the variables, we find the present value of the future cash flows, in which you can see if the present value is higher than the cost of buying. If the present value is calculated to be lower than the actual buy price of said stock or investment, then you would typically try to find better investments.

✏️ DCF Calculation Guide

To calculate DCF, you would need to find cash flows for the company. You can find this in their financial statements (statement of cash flows, balance sheet, income statement), which would all be public if the company trades on indexes (S&P 500, etc.). There are several websites and forums that have this information to compare. Yahoo Finance is perhaps the most notable. (Be careful and do your due diligence to fact-check the cash flows for discrepancies!)

• Another aspect to consider is the discount rate. What affects it? Usually, that would be the risk the investors or the company are willing to take on in an investing sense. This requires market research and time. It’s always good to consider this and start ahead of time so that there’s more time to uncover connections or insights you have for analyzing a company’s cash flows.

DCF helps you put a number to an investment in today’s dollars. The model tries to make it easier to understand the present value of an investment compared to the cash it generates in the future. (Source: Investopedia)

ONE MORE THING

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Nothing MARK IT. publishes constitutes professional and/or financial advice, nor does any information published by MARK IT. constitute a comprehensive or complete statement of the matters discussed.