Financial Terms

This list should evolve over time. I will add more terms linked to derivatives and derivatives trading.

Asset swap

A fixed investment such as a bond with guaranteed coupon payments is being swapped for a floating investment such as an index.

At the market

An order to buy or sell a futures contract at the best available price upon entrance into the exchange for execution.

Bank for International Settlements

An international organization fostering the cooperation of central banks and

international monetary policy makers. Established in 1930, its main goals are to

promote information sharing and to be a key center for economic research.

Base currency

First currency quoted in a currency pair on FX, which is also considered the domestic currency or accounting currency.

Breadth

Breadth is the ratio of the number of stocks in an index that have positive performance versus the number that have negative performance.

Buying forward

Investment strategy that involves the buying of money market instruments or currencies in anticipation of a price rise or a future increase in demand; looks to take advantage of future and potential profits by buying at a lower price.

Commodity block currency

A currency that belongs to a country whose economy is strongly correlated with the price fluctuations of a particular commodity (eg, Canada and oil, Australian/New Zealand and precious metals, etc.).

Commodity pairs

The three forex pairs that include currencies from countries with large amounts of commodities (ie, USD/CAD, USD/AUD, USD/NZD) and that are highly correlated to changes in commodity prices.

Consensus Bullish Sentiment Indexes

Polls are regularly conducted by various agencies that ask investment industry and trading professionals about their evaluation of various markets. The data derived from these polls are used in a contrary fashion. Typically, a reading of 70% or greater, indicates excessive optimism and the potential for a downward reversal. A reading of 30% or lower usually indicates excessive pessimism and the potential for a bounce.

Consolidation patterns

Prices hardly ever continue straight up or straight down for very long. There are usually corrections within the major trend, which carry prices either sideways or slightly against the trend. These interruptions are known as consolidations.

Core inflation

A measure of inflation that eliminates certain products that can have temporary price shocks that can diverge from the overall trend of inflation and give a false measure of inflation; most often calculated based on Consumer Price Index and excluding certain items from the index that face volatile price movements, usually energy and food products.

Country basket

A derivative security designed to mimic the major index of an international exchange; allows investors to invest in specific foreign markets without restrictive costs.

Country risk

A collection of risks associated with investing in a foreign country, including political, exchange rate, economic, sovereign and transfer risk; varies from one country to the next.

Cumulative advance-decline line (A-D Line)

The most popular measure of market breadth, the cumulative A-D Line is defined as the sum of the daily differences between advancing issues minus declining issues, plotted daily.

Current account deficit

Occurs when a country's total import of goods, services and transfers is greater than the country's total export of goods, services and transfers; this situation makes a country a net debtor to the rest of the world.

Cycles

Measurement of time between regularly recurring price highs and lows.

Deflation

A reduction in the level of national income and output, usually accompanied by a fall in the general price level.

Depression

A time of economic crisis or bad times in commerce, finance, and industry, characterized by falling prices, restriction of credit, low output and investment, many bankruptcies, and a high level of unemployment. A less severe crisis is usually known as a recession.

Distribution

The supplying of goods and services to retailers and others.

Double tops and bottoms

Double tops (bottoms) are bearish (bullish) reversal patterns. Double tops(bottoms) are usually thought of as two tops (bottoms) at approximately the same price level. To complete the pattern, prices must decline (advance) below (above), and preferably close below (above), the low (high) point established between the two tops. Price projections using this formation are made by measuring the distance between the high (low) area and the low (high) point between the two tops, and projecting that distance below (above) the violation line for a downside (upside) objective.

Dutch disease

A term originating from a crisis in the Netherlands in the 1960s resulting from discoveries of vast natural gas deposits in the North Sea; an economic condition that refers to negative consequences arising from large increases to a country's income.

Earnings revision ratio

The earnings revision ratio is the breadth measure of earnings expectations that measures the number of stocks for which the consensus EPS estimates have risen versus the number for which they have fallen.

Euro

The official currency of the European Union (EU), currently in use in 17 of the 27 Member States. Participating in the Eurozone are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. The euro is printed and managed by the Eurosystem, comprising the European Central Bank (ECB) and the national central banks of those countries that have adopted the euro. Other member states of the EU are: Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden and the United Kingdom.

European Central Bank

Central bank responsible for the monetary system of the EU and the euro.

FDIC

The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects against the loss of deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.

FDIC: Temporary Liquidity Guarantee Program

A two part program, which fully insures non-interest-bearing accounts and also

provides a government guarantee of newly issued bank debt. Both are fee-based programs.

Fed: Commercial Paper Funding Facility (CPFF)

Fed funded SIV to facilitate issuance of commercial paper by banks and corporations by providing a buyer of last resort to organizations for a fee.

Fed: Money Market Investor Funding Facility (MMIFF)

SIV structured with leverage provided by Fed to purchase commercial paper, CDs and bank notes with maturity of 90 days or less.

Forward contract

A cash market transaction in which delivery of the commodity is deferred until after the contract has been made; although the delivery is made in the future, the price is determined on the initial trade date.

Forward discount

A situation where the domestic current spot exchange rate is trading at a higher level than the current domestic futures spot rate for a maturity period; a forward discount is an indication by the market that the current domestic exchange rate is expected to trade lower.

Forward premium

A situation where the spot futures exchange rate, with respect to the domestic currency, is trading at a higher spot exchange rate than it is currently; a forward premium is frequently measured as the difference between the current spot rate and the forward rate.

Gaps

A price gap occurs when there is clearly no overlap between successive trading periods. Gaps indicate enthusiastic buying or selling and can serve as a very powerful trend-validating tool.

Global Wave

The Global Wave quantifies trends in global economic activity. It is an amalgamation of seven components: global industrial confidence, global consumer confidence, global capacity utilization, global unemployment, global producer prices, global credit spreads and the global earnings revision ratio.

Gross Domestic Product (GDP)

The total of goods and services produced by a nation over a given period, usually one year. Gross Domestic Product measures the total output from all the resources located in a country, wherever the owners of the resources live.

Gross National Product (GNP)

The value of all final goods and services produced within a nation in a given year, plus income earned by its citizens abroad, minus income earned by foreigners from domestic production. GNP equals GDP plus net property income from abroad.

Growth investing

Growth investing refers to an investment strategy that emphasizes stocks that are considered to have strong and above-average earnings and/or revenue growth potential. Our Quantessential Growth portfolios provide exposure to a benchmark-aware portfolio of stocks with an optimal tilt toward growth factors (eg, earnings growth, trend earnings growth, forecast earnings growth).

Head and shoulders

The head and shoulders price pattern is the most reliable reversal pattern, resembling a person's head and shoulders. The trigger for entering a trade using this formation is the violation of the neckline, preferably with a close. Price projections using this formation are usually made by measuring the distance between the head and neckline, and projecting that value from the breakpoint on the neckline.

Index of industrial production

A quantity index that is designed to measure changes in the physical volume or production levels of industrial goods over time.

Inflation

Increase in the overall level of prices over an extended period of time.

Interbank market

The financial system and trading of currencies among banks and financial institutions, excluding retail investors and smaller trading parties; most interbank trading takes place from the banks' own accounts.

Interbank rate

The rate of interest charged on short-term loans made between banks.

Long-dated forward

Refers to contracts that typically involve positions that have settlement dates longer than a year away; sometimes used by companies to hedge certain currency exposures.

Macroeconomics

The study of the sum total of economic activity, dealing with the issues of growth,

inflation and unemployment and with national economic policies relating to these

issues.

Market breadth

Breadth is a comparison of advancing stocks versus declining stocks. Positive breadth indicates that more stocks are advancing than declining, and vice versa.

Market sentiment

Sentiment indicators attempt to assess the prevailing psychological tendencies of the general marketplace. They are known as contrary indicators and are most useful when they reach extreme levels.

McClellan Oscillator

The McClellan Oscillator is a short-term breadth momentum indicator that manipulates advancers minus decliners data by calculating the difference between a 19-day and a 39-day exponential moving average. As a general rule, the oscillator reaches an overbought condition as it climbs toward 70 to 100. Conversely, it reaches an oversold condition as it declines toward -70 to -100.

McClellan Summation Index

The McClellan Summation Index is a cumulative sum of the daily McClellan Oscillator readings. The result is a smoother indicator less prone to volatile swings. The Summation Index is not an oscillator, for practical purposes. Rather, it is used as a change-in-trend indicator, ie, when the index begins to turn higher, it triggers a buy signal, and vice versa.

Micro cap

We define stocks with market caps under $200 million as micro caps.

Microeconomics

The study of the individual parts of the economy, the household and the firm, how

prices are determined and how prices determine the production, distribution and

use of goods and services.

Mid cap

We define stocks with market caps between $2 billion and $12 billion as mid caps.

Minimum wage

A wage below which employers may not legally pay employees for specific kinds of employment.

Momentum

A leading indicator used to gauge the rate of advance or decline of a price pattern in order to make a better assessment of the trend’s strength.

Momentum investing

Momentum investing refers to an investment approach based on the belief that stock price trends are likely to continue. Momentum investing advocates buying stocks that have been outperforming the market irrespective of companies’ underlying value or fundamentals.

Monetary base

The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank's reserves; typically only includes the most liquid currencies.

Monetary policy

The regulation of the money supply and interest rates by a central bank in order to control inflation and stabilize currency. If the economy is heating up, a central bank can withdraw money from the banking system, raise the reserve requirement or raise the discount rate to make it cool down. If growth is slowing, it can reverse the process: increase the money supply, lower the reserve requirement and decrease the discount rate. The monetary policy influences interest rates and money supply.

Monetary reserve

A nation's assets in foreign currency and/or commodities like gold and silver, which are used to back up the national currency; also provides a cushion for executing central banking functions like adding to the money supply and settling foreign exchange contracts.

Money supply

The total stock of money in the economy; currency held by the public plus money in accounts in banks. It consists primarily of currency in circulation and deposits in savings and checking accounts. Too much money in relation to the output of goods tends to push interest rates down and push inflation up; too little money tends to push rates up and prices down, causing unemployment and idle plant capacity. The central bank manages the money supply by raising and lowering the reserves banks are required to hold and the discount rate at which they can borrow money from the central bank. The central bank also trades government securities (called repurchase agreements) to take money out of the system or put it in. In the US there are various measures of money supply, including M1, M2,M3 and L; these are referred to as monetary aggregates.

Monopoly

A market with only one supplier.

Moving average

Moving averages help smooth a data series to better spot prevailing trends. There are different types of moving averages, the most complicated of them using mathematical formulations to weight more recent data over older data. The simple moving average is constructed by calculating the average price of a security over a specified interval of time, and assigning that value to the last observation in that time interval.

Moving Average Convergence-Divergence (MACD)

The MACD is a price momentum oscillator that is based on the difference between two exponential moving averages (EMA) of the security’s closing price, a 26-period EMA and a faster 12-period EMA. The difference between these two lines (differential) is itself smoothed by an even faster 9-period EMA, which is called the signal line. If the signal line crosses above (below) the differential, the interpretation is made that the price pattern is entering the new phase of positive

(negative) acceleration.

Percentage of stocks above their 200-day moving average

An intermediate term gauge of market breadth. As the name implies, the indicator accounts for the number of stocks currently trading above their 200-day moving average and expresses this value as a percentage of all the stocks surveyed.

Put/call ratio

The ratio is calculated by dividing put volume by call volume. A high ratio indicates relatively more put-buying, which indicates greater market pessimism. Conversely, a lower ratio indicates relatively more call-buying, which indicates greater market optimism. Probably the most widely used sentiment indicator.

Relative Strength Index

The relative strength indicator (RSI) measures the relative internal strength of a price pattern. It attempts to measure the same thing as the ROC indicator, but tries to filter out the erratic swings that the ROC indicator is sometimes prone to exhibit. RSI values range from 0 to 100. Traditionally, a reading of 30 or less indicates an oversold condition, while a reading of 70 or more indicates an

overbought condition.

Repo rate

Discount rate at which a central bank repurchases government securities from the

commercial banks, depending on the level of money supply it decides to maintain

in the country's monetary system. To temporarily expand the money supply, the

central bank decreases repo rates (so that banks can swap their holdings of

government securities for cash), to contract the money supply it increases the

repo rates. Alternatively, the central bank decides on a desired level of money

supply and lets the market determine the appropriate repo rate.

Rounding tops and bottoms (saucers)

Rounding tops and bottoms are very gradual patterns that do not have the obvious, defined breakpoints that characterize other major reversal patterns. The rounding bottom takes on the shape of an elongated "U" or saucer shape. As the pattern drifts to the lowest point of the saucer, the volume dissipates significantly, indicating a lack of investor interest. As the pattern works through the low point and begins to rise, so does the volume, indicating renewed interest. The price pattern for the rounding top is the exact inverse, but the volume pattern remains the same.

Single-tranche Open Market Operations (OMOs)

Extension of the Fed’s normal OMOs providing dealers with easier financing for Agency MBS positions. In normal OMOs, dealers would submit distinct bids for Treasury, Agency and Agency MBS financing. In a single-tranche OMO, only one rate is offered, ensuring that the majority of assets financed via this facility are Agency MBS, which typically finance at a higher rate.

Small cap

We define stocks with market caps between $200 million and $2 billion as small caps.

Sovereign bond

A debt security issued by a national government within a given country and denominated in a foreign currency; the foreign currency used will most likely be a hard currency, and may represent significantly more risk to the bondholder.

Sovereign risk

The risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees.

Stock mutual fund cash/assets ratio

Mutual funds typically keep a portion of their assets in liquid securities to answer potential customer redemptions over the short term. The amount of liquid assets (cash) and its proportion to total assets changes depending on market conditions.

Supply and demand

Supply is the amount of goods available at a given price at any time. Demand is how many consumers desire the goods that are in supply.

Swap dealer

An individual who acts as the counterparty in a swap agreement for the fee (called a spread); these are the market makers for the swap market. Because swap arrangements are not actively traded, swap dealers allow brokers to standardize swap contracts to some extent.

Term Auction Facility (TAF)

Derivative of the discount window, the TAF program allows commercial banks to bid on term financing (either 28- or 84-day) using the same collateral allowed for the discount window. Designed to improve a commercial bank’s ability to fund loans and security holdings.

Term discount window

Term version of the discount window. Allows commercial banks to obtain 90-day financing using a broad range of collateral types rather than the overnight loans that traditionally were done via the discount window.

Term Securities Lending Facility (TSLF)/Term Option Program (TOP)

Derivative of the securities lending function. Unlike the normal securities lending function the bond swap that occurs is not overnight but for a 28-day term. The key difference is that dealers are allowed to post non-Treasury collateral and obtain Treasuries in return where the normal program only allowed for a Treasury-to- Treasury swap. The program goal is to improve the ability of dealers to finance non-Treasury positions. The TSLF program now has an attached option facility,

the Term Option Program, or TOP.

Terms of trade

The ratio of a country's average export price to its average import price; also known as the commodity terms of trade. A country's terms of trade are said to improve when this ratio increases, and to worsen when it decreases, that is, when import prices rise at a relatively faster rate than export prices (the experience of most LDCs in recent decades).

The Fibonacci Concept

Number sequence constructed by summing the first two numbers to arrive at the third (1,2,3,5,8,13,21…n). The ratio between any two consecutive integers in the series converges toward 61.8%, which is considered a key retracement level, as is the square of this ratio 38.2%. Fibonacci interpretation of price patterns makes the assumption that important movements will come about in increments of 1.618.

Treasury bill

A short-term debt issued by a national government with a maximum maturity of one year. Treasury bills are sold at discount, such that the difference between purchase price and the value at maturity is the amount of interest.

Treasury: Guaranty Program for Money Market Funds

Extends FDIC-like insurance to certain money market funds for a fee.

Treasury: Supplemental Financing Program (SFP)

Off-cycle Treasury bill program. Bills are issued to public with proceeds deposited at Fed. Allows the Fed to drain liquidity from banking system without selling assets.

Treasury: Troubled Asset Reduction Program (TARP)

Originally designed as a $700 billion asset purchase vehicle this program has morphed into a combined capital injection ($250 billion) and asset purchase program (now $450bn).

Trend

Refers to the general direction in which a price is heading. Typically, there are three types: positive/advancing trend, negative/declining trend, or neutral/sideways trading range. Trends are usually classified as being short-term (typically lasting a few weeks), intermediate-term (typically lasting a few months) or long-term (typically lasting a year or more).

Trend lines

Drawing lines through relevant highs or lows gives rise to a trend line. A trend line is among the simplest of technical momentum indicators, but serves a very important function. It is usually an indication of potential support in the price pattern, and its violation is one of the first indications that the prevailing trend might be coming to an end.

Two-way quote

A type of quote that gives both the bid and the ask price of a security, informing would-be traders of the current price at which they could buy or sell the security; also shows the spread between the bid and the ask, giving traders an idea of the current liquidity in the security (a smaller spread indicates more liquidity).

Value investing

Value investing is an investment methodology of selecting stocks that are undervalued or trading far below their “intrinsic” value. Our Quantessential Value regional portfolios give investors exposure to a benchmark-aware selection of stocks with the best value factors (ie, P/E, P/B, EV/EBITDA, P/FCF, etc) within each region.

Volume

Volume is a measure of the strength of the current price trend. Volume measures how anxious traders are to establish or close out their positions. Volume should increase in the direction of the major price trend.