Group - F

Javed Masood Khan -15243Fawad Abdul Wasay – 13948

Syed Ali Hassan – 14367Yasir Zaidi - 15295

FROM INVESTMENT BOOM TO BUST

TAKING THE MEASURE

DESPERATLEY SEEKING CASH CURE

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TOPICS

BOOM AND BUST CYCLE

A process of economic expansion and contraction that occurs repeatedly.

The boom and bust cycle is a key characteristic of today’s capitalist economies.

During the boom the economy grows, jobs are plentiful and the market brings high returns to investors.

In the subsequent bust the economy shrinks, people lose their jobs and investors lose money

It’s important to pay attention to the market you want to invest in. That’s why when you’re investing in any thing you need to know the best time to buy and sell.

INVESTMENT IN INFORMATION TECHNOLOGY

FIRMS in America, in the past five years, investment in information technology has increased by an annual average of around 25% in real terms, accounting for no less than one-quarter of the country's total GDP growth.

Is the IT boom turning to bust

First, a severe slump in investment could turn a mild economic downturn into a deeper recession.

Second, a fall in IT investment would dampen longer-term productivity growth.

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AFTER THE BOOM, A SHARP SLOWDOWN IN REAL GDP GROWTH

JAPAN AND THE AMERICAN BUBBLE

The differences between Japan's bubble in the 1980s and the American one in the late 1990s.

Japan's bubble engulfed property as well as equities. The country's banking system also started off much shakier than America's today.

Yet the parallels between investment and productivity in America and Japan deserve attention.

INVESTMENT IN AMERICA

One reason why investment in America is unlikely to fall so sharply as in Japan is the different composition of its capital spending.

IT equipment has a shorter life than buildings or industrial machinery.

The risk of an IT investment bust is now rising.

Profits are shrinking, credit conditions have tightened.

A downturn in investment has long-lasting effects on productivity growth.

Taking the measure

Measuring accurate Profits

Market trend

A market trend is a tendency of a financial market to move in a particular direction over time

The terms bull market and bear market describe upward and downward market trends.

A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases

A bear market is a general decline in the stock market over a period of time where transition from high investor optimism to widespread investor fear and pessimism

P/E Ratio:

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

Market Value per ShareEarnings per Share (EPS)

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

Cont.A high P/E suggests that investors are

expecting higher earnings growth in the future.

P/E is compared the market in general or against the company's own historical P/E.

Companies artificially boost their profits inUSA to invite investors and made there shares dearer than they look.

Yield ratio

Yield is a return on the investment done by the capitalists.

Yield ratio is the correlation between expected yields of a bond with an expected yield of other bond.

The earnings yield is the ratio of a company's last 12 month of earning per share its stock price. It is the inverse of the price-to-earnings (P/E) ratio.

A yield ratio is important when deciding whether to invest in one bond or another; generally, the one with the higher yield wins out.

Flaws with Earnings yield ratios.

Without a dividend stream they may never recoup their investment.

Flaws in earnings make profits difficult to gauge,  so it is no substitute for comprehensive analysis.

Better Ratios

The ratio of a firm's market value to the replacement cost of its assets.

 It reflects the costs a competitor would face in re-creating a business.

Replacement cost is hard to measure, and is of little help in explaining daily price movements.

Do not include the intangibles such as patents and brands

Price-to-EBITDA

EBITDA estimate to be reasonably accurate. since it shows earnings before interest, tax, depreciation and amortization.

Cisco Systems had net income of $3.811 billion and, at year end, 6.157 billion shares outstanding. In addition, the company’s EBITDA was $4.996 billion and its share price was $21.77. Compute the firm's price earnings ratio and the price-EBITDA ratio.

3.811 / 6.157 = $0.62 net income per share 4.996 / 6.157 = $0.81 EBITDA per share 

21.77 / 0.62 = 35.11 P/E ratio 21.77 / 0.81 = 26.88 P/EBITDA ratio

“Cash is the King” – A phrase by firms who have survived brutal

global recession

DESPERATLEY SEEKING CASH CURE

November 20, 2008

Example of two firms Citi Group – financial institution, hit by

Subprime Mortgage Debacle which caused the credit crisis of 2008.

Wolseley - biggest distributor of building materials, hit by fall in demand for number of new homes and housing value

Both firms are completely different but have one thing in common i.e. the Job Cuts

Citi Group cut 20 % jobs during this periodWolseley cut 18 % jobs.

The CrisisThe Credit Crisis refers to the unavailability

of the loans by some strict conditions imposed by the banks.

Inadequate/ misrepresentation of assets of the borrower.

Unavailability or insufficiency of collateral in case of bankruptcy.

This enforced business to have more cash/ liquid resources in hand since the duration of the recession was uncertain.

Dealing with Difficult TimesReport from Citigroup’s investment has

shown that ever since the credit crisis the firms with ample liquid assets have outperformed their counterparts by 7%.

Three Motor companies (Ford, General Motors, Chrysler) were facing acute cash shortages for which they tried to revise their payment terms with their creditors.

It is important not to let the bad debts soar/ rise during recession, as it will only make situation worst.

Don’t bet on the BankIn the crisis situation, companies with even

strong balance sheets weren’t able to get loans from the bank.

Revolving credit facilities were set up during the boom at cheaper credit.

Companies like Marriot International availed these facilities even though they didn’t require the cash urgently

Between April 2006 and 2008 such credit lines grew 36 %.

Second way to boost finances is to attract investors into a new business.

Don’t bet on Bank continues..Example of GE, a 50-50 joint venture with

Mubadala in UAE in renewable energy and aviation. Mubadala became one of the ten largest shareholder of GE.

Third way to raise cash is to sell businesses that are no longer profitable.

GM and ford sold shares of Suzuki and Mazda back to Japanese firms to raise cash of $770 Million.

Another way to hold cash into the firm is by allowing low discounts and also by cutting on dividends to the shareholders.

The Daily GrindWorking Capital should also be monitored

carefully and the opportunity cost should be accessed adequately.

Inappropriate marketing forecast and production wastes the cash in the form of inventory.

But thinning the inventories should be done very carefully also as the too much thinning would cause customer dissatisfaction.

The Supply chains have become more complexed and based on Just in time delivery

The Daily Grind ContinuesGerman Car manufacturer like Daimler

even stretched backward to support their suppliers to ensure consistency in their supply chain.

Keeping a laser eye on cash is equally important for large as well as small companies.

Times of recession are best for temptations for new investment but they should be made very carefully.

Firms that remain standing through a brutal recession will be those that have taken the phrase “cash is king” to heart.

How some rich countries' over-regulation has hurt their

productivity

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Simple TheoryCountries with relatively low output per

worker or per hour will catch up with the leaders, as capital and know-how flow to places where productivity is poor and the potential returns are greatest. 

Critique: Aerial’s PerspectiveUntil the mid-1990s real life in rich

countries fitted this template fairly well, as European productivity moved closer to America's. 

But despite Globalization convergence has not been as fast as it should have been.

America has enjoyed a productivity surge, aided by investment in information technology (IT) as opposed to Europe.

Possible reasons being:relative rigidity of most European labour

marketsbetter American managementAmerica's superior education and universities

standardClose links with IT industry

And over-Regulation

Over-Regulation!?The regulation of product markets, if makes

competition less intense, it also blunts companies' incentives to raise productivity and thwart their rivals.

Measured by an index created at the OECD, the gap between the most and least liberal services markets widened in the 1980s and into the 1990s. 

Drill down AnalysisPaper by Paul Conway, Donato de Rosa,

Giuseppe Nicoletti and Faye Steiner, of the OECD assesses the effect of regulation of services markets on the productivity growth of OECD countries.

Since manufacturing is less regulated and more open to foreign competition focus is given to services such as telecommunications and energy that are important inputs for manufacturers.

The in-house index as a gauge of regulation: output per worker grows more slowly in more

rule-bound markets.

This effect is concentrated in industries that either produce IT or use it a lot.

Meaning that  weak competition does most harm by dulling the incentive to invest in IT.

Regulation slows the rate at which laggard countries close the gap between themselves and the leaders.

In nutshell,  lower a country's productivity, the more it has to gain by catching up and the more damage red tape can do. 

Two channels through which regulation may have dampened productivity growth:

discouraging foreign direct investment (FDI)investment in IT

Fruits from FDIFDI helps productivity grow partly because

competition from foreigners drive the locals to improve.

Mostly for services  where cross-border trade is less common than for goods.

The locals may also benefit from  foreign entrants by imitating their methods or recruiting employees trained by the foreigners.

According to Mr Conway and his colleagues, it accounts for 10% of the variation in FDI's employment share.

Direct restrictions on FDI explain a further 13%.

Investment in IT

The authors estimate that, for the period 1985-2003,  12% of the country-by-country differences in IT investment, as a share of business's total, can be ascribed to variations in product-market regulation.

Mr. Nicoletti notes that:The greatest impact of advances in IT has come

since the mid-1990s.

Countries with policies preventing their diffusion lost out  because IT can boost productivity in many industries and its effects (or the absence of it) were felt across the economy.

Policies that prevent the spreading out of this technology are damaging precisely because of its general application.

ConclusionAccording to Rachel Griffith, Rupert

Harrison and Helen Simpson, of London's Institute for Fiscal Studies, the single market and free trade has increased competition, innovation and productivity, and thanks to IT, America's banks and retailers have been able to take better advantage of huge continental markets.