Was Fundamental Analysis Redundant during the Global Financial Crisis - Example

GFC & Fundamental Analysis By GFC & Fundamental Analysis Was fundamental analysis redundant during the GFC (2007-10)? Discuss Critically. Introduction Understanding the market that deals with securities requires a detailed analysis of the different factors that draw indicators to investors with regard to a stock. These factors range from those that provide a fundamental analysis to those that provide tools for technical analysis. These yield explanations in reports that indicate the movement of the market and the effects that it holds. The study below details a critical analysis of the fundamental analysis redundancy possibility during the GFC in the years 2007 to 2010. A redundancy in fundamental analysis indicates a market situation where fundamental analysis may not provide the best market position and may lead investors to make wrong decisions. Analysis of factors that provide a real time effect creates the evaluation approach that provides for an easy understanding of the value of any security (BloggingStocks, 2009). The real time factors attained result from the performance of an analysis on the different factors of qualitative and quantitative nature. The consideration of these allows analysts to determine the intrinsic value of the security and may consider the application of the economic and social factors. Through fundamental analysis, the different factors that may possibly affect the stock come to consideration. These may range from macroeconomic to microeconomic factors. The factors affecting the stock may also fall into either internal factors or external factors within the organization. It generally covers an understanding of the organization as a whole considering the market analysis, the company analysis and the industry analysis. On the other hand, the Global Financial Crisis GFC occurred in five major phases that involved the dates as follows. 9 August 2007, 15 September 2008, 2 April 2009, 9 May 2010, and during 5 August 2011. These dates indicated the worst times in which the financial crisis hit the global economy harder. A consideration of effects to the market indicated with a graph on the stocks of the Bank of America during the years 2007 to 2010. These indicate the negative performance of the banks during the time. Graph based on data obtained from http://finance.yahoo.com/q/hp?s=BAC&a=04&b=29&c=2007&d=02&e=23&f=2010&g=m The flactuation in prices affected the share hence leading to its fall and effect on volumes traded as indiacted by the chart below: This indicates the volumes traded during the times that left many effects on the market with sales volumes peeking in 2009. These times had difficult financial times and provided various effects to the financial analysis methods employed by investors to analyze their stocks. Understanding the happenings in these aids in the justification of each to the financial platform and the effects, they had on the investor’s ability to apply fundamental investment analysis. During the first stage in August 9, 2009, the crisis affected the banking system and generally their ability to continue carrying out their daily financial services. At these times, banks had a huge exposure that resulted into many loopholes that losses occurred from. Many banks suffered huge losses that affected the economy. These led to closure of the Lehman Brothers and other banks seeking financial support for survival. This occurred on September 15, 2008 in which many banks received bailout from government institutions to keep them from collapsing. As a result, many of the world leaders through the G20 summit agreed on a bailout plan that was targeting the economy. A fiscal expansion of $5 trillion was agreed upon. The money was aimed at reforming the banking sector and allowing for its expansion and creation of job opportunities that would yield to growth and economic improvement. During the year May 9, 2010, the crisis had shifted from the solvency that the banks were exposed to towards that which governments had exposed for solvency. It is during these times that the Greece economy seemed affected and led to the struggling economies of various countries that required saving from collapse. Higher government spending was sighted among the major causes of government challenges with budgets and their low taxation efficiencies created challenges that spiraled the financial crisis. This stage indicated the shift of focus from the banks that seemed to have stabilized to the governments. The problem had shifted from the private sector to the public sector (Elliot, 2011). The Efficient Markets Hypothesis Before the happenings of the GFC, analysts relied on a hypothesis that indicated the markets to exist in a perfect manner as per the Efficient Markets Hypothesis (Credit Foncier, 2011). An effect in the market based on information would definitely have an impact on the prices of the securities. The hypothesis had played a role in the global financial spheres for years. These created an impression onto the market that provided an indication of an easy market that will always follow simple market dynamics. During the years 2001 to 2008, the changes in the financial markets created a challenging factor that many financial analysts have proven to interpret as different from the market efficiency hypothesis. The effects that developed indicated bubble behavior that affected the markets more creating a force that defied the Efficient Markets Hypothesis (EMH). Considering the changes in the markets, the need to study the behavioral effects that they had was paramount (Etzioni, 2011). Behavioral finance aided in revealing the various effects that the crisis would have on the abilities and prices of the stock markets (Fama, 2012,). In doing financial analysis, there is need to consider the markets to provide a clear and more reasonable picture of the market. These will include the consideration of the systems involved, the various institutions that take part in the management of different businesses that engage in the market, the various procedures undertaken to protect and verify market activities, social aspects and the market infrastructure. Considering these provides a market position that the different institutions rely on to make decisions on the market factors. The financial crisis created an effect to the market. They affected the level of activity in the market with many institutions failing to provide the market needs to allow them operate. Many of the banks failed to succeed on the markets and hence creating a failure that affected the general market position including that of stocks. The stock market deals with buying and selling of securities, which all occur on the stock market. During fundamental analysis, consideration of the markets reveals the various impacts that the financial position of the stocks will indicate during various market status. The markets during the times of the financial crisis indicated poor prices that discouraged many investors. During these times, the fundamental analysis aspect proved redundant. At such a time of financial difficulty, performing a market analysis would reveal discouraging factors. Company analysis In order to understand the nature of the company and a position that it may hold on the market, a company analysis would prove efficient. Company analysis deals with the analysis of the various aspects of fundamental nature that would aid in revealing the company’s ability to withstand the market effects (Hirshleifer 2001). During these, analysts consider the various company financials performing an analysis that allows the investors to understand eh company’s abilities. Doing a company analysis will reveal different factors ranging from the management effects to the effects of their incomes, assets and liabilities to their future prospects. Company analysis looks at the management and its ability to maintain the company on a steady performance despite the harsh economic times. The ability of the management to remain focused towards improving the performance of the company provides the investors with the ease of making decisions. On considering the financials, the company provides its financials in different places that the investors and analysts may find them. The investors perform various tests on the stocks to ensure it has strong ratio considerations that indicate a positive performance. Rations such as the acid ratio, current asset ratio, Earnings per Share, PE all come into consideration. These provide the investors that remain focused on market aspects and values to invest in a company (Fisher Investments Press, 2010). Industry analysis on the other hand considers the whole industry in which the company belongs. During the earlier stages of the crisis, the banking industry was suffering the most. Industry analysis would reveal various factors that would aid investors in making better decisions. The industry analysis will reveal factors that the industry bases on to create value, the ability it has to sustain the pressure on the market and the general industry stability. During these times, the banking industry suffered major setbacks that would provide it as a wrong industry to invest in for profits. During these times, the market prices grew affected providing a negative effect to investors. At this point investors hold a bias towards the non-performing shares (Pompian, 2006). Considering the above, one discovers that solid decisions in the securities market originate from a thorough fundamental analysis that reveals factors that the investors may rely on to make decisions with regard to the market conditions. The investors based on these to make decisions. During the GFC, the major aspect of the market and the industry was much affected hence leading to an effect to the various companies trading on the markets. The ability to yield dependable reports from the fundamental analysis provided difficult hence, the redundancy of the system in analyzing the best market shares to focus on. The companies performed poorly during these times with the prices and incomes constricted. The stock markets suffered major effects that affected the trading prices of most commodities on the exchange facilities. These provided reasons for redundancy of the fundamental analysis. The analysis of the behavior of the market creates an assurance of a person and the level of confidence that one has (Shiller, 2003). References List BloggingSTocks, 2009, Tom Taulli Viewed on March 16, 2015 from http://www.bloggingstocks.com/bloggers/tom-taulli/ Credit Foncier, 2011, Is Fundamental and Technical Analysis Redundant in the Light of Behavioral Finance? Viewed on March 16, 205 from https://creditfoncier.wordpress.com/2011/08/26/is-fundamental-and-technical-analysis-redundant-in-the-light-of-behavioral-finance/ Elliot, L 2011, Global Financial Crisis: Five Key Stages 2007-2011, viewed on March 16, 2015 from http://www.theguardian.com/business/2011/aug/07/global-financial-crisis-key-stages Etzioni, A 2011, Behavioral Economics: Towards a New Paradigm. American Behavioral Scientist 55(8). Fama, E 2012, Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance. Volume 25 Issue 2, pages 383-417. Fisher Investments Press, 2010, Investing Legends, founder of Fisher & Co. Viewed on March 16, 2015 from http://www.fisher-investments-press.com/authhors/philip-fisher-biogrpahy.aspx Hirshleifer D 2001, Investor Psychology and Asset Pricing, Journal of Finance 56. http://finance.yahoo.com/q/hp?s=BAC&a=04&b=29&c=2007&d=02&e=23&f=2010&g=m Pompian, M 2006, Behavioral Finance and Wealth Management: How to Build Optimal Portfolios that account for Investor Bias. Wiley Finance. John Wiley and Son Inc. Shiller R 2003, From Efficient Markets Theory to Behavioral Finance, Journal of Economic Perspectives 17 (1). Read More