Technical Analysis and Efficient Market Hypothesis - Assignment Example

Essay Questions and Answers on Macro & Micro economics Briefly discuss the premises and the implications of TechnicalAnalysis and Efficient Market Hypothesis Technical analysis refers to a security analysis method that forecasts the direction of prices by studying past market trends especially the prices and volume. The efficient market hypothesis argues that stock markets are unpredictable. This is because stock market efficiency causes current share prices to reflect all the available market information. The assumptions and principles of efficient market hypothesis and technical analysis are that there is a large number of investors who analyze and value securities proceeds, new information entering the market is independent from other news, stock prices adjust to new information and stock prices reflect all available information. The implication is that share prices are unpredictable because they depend on market information which change constantly. 2. Briefly discuss the effect of dividends, stock repurchases, and stock splits on stock prices (make sure you discuss the recent policies pursued by Apple and Panera Bread) A share repurchase means that a publicly traded company buys back its own shares. It results in increase in stock price because it reduces a company’s outstanding shares, thereby increasing its earnings per share. When a firm issues dividends, the stock prices are affected in two ways. One, if the firm issues dividends that are higher/lower than expected, market sentiments shift causing the share prices to increase/decrease respectively. Second, the prices of shares change on the ex-dividend date when a firm decreases its market limit by declaring a dividend pay-out. Stock splits reduce the stock price in inverse proportion to the ration of the declared stock split. Panera bread’s decision to boost its share buyback and sell and refranchise its stores is a big strategic mistake because the company will fall into debts, reduce its profits and distract leaders from effective competition against rivals such as Starbuck and Chipotle. 3. What are the two things that investors should know about financial bubbles? First, financial bubbles last longer that investors hope for. The reason for this is that just like the normal bubble gum, financial asset bubbles provide a good feeling when they blow because they are associated with economic booms. This makes them popular with investors who gain most and central banks because they claim credit during the boom. The second thing to note is that the pace f the bubble quickens briefly before the bubbles burst. For example, most of the stock price increases during the dotcom bubble occurred in short four months before the bubble burst in 2000. The explanation is that during the bubble period, investors use emotions such as fear of missing opportunity for market gain to invest, rather than use of reason. This euphoria results in negative consequences that speed up the bubble’s pace, causing it to burst. 4. Is Intuitive Surgical a good long-term investment? What are the sources of its competitive advantage? This is a good investment because it has been recording strong performance over time. The good performance is an indication that the company’s momentum is backing back. The investors should therefore accumulate stock in all pullbacks because the company’s performance will increasingly grow. The company’s source of competitive advantages includes a ‘first mover’ advantage that made the Da Vinci Surgical System a standard in the industry. It also enjoys economies of scale that give the company cost advantages. In addition, the bundling of hardware with services such as doctors training makes the cost of switching to other machines too high, giving the company a near monopoly in providing medical appliances. 5. What is the direction of the US and the world economy right now? What are the implications for investing? American and the world economy is starting to show cracks that would lead to reduction in economic performance. The US economy closed with great strength but three months later, the economy is looking tired. The US and world economy has been losing momentum in puzzling ways. For example, despite employee hiring increasing in US, the economic growth rate is scaling down. Economies say that the main problems that include slow growth rate of workers’ wages that doesn’t increase spending. Many foreign economies are also slowing down, thereby slowing the rate of economic growth. The implication on investing is that it slows down the rate of investments. Investors fear investing when the economy is decreasing because the returns on investment are meager of even negative. 6. Briefly discuss how an investors can maintain an intelligent state of mind Setting the right priorities results in intelligent decisions. It involves deciding what goals to follow and developing a vision for these goals. Priorities make an investor scale the heights of investment issues and become an expert in the field. Using resources wisely is part of maintain an intelligent state of mind. This is because the investor is able to obtain optimum benefits from the resources and make best use of his money. Staying focus by sticking to set priorities make the investor is art of investor’s intelligence. Focus helps the investor take the right steps towards achieving his goals. Developing the right networks ad relations is a smart move that will avail an investor the skills and resources needed to achieve his investment goals. A good intelligence state of mind can also be achieved by avoiding greed that enable the investor to think using reason rather than use of emotions. 7. Why generic drugs stocks have been on fire lately? The generic drugs have been on fire because of tremendous increase in stock prices for Perrigo, Mylan and Teva Pharmaceutical industries. The increase in stocks prices results from the market belief that the merger will result in efficiency and synergy that will increase the value of the company. The generic drug industry will gain from these trends because the aging population will increase the demand for drugs, therefore increasing profitability and thereby, the stock prices. Another industrial benefit results from the drive by healthcare providers to reduce the cost of pharmaceuticals, which will increase profits. However, success will not come easy because stiff competition from competitor may reduce profit margins. Therefore, generic drug makers are under constant pressure to expand their scales of operations by introducing new drugs. 8. What is Wall Street missing about IBM? Wall-street is missing the strong growth in emerging businesses including Cloud, Analytic, Mobile, Social and Security businesses. IBM’s revenue increased by 16% in these businesses and the profit margins for these sectors are high. There is stabilization of tradition businesses that Wall-street is missing. There was an increase in service signing and hardware unit shed low-end products and introduced new mainframes. IBM brand grew and currently occupies 5th position in Forbes’s list of valuable brands in the world. The nature of the company also grew, increasing its level of technology, one after another. Wall-street is also missing IBM’s host of strategic partnerships that will help monetize the company’s R&D. IBM’s partnership with Apple will transform its mobility by introducing a new business app that will integrate big data and increase analytical ability of i-Phones and iPads. 9. Why some investors are skeptical about Alibaba stock? Investors are skeptical about Alibaba stock because the IPO is a chance to draw a key investing constituency in favor of Chinese stock for the first time. This may create way for many Chinese companies to benefit from the IPO instead of the investors. Alibaba is a Chinese company and therefore investors are skeptical that the IPO manly focuses on availing opportunities for Chinese companies rather than benefiting investors. Skeptical investors fear losing their investment due to the seemingly diverse attention of the IPO from investors and creating a leverage for Chinese companies. 10. Why J.C.Penney has been a poor investment? A strategic mistake concerning its sales i.e. replacing sales via coupons with daily low prices haunts the company. The old strategy of using coupons was preferred by retailers as it hyped their emotions and encouraged more sells. The company abolished this strategy and modeled the stores to resemble those of Apple. The move took away the feeling of accomplishment from retailers by getting rid of coupons, thereby making a big mistake of moving away from its core business. Using Apple’s marketing strategy was wrong because JC Penny products aren’t unique and customers were motivated to shop by the use of coupons. The company’s sales have been declining, reducing the price of shares. Read More