Showing posts with label stocks and business cycle. Show all posts
Showing posts with label stocks and business cycle. Show all posts

Tuesday 10 August 2010

Introductory Lectures to Business Cycles

Business Cycles, Part 0 of 4- Interest and Capital,
Prof. Krassimir Petrov
1:02:36 - 3 years ago
The theory of Interest, Production, and Capital is the foundation for understanding Economic Growth and Business Cycles.http://video.google.com/videoplay?docid=-6484061137769305763&hl=en&emb=1#docid=-5669706349089810530



Business Cycles, Part 1 of 4 - Introduction, 
Prof. Krassimir Petrov
1:06:14 - 3 years ago
An introductory 65 min lecture describing the nature of business cycles. Explains business fluctuations, phases, periodicity, comovement, persistence, amplitude, cyclicality, and introduces major business cycle theories.



http://video.google.com/videoplay?docid=8415267688491832655#
Business Cycles, Part 2 of 4 - Business Cycle Indicators, Prof. Krassimir Petrov
1:02:32 - 3 years ago
The lecture explains the behavior of 18 different procyclical leading or lagging macroeconomic variables/indicators throughout the business cycle.


http://video.google.com/videoplay?docid=5546452117626581217#
Business Cycles, Part 3 of 4 - The Austrian Boom,
Prof. Krassimir Petrov
1:12:14 - 3 years ago
Explaining the Boom - what happens and why; characteristics of booms; why booms cannot last forever; why they inevitably turn to bust. The next part,part 4 is devoted to the "Bust".






BusinessCycles, Part 4 of 4 - The Austrian Bust, Prof. Krassimir Petrov
1:06:20 - 3 years ago
Crisis, Bust, Deflationary Depression, Stagflation, and other fundamental Austrian School concepts.

Wednesday 21 July 2010

Be cyclically aware and responsive.



This means 

  • a) monitoring the progress of the economic cycle, using the 3-phase, 7-waypoint cyclical model I developed and have been using in my Cyclical Investingnewsletters for the past 24 years, and 
  • b) allocating assets profitably in relation to the current state of the economic cycle, owning those assets supported by economic forces at the time, and avoiding those likely to be depressed by them. 

http://www.cyclical-investing.com/

Friday 27 November 2009

Business and Dividend Life Cycles

Business life cycles are most influenced by access to resources and capital. 


A company's success and development are also affected by a host of outside factors - competition from companies in the same industry, economic conditions, even changing consumer preferences.


There are 6 phases in a company's development that influence its dividend policy:


1. The Start-Up Phase:   In the start-up phase, someone invest cash for stock in the business to develop products, hire employees, pay for equipment, and rent space.  It is not unusual for a company to raise seed money from professional investors and enter the start-up phase with a hundred or more employees.  A small company needs to plow all profits back into growing and perfecting its business model to survive.


2.  The Early Growth Phase:  If the company launch is successful, it will enter the early growth phase.  As the demand for its products and services increases, sales and profits increase.  The company will need to reinvest all cash flow and profit to achieve competitive scale.


3.  The Late Stage Growth Phase:  In the late stage growth phase, the company continues to grow and may begin to pay a small dividend, usually 10 to 15% of earnings.  This is a clear signal to investors that the company has reached a level of stability in profits and cash flow necessary to support a dividend.


4.  The Expansion Phase:  If the company is well run, it will enter the expansion phase.  Its rate of growth may slow as competitors take some of the company's market share.  Companies at this stage generally increase their dividend payout ratio to approximately 30 to 40% of earnings.


5.  The Maturity Phase:  Companies can continue to expand even as they reach their maturity phase, but their growth rate usually slows measurably.   Well-run mature companies can continue to be a competitive force in their respective industries for decades or even several generations.  Many of the companies in this group are mature companies, a few over a century old.  It is during this stage that companies tend to increase their dividend payout ratios to 50 to 60% of earnings, which provides investors with generous dividend income.


6.  The Decline Phase:  In the later stages, many companies fail to innovate - to keep their competitive advantage.  These companies will enter the decline phase, and unless they reinvent themselves, they will eventually cease to exist.  In this phase, as sales and profits decline, they will eventually reduce or eliminate their dividend payouts. 


Beware of attempting to buy or hold the stock of a company in the final stages of its business life cycle.




Business and Dividend Life Cycles
Start Up
Growth Rate 20%
Dividend Payout Ratio 0%

Early Growth
Growth Rate 30%
Dividend Payout Ratio 0%


Late Stage Growth
Growth Rate 35%
Dividend Payout Ratio 15%


Expansion
Growth Rate 25%
Dividend Payout Ratio 30%


Maturity
Growth Rate 20%
Dividend Payout Ratio 55%


Decline
Growth Rate < 5% and declining
Dividend Payout Ratio < 20%


AT&T is a great example of a company currently in decline, possibly on its way to extinction. 

Beware of attempting to buy or hold the stock of a company in the final stages of its business life cycle.

At one time, AT&T was the most widely held stock in America.  The company paid its first dividend in 1893 and became known as the widows and orphans stock because it was such a consistent source of dividend payments for investors.  AT&T's history dates back to 1875.  The company's founder, Alexander Graham Bell, invented the telphone and together with several investors started the American Telephone and Telegraph Corporation.  As a telephone company, AT&T was so successful it achieved regulated monopoly status.  In 1984, the US Department of Justice broke the AT&T monopoly into eight companies:  seven regional operating "Bells" and AT&T.

For most of its history, AT&T had been largely insulated from market pressures and competitive forces.  After the break up, smaller and leaner communication companies stole AT&T's market share, first through price competition and later by becoming product innovators.  For the new AT&T to successfully compete in an unregulated environment, it would require a drastic change in corporate culture.  Over the past few years, operations and profits have continued to decline, and AT&T is now struggling to survive. 

AT&T's story of dominance and decline highlights the constant need for you to follow up your initial purchase analysis with a routine review to see if the companies you hold are performing as expected. 

  • Each time you decide to continue to hold a stock, you are in fact making a new buying decision. 
  • Understanding the business life cycle outlined above will enable you to identify companies that are about to emerge as great dividend payers, as well as help you to spot the mature companies headed down the road to extinction.

Monday 25 May 2009

Stocks and the Business Cycle

Stocks and the Business Cycle

The stock market has been surging to new highs almost daily, driving down dividend yields and price-earnings ratios skyward. Is this bullishness justified? The careful investors want to know if the economy is really going to do well enough to support these high stock prices.

What do the economists forecast?
  • Will the real GDP increase over the next four quarters?
  • Will the growth be at a healthy rate?
  • Will there be a recession in the next year or few years?
  • Even if a recession occurs, will it be brief or prolong?
  • What will corporate profits (one of the major factors driving stock prices) be in the next year or 3 years?

The lesson is that the markets and the economy are often out of sync. It is not surprising that many investors dismiss economic forecasts when planning their market strategy.

Quote: 'The stock market has predicted nine out of the last five recessions!' (Paul Samuelson)

Quote: 'I'd love to be able to predict markets and anticipate recessions, but since that's impossible, I'm as satisfied to search out profitable companies as Buffett is.' (Peter Lynch)

However, do not dismiss the business cycle too quickly when examining your portfolio. The stock market still responds quite powerfully to changes in economic activity. Although there are many 'false alarms' like 1987 when the market collapse was not followed by a recession, stocks almost always fall prior to a recession and rally rigorously at signs of an impending recovery. If you can predict the business cycle, you can beat the buy-and-hold strategy.

This is no easy task, however. To make money by predicting the business cycle, one must be able to identify peaks and troughts of economic activity BEFORE they actually occur, a skill very few, if any, economists possess. Yet business cycle forecasting is a popular stock market endeavour not because it is successful - most of the time it is not - but because the potential gains are so large.