The efficient market hypothesis tends to propound that the market prices of stocks are usually accurately priced which the inefficient market hypothesis tends to deviate from. As such inefficient market is opposed to this assumption/hypothesis.
The essence of knowing the price is very important not only to the buyers in the market but also to the suppliers in the market. As far as Economics is concerned, importance in production is pegged on costs which put the price of any goods, from the raw materials to the finished products at the centre stage of the Business transactions.
The success of Entrepreneurs and business personalities has since time immemorial been pegged on the ability to see beyond the curtain. This entails being able to predict the future prices of both the capital goods they are to purchase and the finished products they are to produce. These predictions are the ones that determine the level of production. The consumers on the other hand are key players in the determination of the price of goods and the elasticity of both the demand and the supply.
While the Predictability of the price has been previously pegged on the above factors that sum up as the evidence of price predictability, this may not be always the correct situation on the ground. From this basis is this paper written. This proposes the use of "The price Grid Rule' that is quite accurate in the predicting of the prices in the inefficient market.
BACKGROUND
Revolutions have always arisen in various sectors and Efficient Market hypothesis in Finance is not an exception in this revolution. Economists have challenged the long existing dominance of efficient market resolution. This is with the view that stock price determination is more determined by the psychological and behavioral elements rather than the using the common predictable evidence. This paper is concerned with the study on the attacks on the inefficient market hypothesis and what comes in between predictability and efficiency. This paper argues that contrary to what many recent academic papers claim, stock markets are more efficient and less predictable and that the predictability of the price in stocks cannot be pegged on the significance evidence but rather there is need of the development of a common rule that has superior performance when it is compared with a passive benchmark.
Just an era ago, there was wide acceptance of the efficient market of the efficient market hypothesis by financial economists; for instance, from Fama Eugene's influential survey of 1970 article Titled Efficient Capital Markets, there is a general belief that the stock prices in the securities markets were quite efficient in reflecting not only information on the individual stocks but also on the stock market as a whole. This information was prime to pre3dicting the prices of the various stocks as they acted as the evidence of the like hood of the upward or downward price changes. Such information would rapidly spread around and would at5 the end of the day affect the incorporated in the Securities prices. This underplayed the need for the use of the fundamental analysis as even the study of the past stock prices is not put to consideration in attempt to predict the future prices. Th8is is wanting given that the fundamental analysis enables an investor select an undervalued stocks hence be able to achieve greater profits than if the stocks were quoted at there correct prices in the market.
The id4ea that is 'random walk' is much associated to the efficient market. This is a situation where there is quite a high level of unpredictability of the prices of stocks in the markets. This happens i9n a situation where the facto9rs affecting the prices of stocks today have random departures from the factors that will affect the prices of the stocks in the future prices. Thos comes up logically by the fact that if information is unimpeded and information is immediately reflected in the prices of the stocks ,the following days prices will then be a reflection of tomorrows news. As such economists put in mind the fact that news is by itself unpredictable and that even the uninformed investors would still get the same return like that of experts in the markets.
By the start of the 21st century, the universality of the intellectual dominance of the efficient market hypothesis had crashed down. Economists had to believe that stock prices are predictable but not fully but rather partially. With time there seems to be a new breed of economists that have come up with more emphasis on the psychological and the behavioral elements as being the great contributors to the determination of the prices of other stock prices however this can only be credible by incorporating other fundamental valuation metrics.
As much as these economists had something positive they were stating about the inefficient market, their arguments turned out to be far much to be controversial that t5hese patterns actually enabled the investors in the stock market to earn excess risk adjusted rates of the returns from their investments.
While this papers looks at the attacks on the hypothesis that is based on the efficient market, it takes this perspective by focusing on the impact to the inefficient market. While there is no attempt in the paper of presenting the complete survey of the various anomalies and irregularities in the stock market the paper describes the major findings that are statistical in nature as well as their underpinnings are behavioral . This paper further examines the relevant continuous interrelationships between how predictions are made and the efficiency that results from the predictability. It may also entail the description of essential arguments of the persons who hold it firm that markets are often irrational by deep analysis of the crashes that may have occurred in the past years gone. For instance the "internet bubble' of the fin de sieche and the other particular irrationalities that have been advanced by the critics of efficiency. It key also to note that the stock markets exhibit much more efficiency than some recent academics papers would have held firmly ion their argument. To add to these is that the existing evidence proves to be overwhelming in a manner that whatever anomalous behaviour of stock prices may exist, these does not at all put a platform to create a portfolio trading opportunity that will give enablance to investors to earn extraordinary risk adjusted returns.
Looking at the outset of these, it is very vital to make it a little more clear to what is referred to as "efficiency'. The use of definitions of efficient financial markets that they do not give a chance to investors to get returns above the average without having to accept the above average risks
Markets can only be efficie4nt if they occasionally make errors in valuation. This is the great differentiating fact between the efficient and inefficient market. This can be explained with a good case in point of the 2000 internet bubble. Market participants have to be irrational if the market has to be efficient. Even if the stock market exhibits high level of volatility than it can apparently be explained by any fundamentals of such earnings. It is important t5o note that most economists that believe in the efficiency of the stock markets view the market as amazingly successful devices that reflect any new information and that it does this rapidly and accurately. The mere fact that financial markets do not allow investors to have the benefit of earning above average risk adjusted returns. In clear terms professional and amateur investors don't have $100 bills lying around for the taking.
LONG-RUN RETURN REVERSALS
The unusual argument against market efficiency is that positive serial correlation exists in the short run when the stock returns are measured within a days or weeks period. There has been a finding by the studies that there is evidence of negative correlation that happens to be return reversals over longer holding periods. A case in point is the Fama and French (1988) studies that found out that 25-40% of the variation in the long holding periods. This can be predicted though not in totality but in terms of a negative correlation with past returns. The same study found substantial mean reversion in the stock market.
It is important to note that as individual stocks exhibit the patterns of return reversals it may not be possible to from this tendency. Fluck, Malkiel and Quant used this strategy7 of buying stocks over a span of 13 years from the 1980's to the early 1990's which turned out to have poor results in the past three to five years. This survey found that the stocks with low returns over the past three to five years had higher returns in the next period and that the stocks that had higher returns during the same three to five years had lower returns in the next period. What is funny to note is that in the returns for the following periods was the same both for the stocks that started with low returns and tho0se that started with high returns. Due to these findings it was difficult for them to find the contrarian approach would yield higher than average returns.
Consider this. There has been recently a trend by investors where they tend to use investment strategies that are either based on level of the price earnings or the yield of the dividend. In the year 1987 for instance, the price earnings multiples rose for the standard and the poor 500's stock index into low 20's in June the same year. This would automatically suggest long low returns. The next ten years in the USA experienced annual total return that w3as double the immediate past ten year. However the dividend of the yield came down to three percent the following year.
OTHER PREDICTABLE TIME SERIES PATTERNS
Various studies have indicated that there are various evidences of the predictability of stock prices based on the financial; statistics. Fama and Schwert for instance found out that interests rates that are short term were closely related to the future stock results. Bessembinder argues that the structure of the interest rates spreads contains information that is useful to the forecasting of the stock returns. The spread of risk is between the high yield corporate bonds and that short rates had some more predictive power.
A large size of evidence shows that patterns that are based on firm characteristics and at the same time have different valuation parameters tend to be more predictable.
The paper has rounded to a case study that involves Wegmans Food Market Inc. Wegmans is a US based company that is owned by a family and has more than 75 branches of Supermarkets and restaurants spread all over various state in the Mid-Atlantic. Wegmans being a big company has an approximate of 30,000 employees from all its business units.
Case Analysis
Impact of Workers Union to Wegmans operations
Wegmans Food Market Inc has been and is for quite some time appreciated for the good treatment of its workers. This is attributed to the good working relations between the workers union and the management of the company. Most of the workers of the company are paid relatively competitive salaries and wages with none being paid below the minimum wage.
With the large numbers of employees, the company has ensured that its employees are free to join any union of their choice. This has made it easy for the workers to engage in dialogue whenever an issue came up. This has worked well for the company and has resulted to many disagreements that could have otherwise resulted in strikes to be resolved through dialogue between the management and the unions. Some of the most powerful unions that Wegmans workers are members are Food and Commercial Workers International Union and the Food Workers Union.
The Proposed Employee Free Choice Act
The proposed Employee Free Choice Act is a bill that is in consideration by the Congress. The version of the bill introduced in both chambers of Congress was initiated with the specific purpose.
"amend the National Labor Relations Act to establish an efficient system to enable employees to form, join, or assist labor organizations [unions], to provide for mandatory injunctions for unfair labor practices during organizing efforts, and for other purposes."
If this bill is enacted, Wegmans Food Market Inc. as an organization will be affected in one way or the other. Since the bill does away with calls fresh for additional separate ballot on whether the union should be recognized or not, the management of the company will have less say on issues concerning the choice of the union by workers. A union will automatically be recognized as long as it has acquired more than half of the signature of the employees.
The management of the company would also be forced by this legislation to have a fixed conflict resolution period. Unlike today that the management of the company can determine through negotiations with the unions on time frame for the settling of any conflict or demand that may be brought forward by the workers, the proposed legislation has set a time frame of 120 days after the recognition of the said union.
The bill would have a great impact on the Company management's handling of the workers as far as unionization is concerned. This is due to the provision in the proposed act that increases the penalties on employers that would discriminate workers over their involvement in the unions. This would be in form of injunctions against such employers. Currently there is only provision for injunctions only for violations by unions.
The unionization of workers and the proper union laws are paramount for proper functioning of organizations. This two will enable mutual benefit between the emo0ployer and the employee hence bringing the win situation for both. The laws will do away with vagueness when it comes to conflict resolution between the workers and the management.
Political and Legal
America is a republic and is built around democratic principles and a capitalist economy. As a developed country this means that in the US there is extremely limited political instability. The US is lead by a president, Barrack Obama, who is held accountable by the voter; this accountability ensures that there are no dramatic political risks for foreign businesses in regards to ownership risks, operating risks or transfer risks. This makes the US an ideal place to create an export market as you can feel assured that the business and all its stakeholders are under your control.
What also makes the US extremely appealing is the free trade agreement and fantastic relationships between the US and Australia. This allows for there to be a smooth transaction process between the two countries with no customs or duties to be paid for imports or exports. This will make the Hybrid Camry a cheaper option to export to the USA for both Toyota and consumers as there will be no added charges for the car being built in Australia
It will be extremely important for Toyota to look into the legal requirements for importing into the USA. As in every country there are different packaging labeling and safety requirements not just for the car itself but also bringing the cars into Australia. There are many safety requirements in the USA relating to seatbelts, brakes, Airbags and the strength and structure of the cars. And all of these requirements will be needed to be looked in to in detail before any exportation can go ahead
All the three key factors above make Exporting to the US market very easy and appealing in the context of the political and legal environment. America being a stable democratic republic using a capitalist system means that there is very little political instability and risk to take note off which is important to the company. This cumulated with the US-Australia Free trade agreement makes it an ideal export destination. It will however be extremely important for Toyota to look into import and car safety regulations in the USA cause as like almost all developed countries there are strict rules that apply to car safety as stated above.
Economic and Financial
America is renown around the world as financial powerhouse whose economy affects the entire world, as was seen by the Global financial crisis recently. America has since been on the long road to recovery after the subprime mortgage collapse that crippled the globe, and is slowly gaining back a little more consumer confidence as the economy rebuilds itself through government handouts.
This could be a problem for any potential exporters. As the financial meltdown hit the US particularly hard they have need for many foreign loans to help save the economy. This has led to a dramatically large foreign debt and trade deficit that the government will be looking at reducing. With the fact that California itself is currently having a dept crisis with governor Arnold Schwarzenegger implementing new policies to cut costs in the public sector. Although all this is not particularly good for a potential market the US still has the economic and financial capabilities to bounce back.
However the US market certainly does have its pluses. Even through the current economic climate the GDP per capita for US citizens still stands at a healthy $38,262 US$ while they have an active labor force of over 150 Million people, a large market in anyone's view. The fact that US only produces around 5 million cars a year (1) currently for a population of over 300 million. Although that seems like a lot of cars its really only 1 New car for every 60 people which isn't a lot. This means that there is a definite market for exported cars into the American market to serve a massive population
As can be seen in this table The US GDP growth rates have started to rise again since the 2008-2010 economic down turn. The rising GDP rate will once again raise consumer confidence possibly pointing an increase in car sales in the future
One of the biggest positives for the exporting of hybrid cars to the US is the soaring price of fuel which means that even with the economy down consumers will be looking for way in which to save as much money as possible meaning that they might possibly turn to the extremely fuel efficient hybrid cars.
The economic and financial climate in California is not as rosy as it could be with large mounting debts. And spending cuts but there are positives in that there is still a large and wealthy market that can still be tapped into. And as stated before as the prices of fuel keeps on rising, fuel efficient cars will become more and more popular.
America currently is suffering through a bit of an unemployment spike going from around 6% in 2008 to around 9.5% currently. This unemployment rate is quite high and undesirable but as the economy starts to bounce back so will the employment rate. In looking at the bigger picture for Toyota that 90% of the labor force of 154 million is still quite a few people in jobs who may have the ability to purchase new cars.
America had a program called the cash for clunkers program that allowed people to trade in older less fuel efficient cars for grants between $3,500 and $4,500 $US however this program finished on 24th August 2009 and will therefore not be applicable for our cars.
In conclusion, although the economic downturn has hit America hard financially and economically it doesn't necessarily mean it is a bad export destination. The US is already on the long road to recovery and the GDP growth rate has moved up to a more normal level once again and as it continues to grow so will the employment rate. One of the most important points here is that the US has a labor force of 154 Million people to call on and if 90% of those people have jobs there is certainly a lot of money that is circulating that could possibly be being spent on new vehicles, making the US quite a large and Rich market to export to.
Competition in Export market
As the population becomes more and more aware of climate change and what they can do to reverse it, companies also start to show more and more care about climate change in order to keep up with ever changing consumer needs.
Although Toyota kick started the Hybrid market with the launch of the Toyota Prius in the early 2000's all other leading automotive manufacturers have started to catch on and have now created their own Hybrid innovations. This is leading to a more and crowded and competitive market by the day as the automobile manufacturers fight tooth and nail for the consumer dollars.
In Recent time the Honda Jazz and Toyota Prius have become the leading car sellers in Japan and both of which are Hybrids. Also in The US the hybrid market is slowly increasing its share of the marketplace with new models and innovations of hybrid cars start hitting the market. This of course means greater competitiveness
Recently Honda has entered its civic hybrid car into the marketplace and along with the already popular Toyota Prius. This along with other leading car manufacturers close to bringing out their own Hybrid versions is about to make the US hybrid car market very competitive.
There are also threats from home for Toyota Australia with the development of a Holden Hybrid car. Although Toyota represents the largest share of car sales in Australia, Holden is still a force to be reckoned with in Australia.
This means that Toyota has to watch its back on all fronts from competition in the hybrid market. If the US is the export market that we will choose then we need to enter the market as soon as possible to establish reputation and sales before the marketplace becomes overcrowded.
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