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  1. 1. Economics for Journalists Week 4: Circles & Cycles: How economies work Jeffrey TimmermansMonday, 25 February, 13
  2. 2. Review: Corporate disclosure ✤ Three main types: ✤ Profit & Loss Statement (also called P&L or income statement) ✤ Balance Sheet ✤ Cash Flow StatementMonday, 25 February, 13
  3. 3. Reporting on earnings ✤ Always focus on net profit, and how it changed from a year earlier ✤ Make sure to include revenue, so reader can judge the “quality” of earnings ✤ Make sure to include year-earlier figures! ✤ Look for any dramatic year-on-year changes in figures in disclosure, or big asset sales/purchases ✤ Is cash flow from operations positive, growing?Monday, 25 February, 13
  4. 4. HK’s Hutchison Whampoa reports 12pct rise in profits 01-Apr-2010 | AFP | 7:01 AM Hong Kong’s Hutchison Whampoa said Tuesday net profit rose 12 percent last year, as gains from property sale and the sale of assets more than offset losses at its energy and 3G technology units. The port-to-telecoms conglomerate, headed by Hong Kong’s richest man Li Ka-shing, said in a statement to the city’s stock exchange that net profit was 14.17 billion Hong Kong dollars (1.8 billion US) in 2009, up from 12.68 billion dollars in 2008. The result was lower than the average forecast for a net profit of 15.54 billion dollars in a poll of six analysts by Dow Jones Newswires. The group’s total revenue dropped 14 percent to 300.55 billion dollars, mainly because of a business slump at its Canada-listed affiliate Husky Energy resulted from sharp declines in oil and gas prices last year, it said. And income at its ports division dived 16 percent due to lower trading activity amid the global financial crisis, the statement said. Losses in its third-generation technology operations slumped 67 percent to 5.28 billion dollars, primarily due to the merger of its 3 Australia with the Australian unit of British mobile phone giant Vodafone. Li said in the statement that its 3G results were expected to improve and make a positive contribution to earnings. The company was one of the world’s first to introduce 3G mobile business and has operations in Italy, Britain, Ireland, Australia, Sweden, Denmark and Austria. The group’s earnings have been dragged down since 2003 due to the cost of the 3G business. But last year’s losses were partially offset by a 50 percent jump in profits from the completion and sales of several residential projects. The gains also came from a 12.47 billion Hong Kong dollar total profit from the disposal of investments including its equity interest in three power plants in mainland China and its telecoms assets in Israel and Indonesia. Li said the company performed satisfactorily despite the challenging conditions last year and its operations “are well placed to benefit from a recovering economic environment.” Source: AFP via IntellasiaMonday, 25 February, 13
  5. 5. Circles & Cycles: How economies workMonday, 25 February, 13
  6. 6. Types of economies Command Free-market Economy Economy Total No gov’t intervention intervention U.S. Hong Kong N. Korea SwedenMonday, 25 February, 13
  7. 7. Circular Flow ModelMonday, 25 February, 13
  8. 8. Circular Flow with SavingsMonday, 25 February, 13
  9. 9. Circular Flow with InventoryMonday, 25 February, 13
  10. 10. Economic Growth & The Business Cycle Real output Peak Trend line ry Re ce ove ss io Rec n Re ry ce ove ss io n Rec Re ce ss io n Trough TimeMonday, 25 February, 13
  11. 11. U.S. Economic Growth (1940-2010) Source: St. Louis Federal Reserve BankMonday, 25 February, 13
  12. 12. U.S. Business Cycle (1970-1980) Source: St. Louis Federal Reserve BankMonday, 25 February, 13
  13. 13. Why do economies grow over time? ✤ Population growth ✤ Investment ✤ Accumulated knowledge ✤ Improved productivity ✤ Better technologyMonday, 25 February, 13
  14. 14. What causes a downturn? ✤ An external shock, like a sharp rise in oil prices (1970s) ✤ Over-investment (and subsequent plunge in investment) (2001) ✤ A financial crisis (2008) ✤ High interest rates (when central banks step in to slow things down)Monday, 25 February, 13
  15. 15. The Regulatory Cycle Crisis in un- or under- Recession regulated area Deregulation Politicians respond to Politicians respond to people’s anger companies Regulation, followed by quiet period Lobbyists/companies Growth seek deregulationMonday, 25 February, 13
  16. 16. Market Cycles: Dow Theory ✤ Charles Dow (1851-1902) founded Dow Jones & The Wall Street Journal ✤ Dow noticed that prices on markets follow both long-term and short-term trends ✤ Short-term trends are reactionary and won’t necessarily derail long-term trend Source: Library of CongressMonday, 25 February, 13
  17. 17. Dow Theory: key assumptions ✤ The theory assumes the price of an asset traded on a market reflects all available information ✤ A market price is the sum of all fears and the sum of all hopes ✤ Because a market price reflects everything market participants expect will happen, prices are forward looking ✤ Prices are news!Monday, 25 February, 13
  18. 18. Remember... ✤ Journalists can provide perspective and context: ✤ A recession isn’t the end of the world ✤ A growth & recovery phase won’t go on forever ✤ This time isn’t different! ✤ Regulatory response isn’t always appropriate and is influenced by political considerationsMonday, 25 February, 13