November 17, 2008

To start the class off, Professor Shenoy wanted to talk about the causes of the tech bubble and real estate bubbles, the differences between them, and APM’s possible strategy for the future. We started by discussing the causes of the bubbles, with the tech bubble coming from an increase in productivity from the transition to computers by most companies. This led to increased margins, earnings, and eventually prices, which ended up being overvalued once the technical transition was finished in late 2000. The real estate bubble on the other hand came from the idea that “every American should own his/her own home.” Cuts in interest rates, lower underwriting standards, and deregulation of financial institutions led to the growth, and collapse of this bubble. It was not an actual bubble that came from an increase in productivity.

Professor Shenoy talked about the different economic theories by Nikolai Kondratieff, and Hyman Minsky and their relationship to the bubbles. She related Kondratieff’s theory to the tech bubble, and spoke of the possibility of deflation over the next couple years. The deflation is consistent with Kondratieff’s cycle, and there is evidence of it with the price declines in commodities since July. We also discussed Minsky’s belief that credit availability should tighten in prosperous times, when firms have the cash flows to pay off debt. Minsky argued that credit standards should loosen in bad times to promote economic growth. Professor Shenoy then likened this theory to how deregulation led to banks making riskier decisions, and consequently to some of the economic mess occurring because of those risks.
The class then discussed possible investments during a time when there may be deflation or no growth in the markets. Securities discussed were equities of firms with solid cash flows, such as ones with high dividend yields. We also talked about getting into industries that are part of a demographic trend, which may be insulated from adverse economic conditions.

We then transferred our discussion to our case for the week, AbitibiBowater (ABH). This is was not a typical case. ABH is distressed and so we did not do our usual buy, sell, hold recommendation for the security. Our guests for this class Todd Preheim from Campanile Capital, and Brett Young from Plainfield Asset Management discussed the company. Brett went into detail about our assignment because Plainfield worked with ABH in the beginning part of 2008. Brett generally agreed with our assessment, and gave us his own research and insight on AbitibiBowater from when he worked with the company.

After we discussed ABH, Todd and Brett started talking a bit about their roles in their jobs, and roles in investment banking. They talked about the sales and trading desks in investment banking and spoke to the different interactions within. The gentlemen then gave advice on career paths within finance in tough times. They reminded us that a career is a marathon, and our first job will not be our last.
We sold 1500 shares of KWK at $8.32 and bought 800 shares of HK at $14.32 during the previous week.