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1 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Chapter 12 Macroeconomic and Industry Analysis Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 2 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Framework of Analysis • Fundamental Analysis • Approach to Fundamental Analysis – Domestic and global economic analysis – Industry analysis – Company analysis • Why use the top-down approach Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 3 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Global Economic Considerations • Performance in countries and regions is highly variable • Political risk • Exchange rate risk – Sales – Profits – Stock returns Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 4 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Key Economic Variables • • • • • Gross domestic product Unemployment rates Interest rates & inflation International measures Consumer sentiment Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 5 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Federal Government Policy • Fiscal Policy - government spending and taxing actions – Direct policy – Slowly implemented Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 6 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Federal Government Policy (cont.) • Monetary Policy - manipulation of the money supply to influence economic activity – Initial & feedback effects • Tools of monetary policy – Open market operations – Discount rate – Reserve requirements Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 7 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Demand Shocks • Demand shock - an event that affects demand for goods and services in the economy – Tax rate cut – Increases in government spending Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 8 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Supply Shocks • Supply shock - an event that influences production capacity or production costs – Commodity price changes – Educational level of economic participants Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 9 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Business Cycles • Business Cycle – Peak – Trough • Industry relationship to business cycles – Cyclical – Defensive Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 10 Bodie • Kane • Marcus Essentials of Investments Fourth Edition NBER Cyclical Indicators: Leading Leading Indicators - tend to rise and fall in advance of the economy Examples – Avg. weekly hours of production workers – Stock Prices Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 11 Bodie • Kane • Marcus Essentials of Investments Fourth Edition NBER Cyclical Indicators: Coincident Coincident Indicators - indicators that tend to change directly with the economy Examples – Industrial production – Manufacturing and trade sales Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 12 Bodie • Kane • Marcus Essentials of Investments Fourth Edition NBER Cyclical Indicators: Lagging Lagging Indicators - indicators that tend to follow the lag economic performance Examples – Ratio of trade inventories to sales – Ratio of consumer installment credit outstanding to personal income Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 13 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Industry Analysis • Sensitivity to business cycles • Factors affecting sensitivity of earnings to business cycles – Sensitivity of sales of the firm’s product to the business cycles – Operating leverage – Financial leverage • Industry life cycles Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved. 14 Bodie • Kane • Marcus Essentials of Investments Fourth Edition Industry Life Cycles Stage Sales Growth Start-up Consolidation Maturity Relative Decline Rapid & Increasing Stable Slowing Minimal or Negative Irwin / McGraw-Hill © 2001 The McGraw-Hill Companies, Inc. All rights reserved.
