Download Business cycles

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Chapter 12
Macroeconomic and
Industry Analysis
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Outline
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Valuation approach
Global economy
The domestic economy
Demand and supply shock
Federal government policy
Business cycles: the Macro Cycle
Industry analysis and industry life-cycle;
the Micro Cycle
• Competitive positioning
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Framework of Analysis
• Fundamental Analysis
• Approach to Fundamental Analysis
– Domestic and global economic analysis
– Industry analysis
– Company analysis
• Top-down approach
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An alternative approach
• Stock price is the present value of all future
cash flows it generates to its holder
• Factors influencing dividends: top down
• Factors influencing discount rates
– Risk free rate
– Inflation
– Risk aversion degree
• Interest rate also affects company earnings
power
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Global Economic Considerations
• Foreign Demand
– Foreign demand critical for US recovery
from 2008 financial crisis
• Exchange rate risk
– Cheap $ helps US exports, while
appreciation of $ hurts
– Sales and Earnings
– Stock returns
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Key Domestic Economic Variables
• Gross domestic product
• Unemployment rates
• Interest rates & inflation
– Impact on fix-income assets
– Impact on stocks
• Budget deficit
– Government spending-Revenue
• Sentiment
– Consumer confidence
– Business
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Demand Shocks
• Demand shock - an event that affects
demand for goods and services in the
economy
– Who demand goods?
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Tax rate cut
Increases in government spending
Money supply
Foreign exports demand
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Supply Shocks
• Supply shock - an event that influences
production capacity or production costs
– Basic commodity price changes (oil price)
– Whether to agriculture
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Federal Government Policy
• Fiscal Policy –
– government spending and taxing actions
– Direct policy
– Slowly implemented
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Federal Government Policy (cont.)
• Monetary Policy - manipulation of the
money supply to influence economic
activity
• Tools of monetary policy
– Open market operations
– Discount rate
– Reserve requirements
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Business Cycles-Macro Cycle
• Business Cycle
– Business cycle is the recurring pattern or
recession and recovery
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Cyclical Indicators: Leading
Leading Indicators - tend to rise and fall in
advance of the economy
Examples
– Stock Prices: reflect anticipation of future
– Money supply, New orders for goods:
impact future
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Cyclical Indicators: Coincident
Coincident Indicators - indicators that tend
to change directly with the economy
Examples
– Industrial production
– Manufacturing and trade sales
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Cyclical Indicators: Lagging
Lagging Indicators - indicators that tend to
follow the lag economic performance
Examples
– Average duration of unemployment
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Industry Analysis-sensitivity to business cycle
• Sensitivity to business cycles
• Factors affecting sensitivity of earnings to
business cycles
• Sensitivity of sales of the firm’s product to the
business cycles
• Defensive: Necessities (Grocery, Drugs, Medical),
small/cheap items (Movies, DVD, tobacco)
• Sensitive/Cyclical : big items and luxury ( house, car,
jewels, premium brands)
– Operating leverage (Fixed costs are fixed)
– Financial leverage (interest payments are fixed)
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Industry Analysis: Industry Life
Cycles(micro cycle)
Stage
Sales Growth
Start-up
Consolidation
Maturity
Relative Decline
Rapid & Increasing
Stable
Slowing
Minimal or Negative
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Industry analysis: Competitive
environment
• Porter’s five forces
– Threat of entry
– Rivalry between existing competitors
– Pressure from substitute products
– Bargaining power of buyers
– Bargaining power of suppliers