Download Chapter 17: Macroeconomic and Industry Analysis

CHAPTER 17
Macroeconomic
and Industry
Analysis
Investments, 8th edition
Bodie, Kane and Marcus
Slides by Susan Hine
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Framework of Analysis
• Fundamental Analysis
• Approach to Fundamental Analysis:
– Domestic and global economic analysis
– Industry analysis
– Company analysis
• Why use the top-down approach?
17-2
Global Economic Considerations
• Performance in countries and regions is
highly variable
• Political risk
• Exchange rate risk
– Sales
– Profits
– Stock returns
17-3
Table 17.1 Economic Performance in
Selected Emerging Markets
17-4
Figure 17.1 Change in Real Exchange Rate:
U.S. Dollar versus Major Currencies,
1999–2006
17-5
Key Economic Variables
•
•
•
•
•
Gross domestic product
Unemployment rates
Interest rates & inflation
Budget deficit
Consumer sentiment
17-6
Figure 17.2 S&P 500 Index versus
Earnings Per Share
17-7
Demand Shocks
• Demand shock - an event that affects
demand for goods and services in the
economy
17-8
Supply Shocks
• Supply shock - an event that influences
production capacity or production costs
17-9
Federal Government Policy
• Fiscal Policy: Demand-side management
– Tax rate cut
– Increases in government spending
17-10
Federal Government Policy Continued
• Monetary Policy - Demand-side management
– Manipulation of the money supply to
influence economic activity
• Initial & feedback effects
• Tools of monetary policy
–Open market operations
–Discount rate
–Reserve requirements
17-11
Federal Government Policy Continued
• Fiscal Policy: Supply-side management
– Incentive or marginal taxes
• National policies on education, infrastructure,
and research are important elements
17-12
Business Cycles
• The transition points across cycles are called
peaks and troughs
– A peak is the transition from the end of an
expansion to the start of a contraction
– A trough occurs at the bottom of a
recession just as the economy enters a
recovery
17-13
Figure 17.3 Cyclical Indicators
17-14
Leading Indicators
• Leading indicators tend to rise and fall in
advance of the economy
• Examples:
– Avg. weekly hours of production workers
– Stock Prices
17-15
Table 17.2 Indexes of Economic
Indicators
17-16
Coincident Indicators
• Coincident Indicators - indicators that tend to
change directly with the economy
• Examples:
– Industrial production
– Manufacturing and trade sales
17-17
Lagging Indicators
• 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
17-18
Figure 17.4 Indexes of Leading,
Coincident, and Lagging Indicators
17-19
Table 17.3 Economic Calendar
17-20
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
17-21
Figure 17.5 Economic Calendar at
Yahoo!
17-22
Table 17.4 Useful Economic
Indicators
17-23
Figure 17.6 Return on Equity, 2007
17-24
Defining an Industry
• North American Industry Classification
System, or NAICS codes
– Codes assigned to group firms for statistical
analysis
17-25
Figure 17.7 Industry Stock Price Performance as
Measured by Rate of Return on Dow Jones
Sector iShares, January-October 2007
17-26
Figure 17.8 ROE of Major Banks
17-27
Table 17.5 Examples of NAICS Industry Codes
17-28
Figure 17.9 Industry Cyclicality
17-29
Table 17.6 Operating Leverage of Firms A and B
Throughout the Business Cycle
17-30
Figure 17.10 A Stylized Depiction of the
Business Cycle
17-31
Sector Rotation
• Portfolio is adjusted by selecting
companies that should perform well for the
stage of the business cycle
– Peaks – natural resource extraction firms
– Contraction – defensive industries such as
pharmaceuticals and food
– Trough – capital goods industries
– Expansion – cyclical industries such as
consumer durables
17-32
Figure 17.11 Sector Rotation
17-33
Industry Life Cycles
Stage
Sales Growth
Start-up
Consolidation
Maturity
Relative Decline
Rapid & Increasing
Stable
Slowing
Minimal or Negative
17-34
Figure 17.12 The Industry Life
Cycle
17-35
Industry Structure and Performance
•
•
•
•
•
Threat of entry
Rivalry between existing competitors
Pressure from substitute products
Bargaining power of buyers
Bargaining power of suppliers
17-36