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Macroeconomic and Industry Analysis: A Framework for Fundamental Analysis

This chapter provides an overview of the macroeconomic and industry analysis framework for fundamental analysis. It covers topics such as domestic and global economic analysis, key economic variables, federal government policies, demand and supply shocks, business cycles, and industry analysis. The chapter also explains the importance of using a top-down approach in analyzing industries and companies.

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Macroeconomic and Industry Analysis: A Framework for Fundamental Analysis

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  1. Chapter12 Macroeconomic and Industry Analysis

  2. Framework of Analysis • Fundamental Analysis • Approach to Fundamental Analysis • Domestic and global economic analysis • Industry analysis • Company analysis • Why use the top-down approach

  3. Global Economic Considerations • Performance in countries and regions is highly variable • Political risk • Exchange rate risk • Sales • Profits • Stock returns

  4. Key Economic Variables • Gross domestic product • Unemployment rates • Interest rates & inflation • International measures • Consumer sentiment

  5. Federal Government Policy • Fiscal Policy - government spending and taxing actions • Direct policy • Slowly implemented

  6. 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

  7. Demand Shocks • Demand shock - an event that affects demand for goods and services in the economy • Tax rate cut • Increases in government spending

  8. Supply Shocks • Supply shock - an event that influences production capacity or production costs • Commodity price changes • Educational level of economic participants

  9. Business Cycles • Business Cycle • Peak • Trough • Industry relationship to business cycles • Cyclical • Defensive

  10. 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

  11. NBER Cyclical Indicators: Coincident Coincident Indicators - indicators that tend to change directly with the economy Examples • Industrial production • Manufacturing and trade sales

  12. 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

  13. 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

  14. Industry Life Cycles StageSales Growth Start-up Rapid & Increasing Consolidation Stable Maturity Slowing Relative Decline Minimal or Negative

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