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CHAPTER 11

CHAPTER 11. Macroeconomic and Industry Analysis. Framework of Analysis. Fundamental Analysis Approach to Fundamental Analysis Domestic and global economic analysis Industry analysis Company analysis Why use the top-down approach. Global Economic Considerations.

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CHAPTER 11

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  1. CHAPTER 11 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. Figure 11.1 Change in Real Exchange Rate: Dollar Versus Major Currencies. 1999-2003

  5. Key Economic Variables • Gross domestic product • Unemployment rates • Interest rates & inflation • Budget Deficits • Consumer sentiment

  6. Figure 11.2 S&P 500 Versus EPS Estimate

  7. Figure 11.3 Determination of the Equilibrium Real Rate of Interest

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

  9. 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( federal funds rate) • Discount rate • Reserve requirements

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

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

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

  13. 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 • Initial claims for unemployment • Manufacturer’s new orders

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

  15. 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

  16. Figure 11.6 Economic Calendar at Yahoo!

  17. Industry Analysis • Sensitivity to business cycles • Sector Rotation • Industry life cycles

  18. Figure 11.7 Estimates of Earnings Growth Rates in Several Industries, 2004

  19. Sensitivity to Business Cycle • Factors affecting sensitivity of earnings to business cycles • Sensitivity of sales of the firm’s product to the business cycles • Operating leverage • Financial leverage

  20. Figure 11.9 Industry Cyclicality

  21. Figure 11.10 A Stylized Depiction of the Business Cycle

  22. Sector Rotation • Selecting Industries in line with the stage of the business cycle • Peak – natural resource firms • Contraction – defensive firms • Trough – equipment, transportation and construction firms • Expanding – cyclical industries

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

  24. Figure 11.11 The Industry Life Cycle

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