Week 3.  The lesson today is going to center around the macro-economic forces which influence the US economy and the US large-cap companies.  How will.

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Presentation transcript:

Week 3

 The lesson today is going to center around the macro-economic forces which influence the US economy and the US large-cap companies.  How will the economy affect the stocks we want to purchase?  How will it affect the ones we already own?

 What factors influence our economy? C + I + G + NX  Consumption + Gross Investment + Government Spending + Net Exports

 C (consumption) is normally the largest GDP component, consisting of private household expenditures in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing.

 I (investment) includes business investment in equipments for example and does not include exchanges of existing assets. Examples include construction of a new mine, purchase of [software], or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.

 G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.

 X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.  M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

What occurred during the ups and downs of the graphs?

Consumer Confidence- Consumer Sentiment How comfortable are people with the economic conditions?

 Retail Sales  Cars, clothing, vacations etc.  Personal Income (disposable income)  When so many people are losing jobs, as a whole do we have more disposable income?  Personal Spending (consumption)  What’s our personal consumption like recently?  Are people more likely to spend now or less likely?  Consumer Credit  What do we know about obtaining credit today?

 Inventories  Are companies stocking up on inventory now?  Durable Goods orders  Commercial and Residential Real Estate construction  Housing Starts, Construction spending  Considering the current credit, are people buying more houses- can they get loans to make business investments?

 Federal Reserve  Defense Spending  Taxation Policies  National Debt = $12.4 Trillion  Bailout  budget.com/ budget.com/  clock.org/ clock.org/

 What are exports and imports?  Current Account Deficit  Foreign investment into the US  Impact of the falling dollar on trade  Current position vs. Euro (or Canadian Dollar)

 INTEREST RATES  Discount Rate/Fed Funds Rate

 EMPLOYMENT  New jobs  Unemployment Rate (a survey from households)  Considering all the layoffs, how does this affect GDP?  INFLATION  Consumer Price Index- average price of consumer goods  Producer Price Index (food & energy exclusion)

 Current GDP is GDP expressed in the current prices of the period being measured  Nominal GDP growth is GDP growth in nominal prices (unadjusted for inflation).  Real GDP growth is GDP growth adjusted for inflation.

 Each student must come up with a company within her sector and be prepared to discuss the company in front of the rest of the investment fund managers.  The assignment questions will help to guide the investment manager, but be prepared to discuss why the company is a good choice in the current economy.  What does the company do, who are its customers, where is it located, what is its strongest characteristic? Why should we buy it in the ROY FUND?

 What is happening with the Current Account and how does this impact GDP? (See graph)  How has government influenced the GDP? What does defense spending do for the economy? (See graph)  What happens during recession?  How large is the US GDP?  What does the consumer confidence graph suggest?