Contemporary Investments: Chapter 11 Chapter 11 ECONOMIC AND INDUSTRY ANALYSIS Why are economic and industry analyses important? How are investment decisions related to the business cycle? How are economic forecasts made? How industries classified? What are the important components of industry analysis? What is the framework and some of the techniques used in industry analysis?

Contemporary Investments: Chapter 11 The importance of economic and industry analysis The macro factors are important, but are not a substitute for a careful analysis of the specific company Stock prices are positively related to economic activity Variation in performance among different industries Companies do not operate in a vacuum— economic and industry conditions affect the company and the performance of its stock

Contemporary Investments: Chapter 11 Figure 11.1 – Recent Performance of the S&P500 and Three Industries

Contemporary Investments: Chapter 11 Business cycles and investment decisions What is a business cycle –Definition –No two business cycles have been alike

Contemporary Investments: Chapter 11 Business cycles and stock prices Stock prices lead economic activity Stocks prices are not a prefect predictor of economic activity Stock prices and inflation Over market and the performance of industry groups

Contemporary Investments: Chapter 11 Figure 11.2 – Stock Returns vs. Inflation

Contemporary Investments: Chapter 11 Business cycles and interest rates –Real rates are inversely related to economic activity –Business cycles and yield spreads Investment timing implications –Stocks –Bonds

Contemporary Investments: Chapter 11 Economic forecasting Qualitative forecasts –Leading indicators –Anticipation surveys Econometric model building (quantitative forecasts)

Contemporary Investments: Chapter 11 Implications for investors –Why is economic forecasting difficult –Using economic forecasts

Contemporary Investments: Chapter 11 Industry analysis Defining and classifying industries –Difficulty in classifying industries –Common industry classifications –SIC codes

Contemporary Investments: Chapter 11 Components of an industry analysis –Competitive structure of the industry –Permanence –Vulnerability to external shocks –Regulatory and tax considerations –Labor conditions –Historical record of revenue, earnings, and dividends –Financial and financing issues

Contemporary Investments: Chapter 11 Industry life cycles –Birth phase –Growth phase –Mature growth phase –Stabilization or decline phase –Some caveats about industry life cycles

Contemporary Investments: Chapter 11 Figure 11.4 – Industry Life Cycle

Contemporary Investments: Chapter 11 Analyzing industry data End-use analysis Ratio analysis Regression and correlation analysis

Contemporary Investments: Chapter 11 Figure 11.5 – Ratio of Auto Production to Overall Industrial Production

Contemporary Investments: Chapter 11 Figure 11.6 – Ratio of Semiconductor Sales and Auto Sales to GDP

Contemporary Investments: Chapter 11 Figure 11.7 – Relationship Between Personal Income and Auto Sales

Contemporary Investments: Chapter 11 Figure 11.8 – Relationship Between Operating Revenue and Operating Income: Electric Utilities

Contemporary Investments: Chapter 11 Figure 11.9 – Relationship Between Operating Revenue and Operating Income: Airlines