Chapter 11 Macroeconomic and Industry Analysis

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Fundamental Analysis Approach to Fundamental Analysis Why use the top-down approach Framework of Analysis

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Global Economic Considerations Performance in countries and regions is highly variable Political risk Exchange rate risk

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Key Economic Variables Gross domestic product Unemployment rates Interest rates & inflation Budget Deficits Consumer sentiment

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Federal Government Policy Fiscal Policy - government spending and taxing actions

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 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

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Demand Shocks Demand shock - an event that affects demand for goods and services in the economy

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Supply shock - an event that influences production capacity or production costs Supply Shocks

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Business Cycles Business Cycle Industry relationship to business cycles

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Leading Indicators - NBER Cyclical Indicators: Leading

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Coincident Indicators - NBER Cyclical Indicators: Coincident

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Lagging Indicators - NBER Cyclical Indicators: Lagging

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Industry Analysis Sensitivity to business cycles Sector Rotation Industry life cycles

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Sensitivity to Business Cycle Factors affecting sensitivity of earnings to business cycles

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Sector Rotation Selecting Industries in line with the stage of the business cycle Peak – Contraction – Trough – Expanding –

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Industry Life Cycles StageSales Growth Start-upRapid & Increasing ConsolidationStable MaturitySlowing Relative DeclineMinimal or Negative