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Macroeconomic and Industry Analysis
CHAPTER 11
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Framework of Analysis Fundamental Analysis
Approach to Fundamental Analysis Domestic and global economic analysis Industry analysis Company analysis Why use the top-down approach
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Global Economic Considerations
Performance in countries and regions is highly variable Political risk Exchange rate risk Sales Profits Stock returns
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Figure 11.1 Change in Real Exchange Rate: Dollar Versus Major Currencies. 1999-2003
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Key Economic Variables
Gross domestic product Unemployment rates Interest rates & inflation Budget Deficits Consumer sentiment
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Figure 11.2 S&P 500 Versus EPS Estimate
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Figure 11.3 Determination of the Equilibrium Real Rate of Interest
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Federal Government Policy
Fiscal Policy - government spending and taxing actions Direct policy Slowly implemented
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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
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Demand Shocks Demand shock - an event that affects demand for goods and services in the economy Tax rate cut Increases in government spending
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Supply Shocks Supply shock - an event that influences production capacity or production costs Commodity price changes Educational level of economic participants
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Business Cycles Business Cycle
Peak Trough Industry relationship to business cycles Cyclical Defensive
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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
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NBER Cyclical Indicators: Coincident
Coincident Indicators - indicators that tend to change directly with the economy Examples Industrial production Manufacturing and trade sales
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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
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Figure 11.6 Economic Calendar at Yahoo!
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Industry Analysis Sensitivity to business cycles Sector Rotation
Industry life cycles
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Figure 11.7 Estimates of Earnings Growth Rates in Several Industries, 2004
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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
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Figure 11.9 Industry Cyclicality
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Figure 11.10 A Stylized Depiction of the Business Cycle
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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
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Industry Life Cycles Stage Sales Growth Start-up Rapid & Increasing
Consolidation Stable Maturity Slowing Relative Decline Minimal or Negative
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Figure 11.11 The Industry Life Cycle
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