1. Macroeconomic Analysis BM410: Investments
Or understanding the critical economic factors that affect your company

2. Objectives
A. Do you understand the global analysis framework and the importance of understanding global issues?
B. Do you understand the critical areas of that global analysis framework, particularly economic analysis?
C. Do you understand where to find key international economic data?
D. Do you understand how to include economic data in your company report?

3. Understand the Global Analysis Framework
I want you to change your thinking
You are not preparing to be a US analyst
You are preparing to be a global analyst with expertise in the US
Why must you understand global issues?
Your competitors are likely to be global
They understand global issues
In order to compete, you must understand them as well
For in the future, international business will be just business
Prepare now and you won’t be surprised later

4. Global Analysis Framework
What is our approach to company analysis?
Fundamental Analysis
Approach to Fundamental Analysis
Domestic and global economic analysis
Domestic and global industry analysis
Company analysis
Why use the top-down approach?
The return on a stock is a function of the market
The return on a market is a function of the economy
The return on an economy is a function of the world economy

5. Global Analysis Framework
Global Economic and Political Analysis
(what is the world doing?)
Country Economic and Political Analysis
(what’s happening in my main markets?)
Global Industry Analysis
(what is the global industry doing?)
Country Industry Analysis
(what’s happening in my main industry?)
Company Analysis
(what’s happening with my company?)

6. Questions
Any questions on the global analysis framework and why it is important?

7. Understand Critical Areas of the Global Analysis Framework
Global Economic and Political Analysis
(what is the world doing?)
Country Economic and Political Analysis
(what’s happening in my main markets?)
Global Industry Analysis
(what is the global industry doing?)
Country Industry Analysis
(what’s happening in my main industry?)
Company Analysis
(what’s happening with my company?)

8. Global Economic and Political Analysis
Key Considerations
Performance in countries and regions is highly variable
Monitor it well
Political risk can change everything
Keep your hand on the country’s political pulse
Exchange rate risk is always there
Keep abreast and cover yourself if economically feasible, i.e. sales, profits, stock returns

9. Country Economic and Political Analysis
Key considerations?
1. Government Policy
Fiscal and Monetary Policy
2. Factors that impact the economy
Supply and demand shocks
3. Business cycles
Troughs and peaks
4. Forecasting
Tools to help
5. Key variables to watch

10. 1. Government Policy
Fiscal Policy - government spending/taxing actions as part of “demand-side” management
Direct policy to implement, but hard to decide on
Therefore difficult to use to fine-tune the economy
Look at the governments surplus or deficit
This will show the governments spending program
Monetary Policy - manipulation of the money supply to influence economic activity, also a “demand-side” activity
Easy to formulate, but takes a longer time to work through the economy

11. Government Policy (continued)
Tools of monetary policy
Open-market operations
Adds/subtracts liquidity to the system
Discount rate
The ate banks can borrow short-term from the Fed and indirectly the rate consumers pay for borrowing
Reserve requirements
The amount that banks must keep in cash or on reserve at the Fed

12. 2. Factors that Impact the Economy
Demand shocks
Affects the demand for goods and services
Tax cuts or rebates
Increases in government spending
Dramatic weather changes or political shocks
Supply shock
Affects the supply of good and services
Commodity price changes
Educational level of economic participants
Technology advances that improve production or capacity

13. 3. Business Cycles
How does the economy perform, and how does the industry perform under various economic conditions?
Business Cycle
Peak
Trough
Industry relationship to business cycles
Cyclical
Defensive

14. 4. Forecasting Economic and Industry Performance
Leading Indicators
Tend to rise and fall in advance of the economy
Examples: Avg. weekly hours of production workers, stock prices, money supply (M2)
Coincident Indicators
Tend to change directly with the economy
Examples: industrial production, manufacturing and trade sales, personal income less transfer payments,
Lagging Indicators
Tend to follow or lag economic performance
Examples: ratio of trade inventories to sales, ratio of consumer installment, credit outstanding to personal income, change in index of labor costs

15. 5. Economic Variables to Watch
Key variables
Gross domestic product
Unemployment rates
Interest rates & inflation
International Trade and Investment measures
Consumer sentiment
Other variables
Elections, Katrina and Rita, etc.

16. Problem
Why do you think the index of consumer expectations is a useful leading indicator of the macro-economy?

17. Answer
The index of consumer expectations is a useful leading economic indicator because if consumers are optimistic about the future they will be more willing to spend money, especially on consumer durables, which will increase aggregate demand and stimulate the economy.

18. Questions
Do you understand the critical areas of this global analysis framework?

19. C. Key sources of international Economic Data?
I. World Bank
Global Economic Prospects, published bi-annually
World Economic Indicators, published annually
II. Economist Publications
Economist magazine, published monthly
Economist Intelligent Unit, ongoing publication, but available for a (very high) fee
III. Wall Street Journal
Economic and other forecasts are sporadic, but available if you watch the table of contents closely

20. I. World Bank: Global Economic Prospects

21. II. Economist Publications

22. Economist Intelligence Unit: Purchased Information

23. III. Wall Street Journal
Daily publication
No specific ongoing economic analysis
It does have sporadic forecasts as part of specific articles and sections
They do have a quarterly economic forecasts section where various economic forecasts are compared to actual results

24. Questions
Any questions on the key sources of international economic information?

25. D. Including Economic Forecasts in Financial Analysis
Key issues?
What are your forecasts?
Where did they come from?
How do they come into your forecasts?
How do you document them?

26. Forecasts Used in this Class
This is not an economic forecasting class
As such, I will give you a recommended forecast
This forecast is on the Apple.xls spreadsheet
You can copy this directly to your spreadsheet
Note that my forecasts are from the World Bank
You can, however, change the forecasts consistent with your own views
All I ask is that you document your changes in views in the ratios section

27. Where Economic Data is Used (continued)
Sales Growth
Compare how sales have grown historically within the economic setting
Has sales growth increased even in difficult times?
They may likely continue in the future
Has sales growth declined in difficult times?
This may also continue in the future

28. Where Economic Data is Used (continued)
Forecasting Interest Expense and Interest Income
Generally, most interest rates are (loosely) tied to LIBOR, the London Inter Bank Offered Rate
Keep your rate on interest income and interest expense a consistent multiple over or under this rate, i.e. interest income is + 30 bps over LIBOR and interest expense is bps over LIBOR

29. Questions
Any questions on how to include your economic data into your forecasts?

30. Review of Objectives
A. Do you understand the global analysis framework and the importance of understanding global issues?
B. Do you understand the critical areas of that global framework, particularly economic analysis?
C. Can you find sources of data for your international economic prospects?
D. Do you know how to write up the industry report?

31. D. Understand How to Write Up the Industry Report
Mandatory Framework:
Key Information
Description and Summary
International Competitive Structure
SWOT Analysis/Positives and Negatives Factors
Key Valuation Ratios
Key Items to Watch

32. Key Information Key Information Industry Sub-sector Major Industry
Country
Industry Type
Use the six types as discussed by Peter Lynch on page 400: Slow Growers, Stalwarts, Fast Growers, Cyclicals, Turnarounds, and Asset Plays
Key Indices
Include which items are included in the index, i.e. price, price earnings, dividends, etc.

33. Description and Summary
This should include:
A brief description of the industry and what makes is different. This could include how long it has been around, the key areas of interest, key business models, and any other information that you deem relevant to the discussion.

34. International Competitive Structure
This section includes:
The structure of industry suppliers and competition, i.e., fragmented, oligopolistic; expansion opportunities; the importance of capital, barriers to entry globally, impacts of global regulation and trade, etc.

35. Analysis You can determine the type of analysis
Positive Factors and Negative Factors
Put these in the order of importance, most important first
Strengths, Weaknesses, Opportunities, Threats
Clearly delineate which of these are most important
Regardless of your type of analysis, make sure you cover the industry clearly

36. Key Things to Watch Key Valuation Ratios to Watch
List the key ratios that are followed by analysts in this industry.
A good start is to look at analysts reports from Investex Plus in the library (see FR-1A – Finding Key Sources of Financial Information).
Key Items to Watch
These are the key economic and other statistics that are key to performance for this industry. As you read through your 10-k reports, you will get a strong sense of the key variables to watch.

37. Return Performance
This is the relative total return performance versus the market and industry indices (see IR-2A Getting Industry Total Returns)
Include your market index and industry index (note: your industry index does not need to have PE data to be included here. All it needs is total return data)
Excess is the difference between the industry return and the market return
GDP Return is the GDP real growth rate for the year from FR-2A Company Financials - AAPL Section 19)
By seeing how the industry and economy has performed together, it will give you an indication of what might happen in the future