1. McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Macroeconomic and Industry Analysis 12 Bodie, Kane, and Marcus Essentials of Investments, 9th Edition

2. 12-2 12.1 Global Economy National Economic Environment Crucial determinant of industry performance Exchange Rate Rate at which domestic currency can be converted into foreign currency

3. 12-3 Table 12.1 Economic Performance 2011 Stock Market Return (%) In Local CurrencyIn U.S. DollarsForecasted Growth in GDP, 2012 (%) Brazil-22.9-28.93.5 Britain-3.9-4.20.2 Canada-9.1-10.92.0 China-22.7-19.18.2 France-16.1-19.2-0.3 Germany-11.6-14.90.1 Greece-53.2-54.9-7.5 India-22.6-34.67.8 Italy-24.0-26.9-1.1 Japan-16.3-11.61.7 Mexico-3.0-12.93.1 Russia-15.4-19.03.7 Singapore-15.0-15.54.0 South Korea-9.0-10.13.8 Thailand0.3-3.93.1 U.S.1.6 2.0 Source: The Economist, January 7, 2012

4. 12-4 Figure 12.1 Change in Real Exchange Rate

5. 12-5 12.2 The Domestic Macroeconomy Gross Domestic Product (GDP) Market value of goods and services produced over period of time Unemployment Rate Ratio of number of unemployed to total labor force Inflation Rate at which general level of prices for goods and services is rising

6. 12-6 12.2 The Domestic Macroeconomy Interest Rates High interest rates reduce present value of future cash flows Budget Deficit Government spending in excess of government revenues Sentiment Consumer optimism/pessimism are determinants of economic performance

7. 12-7 Figure 12.2 S&P 500 Index versus Earnings per Share

8. 12-8 12.3 Interest Rates Fundamental Factors of Interest Rates Supply of funds from savers Demand for funds from borrowers Government’s net supply/demand for funds, modified by Federal Reserve Expected rate of inflation

9. 12-9 Figure 12.3 Determination of Equilibrium Real Rate of Interest

10. 12-10 12.4 Demand and Supply Shocks Demand Shock Event that affects demand for goods and services in economy Supply Shock Event that influences production capacity and costs in economy

11. 12-11 12.5 Federal Government Policy Fiscal Policy Use of government spending and taxing for stabilizing economy Monetary Policy Actions taken by Board of Governors of Federal Reserve System to influence money supply or interest rates Supply-Side Policies Address productive capacity of economy, goal is to induce workers/owners to produce goods

12. 12-12 12.6 Business Cycles Business Cycles Recurring cycles of recession and recovery Peak Transition from end of expansion to start of contraction Trough Transition point between recession and recovery

13. 12-13 12.6 Business Cycles Cyclical Industries Industries with above-average sensitivity to state of economy Defensive Industries Industries with below-average sensitivity to state of economy

14. 12-14 Figure 12.4 Cyclical Indicators

15. 12-15 Figure 12.4 Cyclical Indicators

16. 12-16 12.6 Business Cycles Leading Economic Indicators Economic series that tend to rise or fall in advance of rest of economy Stock-market-price index Money supply Manufacturers’ orders

17. 12-17 Table 12.2 Indexes of Economic Indicators

18. 12-18 Figure 12.5 Indexes of Leading, Coincident, and Lagging Factors

19. 12-19 Table 12.3 Economic Calendar

20. 12-20 Figure 12.6 Economic Calendar at Yahoo! Date Time (ET)StatisticForActual Briefing Forecast Market ExpectsPrior Revised From 3-Jan10:00 AMConstruction SpendingNov1.20%0.20%0.50%-0.20%0.80% 4-Jan7:00 AMMBA Mortgage Index31-Dec-3.70%NA -2.60%— 4-Jan10:00 AMFactory OrdersNov1.80%2.60%2.10%-0.20%-0.40% 5-Jan8:15 AMADP Employment ChangeDec325K200K180K204K206K 5-Jan8:30 AMIntial Claims31-Dec372K375K 387K381K 5-Jan10:00 AMISM ServicesDec52.653 52— 6-Jan8:30 AMNonfarm Private PayrollsDec212K200K170K120K140K% 6-Jan8:30 AMUnemployment RateDec8.50%8.70% 8.60% 6-Jan8:30 AMHourly EarningsDec0.20%0.10%0.20%0.00%-0.10%

21. 12-21 12.7 Industry Analysis Defining an Industry NAICS codes Classification of firms into industry groups using numerical codes to identify industries Sensitivity to the Business Cycle Sensitivity of sales Operating leverage Financial leverage

22. 12-22 Figure 12.7 Return on Equity, 2011

23. 12-23 Figure 12.8 Industry Stock Price Performance, 2011

24. 12-24 Figure 12.9 ROE of Application Software Firms

25. 12-25 Table 12.5 Examples of NAICS Industry Codes

26. 12-26 Figure 12.10 Industry Cyclicality

27. 12-27 Figure 12.11 Stylized Depiction of Business Cycle

28. 12-28 12.7 Industry Analysis Sector Rotation Shifting portfolio into industry sectors expected to outperform others based on macroeconomic forecasts After peak, defensive industries often better performers In trough, capital goods industries often better performers In expansion, cyclical industries often better

29. 12-29 Figure 12.12 Sector Rotation

30. 12-30 12.7 Industry Analysis Industry Life Cycles: Stages Firms Pass Through to Maturity Start-up stage: Often characterized by new technology/product Consolidation stage: Industry leaders begin to emerge Maturity stage: Product has reached potential for use by consumers Relative decline: May grow less than rest of economy or shrink

31. 12-31 Figure 12.13 Industry Life Cycle

32. 12-32 12.7 Industry Analysis Industry Structure and Performance Threat of entry: New entrants to industry pressure price/profits Rivalry between existing competitors: Market share competition pressures price/profits Pressure from substitute products: Firms in related industries can threaten market share

33. 12-33 12.7 Industry Analysis Industry Structure and Performance Bargaining power of buyers Large-scale buyers have considerable bargaining power Bargaining power of suppliers Large-scale suppliers have considerable bargaining power