1. Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 17 Macroeconomic and Industry Analysis

2. 17-2 Fundamental Analysis Approach to Fundamental Analysis: –Domestic and global economic analysis –Industry analysis –Company analysis Why use the top-down approach? Framework of Analysis

3. 17-3 Performance in countries and regions is highly variable Political risk Exchange rate risk –Sales –Profits –Stock returns Global Economic Considerations

4. 17-4 Table 17.1 Economic Performance in Selected Emerging Markets

5. 17-5 Figure 17.1 Change in Real Exchange Rate: U.S. Dollar versus Major Currencies, 1999–2006

6. 17-6 Gross domestic product Unemployment rates Interest rates & inflation Budget deficit Consumer sentiment Key Economic Variables

7. 17-7 Figure 17.2 S&P 500 Index versus Earnings Per Share

8. 17-8 Demand shock - an event that affects demand for goods and services in the economy Demand Shocks

9. 17-9 Supply shock - an event that influences production capacity or production costs Supply Shocks

10. 17-10 Federal Government Policy Fiscal Policy: Demand-side management –Tax rate cut –Increases in government spending

11. 17-11 Federal Government Policy Continued Monetary Policy - Demand-side management –Manipulation of the money supply to influence economic activity Initial & feedback effects Tools of monetary policy –Open market operations –Discount rate –Reserve requirements

12. 17-12 Federal Government Policy Continued Fiscal Policy: Supply-side management –Incentive or marginal taxes National policies on education, infrastructure, and research are important elements

13. 17-13 Business Cycles The transition points across cycles are called peaks and troughs –A peak is the transition from the end of an expansion to the start of a contraction – A trough occurs at the bottom of a recession just as the economy enters a recovery

14. 17-14 Figure 17.3 Cyclical Indicators

15. 17-15 Leading indicators tend to rise and fall in advance of the economy Examples: –Avg. weekly hours of production workers –Stock Prices Leading Indicators

16. 17-16 Table 17.2 Indexes of Economic Indicators

17. 17-17 Coincident Indicators - indicators that tend to change directly with the economy Examples: –Industrial production –Manufacturing and trade sales Coincident Indicators

18. 17-18 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 Lagging Indicators

19. 17-19 Figure 17.4 Indexes of Leading, Coincident, and Lagging Indicators

20. 17-20 Table 17.3 Economic Calendar

21. 17-21 Industry Analysis Sensitivity to business cycles Factors affecting sensitivity of earnings to business cycles: –Sensitivity of sales of the firm’s product to the business cycles –Operating leverage –Financial leverage Industry life cycles

22. 17-22 Figure 17.5 Economic Calendar at Yahoo!

23. 17-23 Table 17.4 Useful Economic Indicators

24. 17-24 Figure 17.6 Return on Equity, 2007

25. 17-25 Defining an Industry North American Industry Classification System, or NAICS codes –Codes assigned to group firms for statistical analysis

26. 17-26 Figure 17.7 Industry Stock Price Performance as Measured by Rate of Return on Dow Jones Sector iShares, January-October 2007

27. 17-27 Figure 17.8 ROE of Major Banks

28. 17-28 Table 17.5 Examples of NAICS Industry Codes

29. 17-29 Figure 17.9 Industry Cyclicality

30. 17-30 Table 17.6 Operating Leverage of Firms A and B Throughout the Business Cycle

31. 17-31 Figure 17.10 A Stylized Depiction of the Business Cycle

32. 17-32 Sector Rotation Portfolio is adjusted by selecting companies that should perform well for the stage of the business cycle –Peaks – natural resource extraction firms –Contraction – defensive industries such as pharmaceuticals and food –Trough – capital goods industries –Expansion – cyclical industries such as consumer durables

33. 17-33 Figure 17.11 Sector Rotation

34. 17-34 StageSales Growth Start-upRapid & Increasing ConsolidationStable MaturitySlowing Relative DeclineMinimal or Negative Industry Life Cycles

35. 17-35 Figure 17.12 The Industry Life Cycle

36. 17-36 Industry Structure and Performance Threat of entry Rivalry between existing competitors Pressure from substitute products Bargaining power of buyers Bargaining power of suppliers