1. CHAPTER 17 Investments Macroeconomic and Industry Analysis Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Cover image

2. 17- 2 Cover image  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 Cover image  Performance in countries and regions is highly variable.  Political risk  Exchange rate risk –Sales –Profits –Stock returns Global Economic Considerations

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

5. 17- 5 Cover image Figure 17.1 Change in Real Exchange Rate: Dollar versus Major Currencies, 1999 – 2005

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

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

8. 17- 8 Cover image  Demand shock - an event that affects demand for goods and services in the economy. –Tax rate cut –Increases in government spending Demand Shocks

9. 17- 9 Cover image  Supply shock - an event that influences production capacity or production costs. –Commodity price changes –Educational level of economic participants Supply Shocks

10. 17- 10 Cover image  Fiscal Policy - government spending and taxing actions. –Direct policy –Slowly implemented Federal Government Policy

11. 17- 11 Cover image  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  Supply Side Policies Federal Government Policy (cont’d)

12. 17- 12 Cover image Leading Indicators - tend to rise and fall in advance of the economy. Examples: –Avg. weekly hours of production workers –Stock Prices NBER Cyclical Indicators: Leading

13. 17- 13 Cover image Coincident Indicators - indicators that tend to change directly with the economy. Examples: –Industrial production –Manufacturing and trade sales NBER Cyclical Indicators: Coincident

14. 17- 14 Cover image 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 NBER Cyclical Indicators: Lagging

15. 17- 15 Cover image Figure 17.3 Cyclical Indicators

16. 17- 16 Cover image Table 17.2 Indexes of Economic Indicators

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

18. 17- 18 Cover image Table 17.3 Economic Calendar

19. 17- 19 Cover image Figure 17.5 Economic Calendar at Yahoo!

20. 17- 20 Cover image Table 17.4 Useful Economic Indicators

21. 17- 21 Cover image  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 Industry Analysis

22. 17- 22 Cover image Figure 17.6 Returns on Equity, 2005

23. 17- 23 Cover image Figure 17.7 Rate of Return, 2005

24. 17- 24 Cover image Figure 17.8 ROE of Money Center Banks

25. 17- 25 Cover image Table 17.5 Examples of NAICS Industry Codes

26. 17- 26 Cover image Figure 17.9 Industry Cyclicality

27. 17- 27 Cover image Table 17.6 Operating Leverage of Firms A and B Throughout the Business Cycle

28. 17- 28 Cover image Figure 17.10 A stylized Depiction of the Business Cycle

29. 17- 29 Cover image StageSales Growth Start-upRapid & Increasing ConsolidationStable MaturitySlowing Relative DeclineMinimal or Negative Industry Life Cycles

30. 17- 30 Cover image Figure 17.11 The Industry Life Cycle

31. 17- 31 Cover image 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