1. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 12 Macroeconomic and Industry Analysis

2. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 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. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 3 Global Economic Considerations Performance in countries and regions is highly variable Political risk Exchange rate risk –Sales –Profits –Stock returns

4. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 4 Key Economic Variables Gross domestic product Unemployment rates Interest rates & inflation International measures Consumer sentiment

5. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 5 Federal Government Policy Fiscal Policy - government spending and taxing actions –Direct policy –Slowly implemented

6. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 6 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 –Discount rate –Reserve requirements

7. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 7 Demand Shocks Demand shock - an event that affects demand for goods and services in the economy –Tax rate cut –Increases in government spending

8. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 8 Supply shock - an event that influences production capacity or production costs –Commodity price changes –Educational level of economic participants Supply Shocks

9. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 9 Business Cycles Business Cycle –Peak –Trough Industry relationship to business cycles –Cyclical –Defensive

10. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 10 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

11. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 11 Coincident Indicators - indicators that tend to change directly with the economy Examples –Industrial production –Manufacturing and trade sales NBER Cyclical Indicators: Coincident

12. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 12 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

13. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 13 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

14. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 14 Industry Life Cycles StageSales Growth Start-upRapid & Increasing ConsolidationStable MaturitySlowing Relative DeclineMinimal or Negative