Investments, 8th editionBodie, Kane and MarcusSlides by Susan HineSlides by Susan HineMcGraw-Hill/IrwinCopyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.CHAPTER 17Macroeconomic and Industry Analysis17-2 Fundamental Analysis Approach to Fundamental Analysis:Domestic and global economic analysisIndustry analysisCompany analysis Why use the top-down approach?Framework of Analysis17-3 Performance in countries and regions is highly variable Political risk Exchange rate riskSalesProfitsStock returnsGlobal Economic Considerations17-4Table 17.1 Economic Performance in Selected Emerging Markets 17-5Figure 17.1 Change in Real Exchange Rate: U.S. Dollar versus Major Currencies, 1999200617-6 Gross domestic product Unemployment rates Interest rates & inflation Budget deficit Consumer sentimentKey Economic Variables17-7Figure 17.2 S&P 500 Index versus Earnings Per Share 17-8 Demand shock - an event that affects demand for goods and services in the economyDemand Shocks17-9 Supply shock - an event that influences production capacity or production costsSupply Shocks17-10Federal Government Policy Fiscal Policy: Demand-side managementTax rate cutIncreases in government spending17-11Federal Government Policy Continued Monetary Policy - Demand-side managementManipulation of the money supply to influence economic activity Initial & feedback effects Tools of monetary policyOpen market operationsDiscount rateReserve requirements17-12Federal Government Policy Continued Fiscal Policy: Supply-side managementIncentive or marginal taxes National policies on education, infrastructure, and research are important elements17-13Business Cycles The transition points across cycles are called peaks and troughsA 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 recovery17-14Figure 17.3 Cyclical Indicators17-15 Leading indicators tend to rise and fall in advance of the economy Examples:Avg. weekly hours of production workersStock Prices Leading Indicators17-16Table 17.2 Indexes of Economic Indicators17-17 Coincident Indicators - indicators that tend to change directly with the economy Examples:Industrial productionManufacturing and trade salesCoincident Indicators17-18 Lagging Indicators - indicators that tend to follow the lag economic performance Examples:Ratio of trade inventories to salesRatio of consumer installment credit outstanding to personal incomeLagging Indicators17-19Figure 17.4 Indexes of Leading, Coincident, and Lagging Indicators17-20Table 17.3 Economic Calendar17-21Industry Analysis Sensitivity to business cycles Factors affecting sensitivity of earnings to business cycles: Sensitivity of sales of the firms product to the business cycles Operating leverage Financial leverage Industry life cycles17-22Figure 17.5 Economic Calendar at Yahoo!17-23Table 17.4 Useful Economic Indicators 17-24Figure 17.6 Return on Equity, 2007 17-25Defining an Industry North American Industry Classification System, or NAICS codes Codes assigned to group firms for statistical analysis17-26Figure 17.7 Industry Stock Price Performance as Measured by Rate of Return on Dow Jones Sector iShares, January-October 200717-27Figure 17.8 ROE of Major Banks17-28Table 17.5 Examples of NAICS Industry Codes 17-29Figure 17.9 Industry Cyclicality 17-30Table 17.6 Operating Leverage of Firms A and B Throughout the Business Cycle 17-31Figure 17.10 A Stylized Depiction of the Business Cycle17-32Sector 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 durables17-33Figure 17.11 Sector Rotation17-34StageSales GrowthStart-upRapid & IncreasingConsolidationStableMaturitySlowingRelative DeclineMinimal or NegativeIndustry Life Cycles17-35Figure 17.12 The Industry Life Cycle17-36Industry Structure and Performance Threat of entry Rivalry between existing competitors Pressure from substitute products Bargaining power of buyers Bargaining power of suppliers