1 Bodie • Kane • Marcus Fourth

Essentials of Investments Edition

Chapter 12

Macroeconomic and
Industry Analysis

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 2 Bodie • Kane • Marcus Fourth
Essentials of Investments Edition

Framework of Analysis

• Fundamental Analysis
• Approach to Fundamental Analysis
– Domestic and global economic analysis
– Industry analysis
– Company analysis
• Why use the top-down approach

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Global Economic Considerations

• Performance in countries and regions is
highly variable
• Political risk
• Exchange rate risk
– Sales
– Profits
– Stock returns

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Key Economic Variables

• Gross domestic product
• Unemployment rates
• Interest rates & inflation
• International measures
• Consumer sentiment

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Federal Government Policy

• Fiscal Policy - government spending
and taxing actions
– Direct policy
– Slowly implemented

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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

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Demand Shocks
• Demand shock - an event that affects
demand for goods and services in the
economy
– Tax rate cut
– Increases in government spending

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Supply Shocks
• Supply shock - an event that influences
production capacity or production costs
– Commodity price changes
– Educational level of economic participants

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Business Cycles
• Business Cycle
– Peak
– Trough
• Industry relationship to business cycles
– Cyclical
– Defensive

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NBER Cyclical Indicators: Leading

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

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NBER Cyclical Indicators: Coincident

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

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Essentials of Investments Edition

NBER Cyclical Indicators: Lagging

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

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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

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Industry Life Cycles

Stage Sales Growth
Start-up Rapid & Increasing
Consolidation Stable
Maturity Slowing
Relative Decline Minimal or Negative

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