1. Macroeconomic and Industry Analysis
Chapter 12
Macroeconomic and Industry Analysis

2. Outline Valuation approach Global economy The domestic economy
Demand and supply shock
Federal government policy
Business cycles: the Macro Cycle
Industry analysis and industry life-cycle; the Micro Cycle
Competitive positioning

3. Framework of Analysis Fundamental Analysis
Approach to Fundamental Analysis
Domestic and global economic analysis
Industry analysis
Company analysis
Top-down approach

4. An alternative approach
Stock price is the present value of all future cash flows it generates to its holder
Factors influencing dividends: top down
Factors influencing discount rates
Risk free rate
Inflation
Risk aversion degree
Interest rate also affects company earnings power

5. Global Economic Considerations
Foreign Demand
Foreign demand critical for US recovery from 2008 financial crisis
Exchange rate risk
Cheap $ helps US exports, while appreciation of $ hurts
Sales and Earnings
Stock returns

6. Key Domestic Economic Variables
Gross domestic product
Unemployment rates
Interest rates & inflation
Impact on fix-income assets
Impact on stocks
Budget deficit
Government spending-Revenue
Sentiment
Consumer confidence
Business

7. Demand Shocks
Demand shock - an event that affects demand for goods and services in the economy
Who demand goods?
Tax rate cut
Increases in government spending
Money supply
Foreign exports demand

8. Supply Shocks
Supply shock - an event that influences production capacity or production costs
Basic commodity price changes (oil price)
Whether to agriculture

9. Federal Government Policy
Fiscal Policy –
government spending and taxing actions
Direct policy
Slowly implemented

10. Federal Government Policy (cont.)
Monetary Policy - manipulation of the money supply to influence economic activity
Tools of monetary policy
Open market operations
Discount rate
Reserve requirements

11. Business Cycles-Macro Cycle
Business cycle is the recurring pattern or recession and recovery

12. Cyclical Indicators: Leading
Leading Indicators - tend to rise and fall in advance of the economy
Examples
Stock Prices: reflect anticipation of future
Money supply, New orders for goods: impact future

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

14. Cyclical Indicators: Lagging
Lagging Indicators - indicators that tend to follow the lag economic performance
Examples
Average duration of unemployment

15. Industry Analysis-sensitivity to business cycle
Sensitivity to business cycles
Factors affecting sensitivity of earnings to business cycles
Sensitivity of sales of the firm’s product to the business cycles
Defensive: Necessities (Grocery, Drugs, Medical), small/cheap items (Movies, DVD, tobacco)
Sensitive/Cyclical : big items and luxury ( house, car, jewels, premium brands)
Operating leverage (Fixed costs are fixed)
Financial leverage (interest payments are fixed)

16. Industry Analysis: Industry Life Cycles(micro cycle)
Stage Sales Growth
Start-up Rapid & Increasing
Consolidation Stable
Maturity Slowing
Relative Decline Minimal or Negative

17. Industry analysis: Competitive environment
Porter’s five forces
Threat of entry
Rivalry between existing competitors
Pressure from substitute products
Bargaining power of buyers
Bargaining power of suppliers